Why Project Finance may not be best for your Energy Company

An overwhelming majority of the capital raising requests PUTTRU receives from African energy companies are for project finance.

What we notice, however, is that some of these companies do not fully appreciate the amount of preparatory work and investment needed to raise capital through project finance. So, what we see are very good ideas which are presented in form of concept notes but lacking the prerequisite documentations. Examples of these documentations include front-end engineering designs (FEED) and a well thought-out financial model; these are needed by the project bankers we work with to ascertain the viability of the project.

Project finance vs Corporate finance

Project finance differs from corporate finance. In project finance, rather than borrowing loans from a bank based on the strength of your company’s balance sheet, a company (Project Company) is able to secure loans for a project based on the anticipated cash flow of the planned project.

In addition, unlike corporate finance situations where a company would need to provide not less than 3 years audited financial statements to be considered for loans, in a project finance situation a new company is setup, i.e., a special purpose vehicle (SPV), for the primary purpose of realizing a project. Hence, the term Project Company.

Known as limited or non recourse financing, lenders only have claims to the future cash flows for repayment of the funds borrowed to the Project Company in project finance. Whereas for corporate finance the lenders may have claims to the entire assets of the company.

Of course, you can understand why some companies would prefer project finance to corporate finance. However, raising capital through project finance is not for every company.

It will not cover weak spots, if you have them

First, project finance works best for large-scale, capital projects. Also, the process of getting your project and SPV to the stage where lenders might find it worth financing could be time and cash intensive.

More importantly, in our African business climate, the Project Sponsors of the SPV, these are the corporations that come together to form the SPV, will have their company balance sheets scrutinized by lenders to determine if the SPV is a good use of the lenders’ funds. Thus, if the Project Sponsors are not creditworthy, i.e., their main businesses are underperforming, the lenders will have a problem with this.

Furthermore, since the lenders do not participate in the upside of the project’s performance but are vulnerable to potential downsides if they occur, do expect to meet terms that might appear stringent. Did we mention having a Debt Service Reserve Account (DSRA) and a Debt Service Cover Ratio (DSCR) of 1.5 or maybe more?

In summary, while the increase in appetite for project finance is positive, there are other considerations that must be taken onboard if energy companies in Africa are to be successful with this option. In some cases, corporate financing or other sorts of financing may be a better fit.

During your consultation with PUTTRU, we assess your company and financing needs to determine the financing type that will be best suited to your corporate goals.

Capital RaisingEnergy FinanceProject Finance

Monica Maduekwe

Monica is PUTTRU's founder. See our About page for more.