Project Funding Risk

Funding Risk - Prestige Capital Partners

Every project is different so it is not possible to compile an exhaustive list of project funding risk or to rank them in order of priority. What is a major funding risk for one project may be quite minor for another. One can discuss the risks that are common to most projects and possible avenues for minimizing them. However, it is helpful to categorize the risks according to the phases of the project within which they may arise: (1) the design and construction phase; (2) the operation phase; or (3) include both phases. It is useful to divide the project in this way when looking at project funding risks because the nature and the allocation of risks usually change during and between constructions.

Types Of Funding

Project funding discipline includes understanding the rationale for project financing. Our lenders know how to prepare the financial plan, assess the risk, design the financing mix and raise the funds. Project funding is different from traditional forms of finance because the financier looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in project funding the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.

Project Funding Risks

Non Recourse

In a non recourse or limited recourse project financing loan, the risks for a financier are great. The non recourse loan can only be repaid when the project is operational. If the project falls behind and is unable to complete, the financiers are likely to lose a lot of money.  Therefore, it is imperative that funders make substantial efforts to ensure that the risks associated with the project are minimal. It is also not surprising that because of the amount of risks involved, the cost of funding projects is generally high and decisions to finance a project from a 100% debt funding standpoint is time consuming.

Our Non Recourse Loan Solutions

In most cases, our funding solutions are non recourse loans which are secured by the project assets and paid entirely from project cash flow rather than from the general assets or credit worthiness of the project sponsors. Te financing is typically secured by all of the project assets incl the revenue producing contracts. Our funding partners are given a lien on all of the assets and are able to assume control a project if the project company has difficulties complying with the loan terms.

Risk Minimization Process

Financiers are widely concerned about the risk they undertake, and take measures to prevent any events which could have a negative impact on the financial performance of the project. In particular, the funding risk in every project could result in the project not being completed on time or within it’s budget. Other factors include whether the project is operating at full capacity and whether it’s generating a profit to service the debt.

The minimization of such risks involves a three step process. The first step requires the identification and analysis of all the risks that may bear upon the project. The second step is the allocation of those risks among the parties. The last step involves the creation of mechanisms to manage the risks. If a risk cannot be minimized this will be factored in by the financiers and could be reflected in the interest rate.

Completion Risk

Completion risk allocation is a vital part of any project because this phase carries the greatest risk for the financier. A typical example of this is construction funding where there is a danger that the project will not be completed on time, on budget or at all because of technical or other construction difficulties. Delays like these in any project increases could increase costs, delay loan repayments which inturn cause interest and debt to accumulate. As a result, this might risk contracts for the sale of the project’s output and supply contacts for raw materials.

Completion Guarantees

There are some mechanisms put in place for minimizing completion risk before tranches for funding begins. Some measurements include:

  • Having sponsors making debt repayments and liquidated damages if the completion doesn’t begin by the specified date.
  • Making sure sponsors have committed interest in the project to keep it going financially.
  • Requiring the project to be developed under fixed-price, fixed-time turnkey contracts. Performance is guaranteed by performance bonds or third parties.
  • Independent experts’ reviews and reports on the development and construction of the project.

Completion risk is managed during the loan period by methods such as making ore-completion phase draw downs of further funds conditional on certificates being issued by independent experts to c confirm that the construction is progressing as planned.

There are many funding risks which are taken in account, we have not explained them in great detail however the main risks to consider are;

  • Construction Phase Risk – Completion Risk
  • Operation Phase – Resource/Reserve Risk
  • Market – Take off Risk
  • Technical Risk
  • Currency Risk
  • Regulatory/Approvals Risk
  • Political Risk
  • Force Majeure Risk

At Prestige Capital Partners we will work on your behalf to present your project to our funding partners whom we feel will best understand how large project financing works and know how to evaluate associated risks. We have done all the vetting and hard work on your behalf. Sifting through hundreds of lenders we have embedded ourselves  with financiers whom we feel would be empathetic, knowledgeable and above all, understand the needs and requirements of the project.