EFSC Investment Group offers organization of international project finance schemes in the United States of America as well as full financial, legal and engineering support for major projects.
✓ Project finance and investment financing from ESFC Investment Group:
• €50 million and above.
• Investment up to 90% of project cost.
• Loan tenure from 10 to 20 years.
The United States has the largest and most technologically advanced economy in the world, where individuals and companies make most of the decisions, and government consumers buy the goods and services they need primarily from the private market.
The financial system of the United States is complex and diverse, including federal authorities, financial departments and institutions, private banks, and corporations that conduct domestic and international financial transactions.
Project finance in the United States can be provided by both major American banks and international financial institutions.
The most prominent lenders in this area are the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD).
In the 1970s and 1980s, project finance became a veritable salvation for debt-ridden corporate America.
Unlike the United States, fragile and corrupt developing countries rarely use pure project finance.
In 2015, the volume of the project finance market in the United States was $ 56.5 billion with 140 transactions completed, which was about 20% of the number of transactions in North and Central America. Project finance sectors in the United States in 2015 included the electric power industry (41.9%), the oil and gas sector (33%), infrastructure and transportation projects (13%), and minerals mining and processing (1%). .
ESFC Investment Group, an investment advisory company with European origins, offers international project finance for major investment projects in the USA, Canada, Latin America and other regions of the world.
Project Finance Achievements in the USA: Largest Investment Projects
For the past 30 years, project companies have been used as a vehicle for securitization of real estate-based financial products.
This was facilitated by favorable credit conditions and liberal financial regulation.
These companies contributed significantly to the growth of the global economy, but then led to the US mortgage bubble. The 2007 crisis highlighted the disadvantages of using such models, as too much flexibility allowed companies to make unreliable transactions with serious consequences. Examples include corporations such as Bear Stearns and Lehman Brothers, which have been closed.
Project companies provide investors with otherwise unattainable investment opportunities in securitization, fund raising, risk sharing etc.
Without creating an independent company, this type of operation imposes high risks on the business.
On the other hand, SPVs also carry specific risks for the sponsor (less transparency, reputational risk, liquidity and capital risks).
Lessons learned have led to increased regulatory oversight of these companies. Stronger principles of control and transparency were introduced as part of the reform of the law governing project companies. A prime example of this is the adoption of Basel III international standards that require banks to maintain adequate levels of capital and liquidity. As a result, the cost of loans has increased for project companies.
At the moment, there are discussions about the advisability of a closer integration of the SPVs with the sponsors or their complete separation.
However, project companies should clearly assess the impact of internal (structure) and external factors (competition, regulation, etc.) on their activities. Their future depends on their ability to communicate clearly with investors and balance their risk portfolio.
Examples of the largest projects implemented on the basis of PF in the USA
The largest PPP project in the United States implemented on a project finance basis is the construction of the $14 billion Chicago South Suburban Airport.
It is the third airport of the city, serving passenger, transport and business flights. The project is owned by the Illinois Department of Transportation.
Another project is the construction of a complex for the production of liquid natural gas in Texas (SPV Cheniere Corpus Christi Holdings, LLC). The development of the project was carried out by Cheniere Energy, which invested $ 4 billion. 31 banks were involved in the transaction, which in May 2015 provided $8.4 billion for the construction of the first two phases of the project. Subsequently, another $3 billion was allocated for the construction of the third train.
Also noteworthy is the construction of a complex for the export of liquefied natural gas in Louisiana (SPV Lake Charles LNG Export Company, LLC).
The project is being undertaken by Energy Transfer Partners, which invested $2.8 billion.
The project began in 2011, and the amount of debt financing reached $ 8.1 billion.
Construction of two 1117 MW nuclear reactors in South Carolina was estimated at $9.8 billion, including borrowed funds (VC Summer Nuclear Station). The project is sponsored by South Carolina Electric & Gas and Santee Cooper.
The project was first announced in 2009, but the license to build two new NPP units with AP-1000 reactors was only granted in 2012. As a result of technical and financial difficulties, the project was discontinued.
Essence of Project Finance: Principles, Sources of Funds, Risks and Models
Regardless of the objective, with traditional forms of debt financing and equity financing, it is generally assumed that the borrower guarantees repayment of the debt with all available assets.
In this case, the source of funds for debt repayment is the cash flow generated by the company’s assets, which attracted additional financial resources, including projects for implementation.
It is mainly used to finance investment projects related to the real sector of the economy. In particular, PF is the most important way of financing so-called innovative projects aimed at developing new types of products and new technologies.
The source of funds for investors is the flow of money generated directly by the project, and in this case the assets acquired for its implementation act as collateral.
Project finance has a number of distinct advantages that distinguish it from other types of financing. American investors prefer to use PF tools in established industries and projects, the results of which can be predicted more accurately than in new facilities.
As a rule, the implementation of the project requires the establishment of a Special Purpose Vehicle (SPV), whose founders are the initiators of the project.
Sponsors finance 10-40% of the project cost through the authorized capital of the newly formed company. Further development of the project and attraction of borrowed funds is carried out by an independent project company.
This approach has many advantages.
First, the emergence of a new company makes it possible to avoid the negative impact on the project of circumstances that are associated with the history of the initiator.
Second, the project becomes more “transparent”. Cash flow planning and management is much easier due to the lack of non-project related activities.
Thirdly, this model allows initiators to significantly expand the circle of project participants.
The interaction scheme of PF participants is shown in figure.
The duration of participation of each investor in the project is determined by its role in the overall investment structure.
Depending on the investor’s goals, PF can act as a specialized financial instrument used in underdeveloped industries and as a risk diversification tool in the form of off-balance sheet financing of capital-intensive projects for large companies. The list of potential participants in the scheme and their role in the project is shown in the table below.
| Participants | Role in the investment project |
| Initiators (sponsors) | Companies and individuals create a project, solve current issues and receive official permits. |
| Suppliers and contractors | Companies that have contractual obligations for the supply of products and services related to the project. |
| Buyers (customers) | Conclusion of long-term contracts with a group of companies for the purchase of a certain guaranteed amount of products, because in most projects, the product does not go to the open market (for example, an LNG supply contract). |
| Government bodies | Provision of guarantees and necessary permits, as well as participation as a sponsor or shareholder of the project. |
| Project managers | A professional management team that oversees the implementation of the project. |
| Investors (lenders and shareholders) | Legal entities and individuals providing equity or debt financing for a certain period of time and on pre-agreed terms |
| Consultants and advisors | Specialized companies and individuals, competent in various aspects of the project. |
The method of project finance in the United States involves the creation of a system of guarantees that protects the interests of both the attracted investors and the founders of the SPV.
The general goal of creating such a system is to distribute among the parties all the risks associated with the implementation of the project in such a way that each of them bears only what it is capable of managing. A multi-level guarantee system allows for a significant increase in the share of loans with little increase in financial risk.
The method of project finance in the United States involves the creation of a system of guarantees that protects the interests of both the attracted investors and the founders of the SPV.
The reasons for using PF can be as follows.
- Scale of the project and amount of funding required.
- Impossibility of project implementation by a single initiating company.
- High project implementation risks at high project cost.
- Intersection of interests of several parties.
- Lack of resources.
In general, international project finance mechanisms are a more flexible option for raising funds than traditional financial models.
Our company is ready to provide long-term financing for large investment projects in the USA and other countries with a minimum initial contribution of up to 10%.
Advantages of project finance include:
- Risks are shared among all project participants.
- The assets and liabilities of the project are on the balance sheet of the SPV, not its shareholders.
- SPV shareholders’ own contribution, as a rule, does not exceed 40% of the project cost.
Project financing is characterized by a wide range of lenders, which makes it possible to organize a consortium.
The interests of creditors, as a rule, are represented by the largest credit institutions (agent banks). Despite the high development of project finance in the United States, this model is associated with specific risks at each stage of the project. Typical risks of PF are listed in the table below.
| Investment (construction) phase | Operation and maintenance phase |
| The risk of untimely completion of construction and, as a consequence, the risk of putting the facility into operation (completion) with a delay. | Refinancing risk (the ability to increase the term of use of borrowed funds by paying off old debt and attracting a new one, reducing the cost of borrowing). |
| Risk of cost overrun or underfunding of the project by shareholders. | Currency risks associated with the mismatch of exchange rates, on which the proceeds from the project and debt obligations depend. |
| Risk of failure to reach the planned design capacity. | Risks of changes in legislation, as well as changes in regulatory mechanisms during the period of project implementation |
Project finance risk is defined as a financial expression of the possible deviation of the actual result from the expected results (occurrence of the risk event) due to the uncertainty of external and internal factors associated with lending and other banking processes.
To minimize credit risk, project participants need to conduct thorough research while ensuring professional project management at all stages.