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Project Finance


(Project Finance)

 

Introduction

It refers to that the project sponsor (shareholder) raises funds through establishment of a project company for such project operation, and then taking the company as borrower, its cash flow and benefits as repayment source and its assets as guaranty of loans. It is generally applied to such large-scale infrastructure projects as generating facilities, high-grade highways, bridges, tunnels, railways, airports, urban water supplies and sewage treatment plants, and other construction projects with large investment scale and long-term stably expected profits.

It may be divided into two types, the project finance with recourse and the project finance without recourse in accordance with the recourse.

Functions

1. Realize the non-recourse or limited recourse of finance. Under normal situations of such product design, the project sponsor shall not guarantee loan liquidation by its assets except for investing a certain share capital into the project company. Therefore, the sponsor will have bigger space and more resources to invest other projects.

2. Realize the off balance sheet finance. If the sponsor gets a loan directly from the bank, its ratio of liabilities increased, part financial indicators worsen will enlarge future financing cost. By contrast, the sponsor establishes the project company with legal personality which takes charge of project finance and construction. On condition that shares of the sponsor in the project company is no more than a certain percentage, the finance of the company will not be reflected on the balance sheet consolidated by the sponsor.

3. Enjoy the tax preference. As the high-level liability structure in the project finance and tax deduction of loan interest, the optimization of capital structure and decrease of capital cost of the company will be achieved.

Interest Rate

In accordance with the project's industry and region, shareholder, currency type of loans and other specific situations.

Term

The term of project finance generally includes medium term (one to five years) and long term (over five years), it mostly adopts amortization and floating interest rate.

Charges

In accordance with contract signed by both Parties.

Target Customers

All projects that may gain stable cash flow and be attractive to the bank may raise funds through project finance. Enterprises using project finance products always are under monopoly with government background, mainly focusing on following fields: projects of energy development, oil pipeline, oil refinery, mineral resource exploitation, toll road, sewage treatment and communication facility.

Application Qualifications

1. The project has been approved by competent government departments;

2. The project feasibility study report has been inspected and approved by relevant government departments;

3. Introduction of foreign technology, equipment and patent has been approved by government economic and trade departments;

4. The company's raw materials needed for project production have stable resources and the company may sign the raw material supply contract or the letter of intent;

5. The project company may provide completion guarantee and over-spending arrangement of infrastructure cost, and agree to transfer insurance interest, mortgage the construction in process of the project and its fixed assets formed, and pledge the project profits to the lender. The project shareholders agree to pledge share ownership to the lender.

6. The project product has a good sales channel, and the "take-or-pay" product purchase and sales contract have been signed;

7. The project product under prediction has well market prospect and development potential and strong profitability;

8. The construction site and land have been set, and the project construction and its ancillary facilities of water, electricity, communication have been conformed.

Submitted Documents

1. Approval document for the project feasibility study report from competent national departments;

2. Approval document from relevant environmental protection departments;

3. Joint venture contract, articles of association and relevant replies approved by the Ministry of Foreign Trade and Economic Cooperation (now as Ministry of Commerce) which are required to be provided by foreign investment enterprises;

4. Copy of business license for enterprise legal person;

5. Tax registration certificate (state tax and local tax);

6. Copy of the People's Republic of China organization code certificate;

7. Copy of the foreign exchange registration certificate (foreign investment enterprises);

8. Construction land planning permit, planning permit on construction works and so on;

9. Identity certificate of legal representative;

10. Loan cards;

11. Intent documents including "take-or-pay" purchase and sales contract, raw material supply contract, completion guarantee, over-spending arrangement of cost, transfer of insurance interest, mortgage of construction in process and its fixed assets formed, pledge of project profits, pledge of share ownership.

Process

1. The project company raises requirements of project financing loans to the company business unit of Bank of China.

2. Bank of China consults and reaches a consensus with the project company according to such financing conditions as "take-or-pay" purchase and sales contract, raw material supply contract, completion guarantee, over-spending arrangement of cost, transfer of insurance interest, mortgage of project finance, pledge of project profits, and pledge of share ownership.

3. Bank of China approves the project in accordance with approval procedure for loans.

4. After approval, the project company and Bank of China will consult all financing agreements.

5. Two parties sign an agreement and the company withdraws loan funds.

Kind Reminder

1. Project finance without recourse

It is also called as pure project finance. Under this financing method, company may repay principal with interest for loans completely depending on operating efficiency of the project. Meanwhile, the lending bank must gain property guarantee from project’s assets in order to guarantee its own interest. If the project fails for completion or operation and its assets or interests are not sufficient for repayment of all loans, the lending bank has no right of recourse to the project sponsor.

2. Project finance with recourse

Except taking operation benefits of the loan project as repayment source and gaining property guarantee, the lending bank also requires the third Party other than the project to provide guarantee. The lending bank has right of recourse to the third Party. However, the third Party undertakes limited liabilities in their guaranteed amount. So it is called as limited recourse project finance.

3. Distinctions between project finance and company finance

  Project Finance Traditional Company Finance
Loan Object Project company Project sponsor
Nature of Recourse With recourse or without recourse Full recourse
Repayment Source Profits after project put into production and the project assets All assets and profits of the project sponsor
Guarantee structure Complicated Single guarantee structure
Cost High Low

Case

The project of the Angola block No. 18 totally invests USD 4.5 billion, of which the Chinese investment occupies share of USD 2.25 billion. In 2006, for meeting fund requirements, a domestic enterprise raised funds of USD 1.4 billion in total for the project. There are 13 domestic and foreign banks to participate in this finance including Bank of China.

This project finance successively has won two awards of the EMEA Oil and Gas Deal of the Year 2006, and the Africa Oil and Gas Deal of the Year 2006 after the finance is over.

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