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Using its assets, rights, and interests of a project as security, a company might arrange for a loan based on the cash flow earned after the completion of the project. Industries with low technological risks and a stable market often use this structured finance strategy to finance their ambitious projects.
The primary reason is that with the help of Project Finance, a company can transfer the default risk of the project to the lenders. The lenders can procure better margins as they get better returns as compensation for the higher risk involved.
1. Mortgage on immovable property
2. Hypothecate Fixed assets
3. Hypothecate Current assets
4. Pledging Shares
5. Assignment of Rights in project and insurance policies
6. charge over project ledgers.
A Special Purpose Vehicle (SPV) is a separate legal entity from its parent firm, having its assets and obligations that are not shown on the parent company's balance sheet. SPV guarantees the banks and other lenders that the project is financially stable. The parent company's or a government organization's financial sheet is unaffected by a project company's debt.
1. Project financing drives costs higher while decreasing liquidity.
2. Require higher premiums to compensate for various risks associated
3. Shifts Risk to Lender but provides them better margin on credit.
4. Multiple Participants allowed.
5. Asset Ownership decided as per the particulars of the credit.
6. Zero or Limited Recourse Financing Solution
7. Cash Flow from Project repays the loan
8. Multiple Tax Benefits
9. Isolated from credit ratings of sponsors
• Determining the Project Plan
• Evaluating and Reducing Risk
• Verifying Project Feasibility
• Finances arranged by sponsor(s)
• Credit Negotiation between borrower(s) and lender(s)
• Terms documentation
• Verification of terms
• Installment paid to the borrower
• Regular Project Monitoring
• Timely Project Closure
• Credit Repayment
As per the Transfer of Property Act 1882, if a borrower fails to make payments on a loan, the lender has the right to foreclose on the debt and seize any assets used as collateral. These rights of the lenders are further secured under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).
A security trustee agreement normally outlines the duties and responsibilities of the security trustee. The Security trustee secures the interest of the lender by taking actions for the enforcement of the security. The trustee also has the onus of providing proceeds to the claims of lenders as per the contribution to the loan.
