Getting your financing package ready

Transaction costs for arranging project financing are usually substantial. A good process structure can go a long way in keeping the overall cost – and also the time needed until financial close is achieved – under control.

In general, this means that the documentation package to be scrutinized by the bank and their advisers should be as complete and final as possible before the bank is approached with a request for financing. In an optimal (theoretical) case, the financer is presented with a complete project package, performs their due diligence on this package, and then approves the loan.

Process considerations

In practice, it’s not quite that simple. Different banks have different practices and internal guidelines as to the form of required documentation and acceptable risk levels, which will cause the need for some tailoring of the documentation in each case. Further, financing arrangements usually need to be kicked off at a point when important third-party contracts are still under negotiation and permitting processes are underway. This means that new developments will need to be reflected in the package and possible implications for the financing terms discussed with the bank.

Despite these challenges the owner should strive to provide a complete package, with drafts and plans in place of final documents where necessary, rather than leaving relevant items open. This will also make it possible to obtain competing bids from different banks.

Documentation checklist

The exact documentation to be put together for a potential financer will depend on the nature of the project. In general terms, the financing package must include at least the following:

detailed account of the project SPV, the project owner, the sponsors, financing sources other than project financing

account of the project’s operating environment, including customers, competitors, regulatory restraints and permitting requirements

financial model for the project’s lifetime (respectively the term of the envisaged loan), showing the achievement of a sufficient debt service coverage ratio (DSCR), with an analysis of uncertainties in terms of cash-flow

account of the existence of necessary permissions or other regulatory requirements

account of the project assets available for the bank’s security package

contracts or drafts for the project’s construction

contracts or drafts for the procurement of crucial operation-time goods and services (such as operation and maintenance agreements or raw material procurement)

contracts or drafts for the sale of the project’s goods or services.

The last point is usually a core element of the financing package. The bank needs to be confident that a sufficient flow of revenue is guaranteed for the term of the loan.

Revenue flow

Demonstrating revenue flow is simple in subsidized environments. For example, under the rule of the now-expired feed-in tariff scheme for Finnish wind power, a fixed sum was guaranteed for each MWh of produced power.

The question is more challenging in non-subsidized cases. The project will usually be required to have one or more contracts with offtakers that commit themselves to purchase sufficient amounts of the project’s services at sufficient prices so as to reach the required DSCR. As an example, a wind power project may conclude a long-term power purchase agreement with a corporate offtaker.

An offtake agreement with a private offtaker will satisfy the bank only if the offtaker itself is sufficiently creditworthy for the bank to trust that they will be able to honor their commitment. The bank’s advisers will therefore extend their due diligence scrutiny to the offtaker’s bankability.

Additional challenges emerge when the project’s sale process itself is regulated, which is the case for important infrastructure projects. For example, an LNG terminal will not be allowed to commit to sell all capacity to only one offtaker, while the bank expects full commitment from the offtaker. A delicate network of contractual arrangements will need to be created in order to handle such situation.