3.1.1 Basic principles
PPP projects financing is based on the principles of non–recourse financing. The essence of non–recourse financing is that the debt servicing is based on the cash flows of the project rather than the credit worthiness of each individual investor of the project.
PPP projects are usually been undertaken by Special Purpose Vehicles (SPVs) which normally have a small capital base. One of the most important factors is the legal entrenchment that allows the banks to have priority against other providers of financing in default incidents, thus ensuring servicing of the debt through the cash flows of the project. Consequently, the analysis of debt providers is being focused on the cash flows of the project and the project agreement is designed in a way that ensure that banks have priority over all other claims on the cash flows, so as principal and interest is serviced through time.
The main measures used by the banks examine cash flows available for debt service relevant to the cost associated with servicing debt annually (Debt Service Cover Ratio) project both to the whole lifetime of the loan (Loan Life cover Ratio) and to the whole life of the project (Project Life Cover Ratio).
3.1.2 Funding of PPP projects
The main types of PPP projects financing are the following:
Equity finance
The equity in PPP projects (also known as risk capital) bears the greatest level of operational and financial risk, and for this reason is rewarded by a higher
3 Planning a PPP project
3.1 Funding of PPP projects
3.1.1 Basic principles
PPP projects financing is based on the principles of non–recourse financing. The essence of non–recourse financing is that the debt servicing is based on the cash flows of the project rather than the credit worthiness of each individual investor of the project.
PPP projects are usually been undertaken by Special Purpose Vehicles (SPVs) which normally have a small capital base. One of the most important factors is the legal entrenchment that allows the banks to have priority against other providers of financing in default incidents, thus ensuring servicing of the debt through the cash flows of the project. Consequently, the analysis of debt providers is being focused on the cash flows of the project and the project agreement is designed in a way that ensure that banks have priority over all other claims on the cash flows, so as principal and interest is serviced through time.
The main measures used by the banks examine cash flows available for debt service relevant to the cost associated with servicing debt annually (Debt Service Cover Ratio) project both to the whole lifetime of the loan (Loan Life cover Ratio) and to the whole life of the project (Project Life Cover Ratio).
3.1.2 Funding of PPP projects
The main types of PPP projects financing are the following:
Equity finance
The equity in PPP projects (also known as risk capital) bears the greatest level of operational and financial risk, and for this reason is rewarded by a higher
either in the form of ordinary share capital or subordinated debt. Depending on the project’s risk profile, equity level as percentage of the total financing ranges from 10% to even 50%. The main features of these types of finance are:
Ordinary share capital: The SPV must be capitalized with ordinary share capital. This is normally a nominal amount that is injected to the project during construction from the project sponsors.
Subordinated Shareholders’ debt: It is also regarded as equity financing as it is subordinate to the senior debt and any mezzanine debt and is therefore at risk over the project.
Debt finance
Debt finance (debt) can be provided either as a bank loan (senior debt or mezzanine loan) or as bond finance (capital markets).
Bank Loan
Bank loans are the most classic form of debt finance provided mostly by commercial banks, fairly customized for each project and require substantial resources from each participant bank for the credit analysis of the project and final approval. The main types of banks loans are:
Senior bank debt: ranks in terms of security above all other forms of financing.
Mezzanine loan (mezzanine): In a project finance structure normally bears a higher level of risk than senior debt but slightly lower than equity finance.
Bond finance
A bond is a negotiable debt instrument that pays the bondholder a rate of interest in exchange for the bondholder paying the principal amount of the bond to the issuer on issuance. It is considered as a long dated debt and an
either in the form of ordinary share capital or subordinated debt. Depending on the project’s risk profile, equity level as percentage of the total financing ranges from 10% to even 50%. The main features of these types of finance are:
Ordinary share capital: The SPV must be capitalized with ordinary share capital. This is normally a nominal amount that is injected to the project during construction from the project sponsors.
Subordinated Shareholders’ debt: It is also regarded as equity financing as it is subordinate to the senior debt and any mezzanine debt and is therefore at risk over the project.
Debt finance
Debt finance (debt) can be provided either as a bank loan (senior debt or mezzanine loan) or as bond finance (capital markets).
Bank Loan
Bank loans are the most classic form of debt finance provided mostly by commercial banks, fairly customized for each project and require substantial resources from each participant bank for the credit analysis of the project and final approval. The main types of banks loans are:
Senior bank debt: ranks in terms of security above all other forms of financing.
Mezzanine loan (mezzanine): In a project finance structure normally bears a higher level of risk than senior debt but slightly lower than equity finance.
Bond finance
A bond is a negotiable debt instrument that pays the bondholder a rate of interest in exchange for the bondholder paying the principal amount of the bond to the issuer on issuance. It is considered as a long dated debt and an
alternative to the banking debt, especially in cases where the project size is so high that there is insufficient liquidity in the banking market to procure attractive margins.