Chairman of the NewHayven Merchant Bank Floyd Haynes says that the discovery of oil in Guyana’s Atlantic Basin in 2015 has ushered in a new era of unparalleled business opportunities and this country will continue to see increased demand for financing.
But with most businesses here accustomed to traditional financing from commercial banks, Haynes, who is also a business professor, believes that the private sector community and prospective entrepreneurs should familiarise themselves with other types, especially project financing.
“One of the salient features of this new business environment is the ever increasing demand for project and related forms of financing, including equipment financing, factoring, and accounts receivable financing,” he told the Stabroek News.
“Project financing is a specialised form of financing used to fund large-scale, long-term projects with a specific focus on infrastructure, energy, construction, and other capital-intensive ventures. The financing is structured based on the projected cash flows and assets of the project itself, rather than relying solely on the creditworthiness of the borrower,” he explained.
Haynes said that borrowers must be aware that in project financing, lenders assess the feasibility and profitability of the project, considering factors such as market demand, technical viability, regulatory compliance, and environmental impact.
“The financing is typically structured as non-recourse or limited recourse, which means that the lenders’ recourse to the project sponsors is limited to specific project assets or revenue streams, he related.
“This helps to mitigate risks for the lenders and allows them to evaluate the project’s viability independently. Project financing often involves multiple parties, including lenders, project sponsors, contractors, equity investors, and sometimes government entities.
“The project sponsors are responsible for managing and executing the project, while lenders provide the necessary capital to finance its development. Lenders and other stakeholders assess the risks associated with the project and negotiate terms, such as interest rates, repayment schedules, and security arrangements.”
Learning the “ins and outs” of financing, according to Haynes, is an area all potential business owners should do since it also equips them with skillsets to make positive borrowing decisions to grow their investments.
“Project financing allows for the mobilisation of substantial capital for large-scale projects that may not be feasible through traditional financing methods. It helps to align the risks and rewards among project stakeholders and provides a framework for the long-term financing and successful execution of complex projects,” he informed.
Comparing project financing and traditional financing, Haynes said that they differ in several key aspects and he listed the differences according to specific areas.
“Purpose: project financing is specifically designed to fund large-scale, long-term projects such as infrastructure development, energy projects, or construction ventures. Traditional financing, on the other hand, is a broader term that encompasses various types of financing, including loans for personal, business, or general corporate purposes,” he stated.
“Security: in project financing, the primary source of repayment is the cash flow generated by the project itself, rather than the general assets or creditworthiness of the project sponsor. Lenders assess the feasibility and profitability of the project before providing financing. In traditional financing, lenders often rely on collateral or the creditworthiness of the borrower to secure the loan.
“Number three is risk allocation. Project financing involves careful risk allocation among project stakeholders. Each party, such as lenders, project sponsors, contractors, and equity investors, assumes a portion of the risks associated with the project. Traditional financing typically places the burden of risk primarily on the borrower.
“Debt structure: Project financing often involves a complex debt structure, known as non-recourse or limited recourse financing. This means that the lenders’ recourse to project sponsors is limited to specific project assets or revenue streams, minimising their exposure to risks. In traditional financing, lenders have broader recourse, typically looking to the borrower’s general assets and creditworthiness for repayment.”
Looked at too was also long-term nature project financing and cash flow analysis. “The first is typically used for long-term projects with extended payback periods, which may span several years or even decades. Traditional financing, on the other hand, can include shorter-term loans, such as personal loans or working capital financing for businesses,” he added.
“Cash flow analysis: Project financing relies heavily on detailed cash flow analysis, assessing the project’s ability to generate sufficient cash flow to repay the debt. Traditional financing may consider cash flow analysis but often takes a more comprehensive view, evaluating the overall financial health and creditworthiness of the borrower.”
He said that it’s worth noting that project financing is a specialised form of financing that requires a thorough understanding of the specific project, its risks, and the industry involved. Due to its complexity, project financing often involves a consortium of lenders and requires extensive legal and financial expertise to structure and execute successfully.
Types of project financing may include debt financing, which involves borrowing funds from lenders or financial institutions. The borrower (project sponsor) agrees to repay the loan with interest over a specific period. Debt financing can be secured (backed by collateral) or unsecured, and it can take various forms such as bank loans, bonds, or commercial paper.
There is also equity financing: “In equity financing,” he said. “The project sponsor raises capital by selling shares or ownership stakes in the project to investors. The investors become shareholders and participate in the project’s profits and losses. Equity financing can come from individual investors, venture capital firms, private equity funds, or public offerings through the stock market.”
Another type is public-private partnerships (PPPs), which involve collaborations between public entities (such as governments or municipalities) and private companies. The private sector provides funding, expertise, and management while the public sector offers support, infrastructure, or regulatory framework. PPPs are commonly used for large infrastructure projects like transportation systems, utilities, or public buildings.
Haynes also spoke of project bonds and mezzanine financing. “Project bonds are a specific type of debt instrument issued to finance infrastructure or large-scale projects. These bonds are typically backed by the project’s cash flows or the revenue generated by the completed project. Investors receive fixed interest payments over the bond’s term, and the principal is repaid upon maturity. Mezzanine financing fills the gap between senior debt and equity. It involves a combination of debt and equity elements, offering lenders the potential for higher returns. Mezzanine financing often includes subordinated debt or convertible debt, allowing the lender to convert their investment into equity if specific conditions are met,” Haynes proffered.
“Asset-Based Financing: this type of financing is secured by specific project assets, such as equipment, real estate, or accounts receivable. Lenders provide funding based on the value of the assets and have the right to seize or liquidate them in case of default. Asset-based financing can be useful for projects with substantial physical assets. Crowdfunding: crowdfunding involves raising small amounts of capital from a large number of individuals or investors, typically through online platforms. This method is often used for smaller projects or startups. Contributors can receive rewards, equity, or interest payments, depending on the crowdfunding model.”
Haynes also looked at Export Credit Agencies (ECAs) which provide financing and insurance to support international trade and export projects. “They offer loans, guarantees, or insurance, to protect against commercial and political risks associated with cross-border transactions. ECAs are typically government-backed institutions,” he said.
Grants and subsidies was another ways some projects may qualify for financing. These are usually for government grants, subsidies, or incentives. “These funds are non-repayable and are provided to support specific initiatives, such as research and development, renewable energy projects, or community development,” he said.
“It’s important to note that the availability and suitability of these financing types may vary depending on factors such as the project’s nature, scale, location, and the financial landscape. It is recommended to consult with financial advisors or experts to determine the most appropriate project financing options for your specific needs,” he added.
