What are the conditions for bank lending to projects? Lending to investment projects
Feature of project lending (financing)
- 11 under project lending (financing) is understood as the financing of individual independent investment projects without additional attraction of funds of project participants - enterprises and organizations. Project lending arose and developed from banking practices such as lending with the condition that the loan was repaid with manufactured products: the loan was repaid after the implementation of the project from sales proceeds. Subsequently, the ego identified the main features of project lending, such as:
- object - a specific investment project, and not production and business activities or business operations;
- loan repayment source - income from the implementation of the project, isolated from the financial activities of the project initiators;
- the possibility of combining various forms of credit: banking, commercial, state, international;
- project risks are distributed among the participants;
- the bank can act as a project organizer, creditor, investor, financial consultant;
- transfer of borrowed funds for an independent project is carried out by a specially created company;
- solvency and creditworthiness of investing organizations may not be taken into account.
When organizing project financing, the object of evaluation is the investment project itself and its viability. An important point is the ability to generate cash flows sufficient to repay the loan. The implementation of the project and the repayment of the loan largely depend on the effective interaction of investors, the bank and other project participants. In practice, banks carefully examine investors to find out how capable they are of supporting the project. The effectiveness of the project is largely determined by the coordinated actions of all participants. Therefore, for a bank, first of all, it is important to guarantee the commissioning of a loan facility, the timely start of its operation, the obligation to provide everything necessary, and guarantees for the supply of necessary products by third parties. Specialists identify five basic principles of project lending 1:
- project viability:
- participation in the project of experienced, strong, conscientious partners;
- accounting and distribution of all project risks;
- settlement of all legal aspects;
- development of specific and coordinated action plans and the availability of a quality business plan.
Unlike traditional bank lending, project lending can involve suppliers and buyers of products, government agencies, pension funds and leasing companies. Therefore, with project lending, it becomes possible to use several sources of borrowed capital. When lending to large investment projects, access to more beneficial sources of credit, such as funds from international financial markets, budget funds, funds from international financial and credit organizations, can be obtained. Project lending allows you to attract capital in large volumes and with high financial leverage. This is especially important for small companies for which access to a loan of large sizes and with high leverage is practically closed.
Banking: management and technology: textbook, manual for universities / ed. L. M. Tavasieva. - M .: UNITY-DANA, 2001 .-- S. 667.
A significant advantage for the founders of an investment project is the possibility of obtaining a loan without reflecting this debt on its balance sheet, since it is included in the balance sheet of a special company. Therefore, the damage to the balance sheet and indicators of the payment ™ of the founder is less than that of a conventional loan, since the ratio of the own and borrowed capital of the project founder is worsening.
A special role in project lending is played by the distribution of risks. From this point of view, the following types of project lending are distinguished:
- full recourse loans: the lender retains the right to full compensation for all obligations of the borrower. If the lender manages to retain the right of full recourse to the initiating founder regarding all project obligations, this actually means ordinary secured lending, which violates one of the principles of project lending;
- partial recourse loans: lenders have a limited right to transfer responsibility for repaying a loan, which means sharing risk between all project participants;
- non-recourse lending: lenders take most of the risks and in fact bear full responsibility for the implementation of the project, which, of course, leads to more expensive loans.
To minimize risks in project lending, banks, as well as in traditional lending, require collateral. In project lending, possible forms of collateral are divided into two groups: quantifiable collateral, and collateral that, as a rule, cannot be estimated by a specific amount of money and which sometimes cannot be separated from the company implementing the investment project. The second group of collateral usually includes information types of collateral:
- obtaining objective information about the competitive advantages known in marketing and pricing, acquired by the company during its work in the market, considered as a guarantee of future new achievements;
- information about the project itself: a feasibility study and feasibility studies, the likelihood of timely implementation of the project, the quality and cost of future products;
- Information about the project managers.
The bank, as a rule, does not perceive the insufficiency of material support for an investment loan as an indisputable basis for refusing a loan, provided that bank employees are well versed in analyzing and evaluating types of information support. In this regard, not every bank is able to organize project lending. In real practice, lenders, as well as initiators of an investment project, use various criteria for the appropriateness of project lending, including technical and economic viability, profitability, and the presence of a common interest uniting all participants. If in the long term there is a common focus of interests of all project participants and it is quite stable, then the bank can participate in the project with its credit resources.
How to attract the necessary financial resources using asset securitization?
The term "asset securitization" describes a financing technique based on the issue of securities secured by assets - ABS (.Asset-Backed Securities) - company or bank. This technique was first applied in 1971 in the USA by the agency Freddie mac: it implemented the first innovative mortgage-backed securities issue program at that time - MBS (Mortgage-Backed Securities). The term itself did not exist then, but the program turned out to be very successful, as it contributed to the development of the secondary mortgage market, provided an opportunity to increase the volume of mortgage lending, which contributed to the development of the real estate market and more fully meet the housing needs of American citizens.
The term "securitization" appeared in Wall street journal in 1977 and was “invented” by Lewis Ranieri (Lewis S. Ranieri), head of the mortgage department of the bank Solomon brotherswho suggested using the term to a reporter Wall street journal Ann Monroe (Ann Monroe) in an article describing the first issue of securities secured by a pledge of rights of claim on mortgage loans.
There are various definitions of securitization, but the essence of this technology is that it allows you to transform assets into securities backed by cash receipts from the original assets. By selling such securities on the stock market to a wide circle of investors, companies receive a significant additional inflow of free cash that can be used for both current and investment activities.
Asset securitization is a rather complex and high-tech operation, which is carried out in several stages. Several entities participate in it, and various financial instruments are used. The main steps in structuring each specific transaction are:
- asset allocation;
- creation of a special legal entity;
- the introduction of mechanisms to increase the reliability of meeting the interests of the parties;
- issue of securities;
- sale of securities to investors.
The basis of a securitization transaction is an asset that generates regular and predictable cash flows. At the same time, financial assets (i.e. monetary claims against third parties) can occur both from financial contracts (in the vast majority of cases, credit contracts), and from contracts in any other sector of the economy. In order to securitize assets, the company must either be able to plan revenue for the already concluded agreements or, within the framework of the agreement, have a specific payment schedule, which could subsequently be used as a payment schedule for investors for ABS. As a rule, banks and some companies in the real sector have this certainty regarding future earnings. It should be borne in mind that for investors, the object of investment analysis is not the credit quality of the company itself, but the reliability of its financial assets. Thus, the first necessary characteristic of securitized assets is their ability to generate a stream of payments with known regularity. These may be assets generating only interest payments (medium and long-term bank loans), or assets generating capital payments (claims under leasing or trade agreements).
The second most important characteristic of securitized assets is the coordination of the urgency of receipt of payments and payments to investors for ABS. In this regard, when securitizing assets, it is necessary to take into account the life of the assets and the frequency of the cash flow using appropriate structuring mechanisms. Accordingly, cash flows generated by securitized assets should be well predicted.
The third essential characteristic of an asset to be securitized is its legal separability from the originator. In practice, the assignment of a claim is often prohibited by an agreement between the debtor and the creditor. In addition, the contract often includes conditions on the confidentiality of information, which create certain legal difficulties in securitization.
Another criterion for allocating an asset pool is the minimum required volume. Since various entities participate in the transaction and high transaction costs and the costs of ongoing monitoring and management arise, according to most experts, it is economically feasible if the volume of assets exceeds $ 80-100 million. Therefore, specialized companies are often created for small companies and banks - drive conduits (refinancing organization). At the first stage, for example, a bank sells its mortgage loans to the balance of its own branch in a conduit. With the accumulation of loans transferred by various banks in an amount sufficient to form a pool, the conduit will issue securities.
In the framework of traditional securitization, the originator forms a pool (this process is called “bundling”) of homogeneous assets, consisting of debt obligations that are approximately equivalent in quality, timing, risk and profitability. Such assets can be differentiated payment flows, for example, for banks: future plastic card flows and future receipts to correspondent accounts; various types of loans: mortgage, consumer, car loans; lease payments. For other securitization companies, i.e. transformation into securities, practically any financial asset that generates regular cash flows, taking into account the previously considered characteristics, is susceptible, for example, export revenue, etc.
The next step is the sale of this pool to the issuer of securities. A special investment company is established for this. (Special Purpose Vehicle, SPV) which buys assets from the originating bank and issues securities ( ABS) secured by proceeds from these assets. It can be bonds, certificates, notes. The result of this operation is the transfer of securitized assets to the balance sheet. SPV as her sole asset. The most important principle of traditional securitization along with the principle of ensuring the actual transfer of assets (Tme Sale of Receivables) SPVis an exception to the risk of bankruptcy SPV which is practically forbidden to engage in all types of business and financial transactions and whose actions are strictly controlled.
An indispensable participant in the asset securitization operation is a rating agency, which, on the basis of a thorough study of the characteristics of the debt pool and the financial stability of the participants, determines the rating of the issue of securities
The rating of the issue of securities also depends on the credit rating of guarantors who provide credit support for securitization. Large banks and special insurance companies can act as guarantors. Asset securitization credit support measures are very diverse. This can be an irrevocable letter of credit opened by the guarantor in the amount of possible losses in the event of default on the issued obligations, as well as the creation of a reserve fund or cash deposit made by the guarantor or the originating bank.
Rating is important for determining the selling price and profitability of securities. For potential investors, it serves as a guide. It is important to consider that institutional investors, as a rule, are not allowed to purchase securities below a certain rating.
A specific feature of securitization is that a securities issue may be assigned a higher rating than the rating of a securitization company, which allows attracting cheaper long-term resources compared to direct borrowing.
The technical functions of accepting payments from borrowers, crediting them to trust accounts, collecting foreclosures on default loans, collecting statistics and publishing reports are performed by the service provider - a special service company or the originating bank itself, which receives a commission for these operations. A backup servicer may also participate in securitization, which is created in case the main servicing bank stops or is unable to service securitized assets.
The interests of investors are represented by the trustee ( trustee), which acts as an independent controller. The trust exercises control over the flow of receipts for transferred receivables and over the actions of all participants in the operation. He has a power of attorney to manage incoming contributions and assets that are at zero; carries out monitoring; has the right to receive any information and the right to declare default on securities, and also sells collateral in case of insolvency of the issuer.
Participation in the securitization of the trust ensures the implementation of another important principle of the trust - the availability of tight control of investors over the flow of income from transferred receivables. However, in traditional securitization, investors rely mainly on the quality of assets providing securities and the strength of the legal structure of the issue.
Certain disadvantages of traditional securitization, such as the high cost of genuine sales (True sale) difficult
Securitization provides the necessary effect if the volume of assets to be pooled is at least $ 100 million.
tax accounting, the need to disclose confidential information about the borrower, state registration of concession rights, are overcome in the framework of synthetic securitization. In this type of securitization, the asset is not sold and remains on the balance sheet of the company, but the risks of this asset are transferred to the market through the inclusion of credit derivatives in the transaction structure.
These asset risks are transferred SPV through the use of derivative securities referred to above - credit default swaps (Cds) or bonds absorbing credit risks - CLN (Credit Linked Notes).
SPV as a rule, produces a hook called synthetic secured debt - CDO (Collateral Debt Obligations).It is they who, after receiving the rating, are placed among investors. With funds from the sale Cdo a special company acquires highly liquid (government) securities. They are used as security for the fulfillment of obligations to the originator on the transferred credit risk and are transferred as collateral to the originator.
Upon the occurrence of an event specified in the contract Cds or CLNgovernment securities are sold to pay obligations to the originator, and the remaining amount is distributed among investors.
Asset securitization is an effective financial management tool, expanding freedom of action, allowing to overcome financial difficulties and avoid critical situations.
Thanks to asset securitization, companies can more successfully solve many management tasks:
- diversify sources of financial resources;
- reduce the cost of debt financing and attract resources for the long term;
- reduce the debt burden on the company's balance sheet;
- manage business structure and liquidity more efficiently;
- minimize credit risk or non-payment risk by transferring it to other participants;
- increase the investment attractiveness of the business.
At the same time, securitization also contains potential
danger to both banks and companies, and to the financial market as a whole. Thus, the banks' enthusiasm for secorization schemes led to weakening of control over credit risks, to softening credit conditions, to lowering requirements for borrowers, which gave rise to the widespread use of so-called subprime loans (Subprime Lending).
In addition, the rapid development of asset securitization led to a rapid increase in the volume of transactions with derivative financial instruments, which contributed to the strengthening of the processes of virtualization of the economy, the separation of the financial sector from the real sector of the economy, and the emergence of deep imbalances in both the global and national economies. The crisis that erupted in the US mortgage market in 2007, affected Western European countries and triggered an unprecedented financial and economic crisis in 2008, was, inter alia, a consequence of the lack of necessary responsibility on the part of all participants in the asset securitization process.
Russian banks and companies became interested in securitization in the late 1990s. But the first attempt to carry out full-fledged securitization of banking assets was made in August 2002 by Russian Standard Bank by issuing bonds secured by a portfolio of 50 thousand consumer loans. The issuer of three-year bonds with a total amount of 500 million rubles. made an independent company LLC "Russian Standard - Finance." However, some experts believed that, despite the fact that this transaction was declared the “Russian securitization debut”, its structure did not provide a clear separation of assets from the originator and did not protect securities owners in the event of bankruptcy, and none of the principles of traditional securitization was observed. In 2004, Gazprom completed the largest transaction in Russia on the securitization of future gas export payments. Until mid-2007, Russian banks and companies actively developed the securitization market, having conducted more than 20 transactions. The total volume of securitized assets in Russia reached almost $ 5 billion. In mid-2007, the structure of Russian ABSby type of collateral was: DPR (Diversified Payment Rights - diversified payment rights) - 35%, mortgage housing loans - 22%, car loans - 21%, consumer loans - 10%, leasing payments - 8%, credit cards - 5%. Most securitizations by Russian banks and companies were carried out abroad, i.e. transactions were cross-border when the asset pool was sold SPV created outside the Russian Federation. Two securitization transactions were conducted in Russia: in 2006, Sovfintrade securitized mortgage loans in the amount of 3 billion rubles. In 2007, the securitization of mortgage loans in Russia was carried out by the Agency for Housing Mortgage Lending (AHML).
World financial and economic crisis of 2008-2009 To a large extent, it undermined confidence in the technology of asset securitization, since many participants in this process, and especially the largest investment banks, were unable to fulfill their obligations on the acquired credit derivatives. However, the discrediting of securitization as one of the important links in the modern financial system did not occur due to the fact that this financial technology is basically ineffective, but because the main participants and organizers were unable or unwilling to take into account the risks inherent in this mechanism.
Nevertheless, the Russian economy and Russian banks and companies are in dire need of the development of modern financial technologies, including asset securitization. The need to create broad opportunities for securitization of financial assets as the most important task is mentioned in the “Strategy for the development of the financial market in the Russian Federation for the period until 2020”, approved by the Government of the Russian Federation in December 2008
In modern conditions on the world markets and in Russia there is a gradual restoration of the asset securitization market, which Russian banks are increasingly resorting to. So, in April 2011, the Joint-Stock Bank “GPB-Mortgage”, which is part of the Gazprombank Group, conducted a transaction on the securitization of mortgage assets, while the total issue amounted to 7060 million rubles. ; Bank Vozrozhdenie in December 2011 securitized its mortgage portfolio and placed mortgage bonds worth 4.07 billion rubles. In mid-2012, VTB Group raised $ 275 million, due to the securitization of the VTB-24 car loan portfolio, Nomos-Bank announced the preparation of a securitization of the mortgage portfolio in the amount of 5 billion rubles. AHML in modern conditions is also trying to develop securitization. So far, this type of activity is limited only by guarantees to banks independently preparing issues of mortgage bonds. At present, four AHML partners are planning a joint transaction at the end of 2013 on securitization of mortgage loans totaling 3 billion rubles. The organizer of the transaction is AHML. If this partnership is successful, it will become the first in the Russian mortgage securitization market 1 In Western practice, when securitizing mortgages, they issue MBS (.Mortgage Backed Securities): CMBS are provided with a commercial mortgage, RMBS housing.
In the Russian economic literature two independent forms of bank investments are considered: investment lending and project financing.
Investment lending - This is the process of providing a bank with a long-term loan for the implementation of a specific investment project for a certain security in the form of property, values, guarantees, sureties.
The sources of repayment of obligations on long-term investment loans for legal entities are their income and profits generated as a result of their financial and economic activities, including income generated by the project. The sources of repayment of investment investments for individuals will be their income in the form of wages and other legal income.
Investment lending has a number of distinguishing features from conventional loans.
First of all, and it has already been indicated, the term of the loan. With investment lending, it cannot be short-term, as a rule, long-term or medium-term.
Carrying out investment lending, highly qualified specialists of the bank carry out a more detailed analysis of the enterprise both in the current period and in the future period. This analysis includes a characteristic of the demand for this product, the state of the market for the forecast period from considering estimated dynamics of market prices, exchange rates, interest rates.
Bank experts find out not only the creditworthiness of the borrower at the date of loan processing, but also his investment creditworthiness for the period of investment lending.
To clarify the comprehensive aspects of the enterprise involved a wider range of documents. As a rule, this is not only a balance sheet for 2-3 years and current financial statements, but also a feasibility study for an investment loan, a business project plan, an investment project form, an estimate of a construction project and justification for its effectiveness, various tolerances and permits, etc. d.
Assessing investment risk, taking into account many market and non-market factors that can reduce the effectiveness of an investment project, is considered quite complicated.
In the most general form under project financing Credit is understood in which repayment of a borrower's debt obligations is carried out by cash proceeds from its sale.
Project financing implies a closer participation of a commercial bank in an investment project in the form of an investment loan, bank guarantees, project financing at its earliest stage. Very often the bank claims to share in the project. Taking into account all the risks assumed, the bank will thus receive not only a percentage of the loan provided, but also a part of the company's profit. The return on invested funds is possible at the stage of operation of the project, mainly from income received after the project is materialized. This is only possible if the manufactured products are competitive and find their buyer.
Specialists note certain differences between investment lending and project financing. Comparative characteristics of investment lending and project financing are given in table. 8.1.
Table 8.1
Comparative characteristics of investment lending and project finance
Investment lending |
Project finance |
1. Participants |
|
Commercial Bank |
Commercial banks Investment banks Investment funds and companies Business entities Leasing companies |
2. Sources g |
Financing |
Bank loan Own funds of the borrower |
Bank loan Own funds of a borrower Bonded loans Equity financing Financial leasing Government financing |
3. Securing a loan |
|
Pledge of highly liquid assets of the borrower Guarantee Surety |
Design capacity Cash inflows from the operation of the project Property created in the process of investment activity |
4. The ratio of own and borrowed funds |
|
Own funds - 30% Borrowed funds - 70% |
Own funds - 50% Borrowed funds - 50% |
5. Project implementation control |
|
Commercial Bank does not interfere in the project implementation process |
Commercial Bank is an active participant in the investment project. |
6. Risk and profitability |
|
Low risks and reduced returns |
High risks and relatively higher returns |
7. Lending Authority |
|
Bank credit department and credit committee |
Credit department of the bank, credit committee, board of the bank |
8. Project implementation |
|
A project company is not created, an enterprise independently carries out an investment project |
The investment project is carried out on the basis of the created project company. |
When assessing the possibility of providing an investment loan or project financing, the influence of the so-called stop factors, which increase risks and impede these investments, is taken into account. For example, the project being created is located in a region of increased political or economic instability; during the construction of the facility there is no transport and communication infrastructure; there is a shortage of personnel; project effectiveness is problematic, etc.
All investment projects vary in risk: the least risky projects are carried out by state order. Corporate community projects have a significantly greater degree of risk. But in practice, mixed forms of financing, the so-called public-private partnership, can also be applied.
Sources of corporate project financing are own funds of a commercial company, depreciation charges, retained earnings. If bank loans become the predominant source of financing, then such a project is financed under the terms of bank project financing.
Under market conditions, joint project financing is used to create and construct very large facilities. This means that funds are allocated by several credit organizations. Joint project financing can take three forms: independent parallel financing, co-financing, mixed project financing.
With independent parallel financing, the credit institution concludes a separate loan agreement with the borrower and provides loans for a certain part of the project.
Co-financing means combining lenders into a single pool in the form of a consortium or syndicate that enters into a single loan agreement with the borrower.
Mixed project financing combines several types of financing: borrower's cash, bank loan, commodity loan, leasing, borrowed funds in the market for loan capital, etc.
Financing of investment projects, as already mentioned, is always associated with certain risks, which is due to various external and internal factors. Therefore, the key issues are the distribution of risks between project participants.
Risk allocation is based on the degree of regression.
Non-recourse loans The borrower's corporation assumes that the creditor bank assumes all risk associated with the implementation of the project without any guarantees from the borrower. In case of success, the creditor bank receives increased compensation in the form of high interest payments and part of the profits of the created enterprise.
Lending with limited (partial) recourse right means that each participant assumes a certain part of the risk. Parties interested in the implementation of the project take on specific commercial obligations. Typically, these obligations are distributed at the stages of the project and facility.
The essence of project financing with full recourse to the borrower is that the borrower assumes all possible risks that may arise during the creation of the project. In this case, the risks for the bank are significantly reduced, especially when it comes to government orders, but do not disappear at all.
Project financing has its own organizational forms, which differ depending on the types of project financing, sources of financing, subjects of credit relations, forms of protection of interests of all parties involved. Organizational forms of project financing are shown in table. 8.2.
Table 8.2
Organizational forms of project financing
Kinds design financing |
Sources financing |
Subjects credit the relationship |
Forms of protection of interests |
Banking design financing |
Bank |
Acting company |
FROM certain degree of regress |
Corporate design financing |
|
Design company |
Limited liability of participants in proportion to contributions |
Mixed design financing |
3. Bank loan 4. Government funds |
Design company |
Lenders:
|
An analysis of the applied organizational forms of project financing reveals their advantages, which include attracting significant resources for a potential project, providing good credit conditions, obtaining guaranteed funds as part of joint activities, and distributing project risks among participants.
A feature of project financing is that an independent legal entity - a project company - is created for investments. The founders of this company are not responsible for repaying the loan, their task is to gradually create an investment project. For this purpose, the project company has its own bank account, which receives the necessary funds from the founders.
To assess the economic efficiency of the investment project, many indicators are used. For example, to reduce risks and determine future profitability, you should calculate the margin of financial strength of the project. The latter is determined on the basis of calculating the debt coverage ratio, which is calculated as the ratio of the amount of expected net income from the project to the planned payments on credit debt. This coefficient should not be lower than 1. In world banking practice, the minimum value of the coefficient is 1.3. Sberbank of Russia provides project financing and investment lending, if this ratio is not less than 1.5.
In addition to this indicator, the following are calculated: net present value, internal rate of return on the project, return on investment index, payback period. Currently, to simplify the system of calculating data and other indicators, programmers have developed many programs that the bank can choose at its discretion. It is also important to pay attention to the sensitivity of the project to external changes. This analysis allows you to determine the degree of influence of individual volatile market factors on the payback period of the project.
As already mentioned, investment lending and project finance are the most risky types of long-term lending. In this case, we are talking about specific credit risk.
In turn, the likelihood of such a risk depends on a number of external and internal factors.
TO external factors macroeconomic reasons are included, the occurrence of which is especially difficult to foresee. For example, global financial crises, the dynamics of world prices for designed products and raw materials, inflation processes within the country, increasing the cost of the project, tax and tariff changes, possible changes in the legislation of the country, natural disasters, technological disasters, etc.
Intrinsic factors investment risks depend on the project participants themselves. This could be a risk of non-compliance by participants 146
the project of its obligations to finance the project, the risk of default by suppliers and contractors of their obligations, the risk of delaying the construction of facilities, as well as the timing of equipment delivery. There are great risks associated with errors in the project, with defects during construction and installation works, the risk of illiterate management in solving organizational and managerial decisions.
In addition, with investment projects whose goal is the production of new products, marketing risk may arise, the essence of which is in the wrong marketing strategy. A marketing strategy concerns, first of all, pricing policy, sales markets, assessment of the infrastructure component of the project, etc.
With long-term and large-scale projects, administrative risks are not uncommon. The fact is that such projects are always accompanied by obtaining various permits and licenses from the oversight bodies. The absence of certain permits and licenses may violate the construction time of the facility.
Investment lending and project financing, as we have seen, have their advantages and disadvantages for both borrowers and banks. High risks are associated for borrowers with the loss of part of their income and puts them under the control of the bank. But it is quite possible that without the participation of the bank, the investment project would not have been implemented.
Bank lending to investment projects
Lending to investment projects is not identical to long-term lending, although it also provides for a sufficiently long period of use of credit resources, in contrast to short-term loans that involve
First of all, bank lending to investment projects is characterized by the presence of a funded project, both new and existing, for the implementation or development of which the borrowed funds borrowed by the borrowing company will be sent. In this case, the investor bank assumes certain risks that are associated with the implementation of the funded project. A decision in favor of lending to such a project will depend on the planned income received from the project. Naturally, with this option, the current situation of the financial condition of the enterprise, the size of its profits, the dynamics of growth indicators, stability, creditworthiness, and solvency of this enterprise will be mandatory taken into account. But the investment project itself will also play a fairly significant role. When lending to investment projects, special attention is paid to the result predicted from the implementation of the project.
Lending to investment projects by Russian Credit Bank
Russian Credit Bank finances investment projects involving the reconstruction, modernization, expansion of the existing and the creation of new production enterprises, both large and medium-sized businesses.
The use of the loan may be made in order to:
Increase production capacity;
- financing costs for the overhaul of technical re-equipment;
- acquisition of movable as well as real estate;
- refinancing loans.
The loan limit may amount to more than 100 million rubles. Financing is in the form of a loan / line of credit. The term of use of credit funds can reach 5 years. The debt repayment schedule is drawn up by agreement of the parties. The loan rate is set individually for each borrower.
As collateral for a loan can be issued as a pledge:
Land rights (property, long-term lease);
- real estate objects;
- property rights;
- shares / stakes, incl. assets that are not related to the investment project;
- guarantees of solvent companies;
- bank guarantees.
Bank lending to investment projects most often implies that borrowers who: are legal entities registered in the Russian Federation or performing operations, or possessing assets in the Russian Federation will take this opportunity; have a period of actual business operation - at least 2 years; have the necessary licenses and certificates.
Technology for bank lending to investment projects
Effective lending to investment projects involves a different organization of the bank than simple lending. For example, many banks practice visiting a future borrower, even when considering a regular loan application. Thanks to this, the bank’s specialists mainly get acquainted with the financial documentation of the enterprise. But, when considering the issue of crediting the implementation of investment projects, much more is often required, namely, it is a question of conducting a comprehensive survey of the enterprise with the goal of establishing the level of risk of issuing funds. A similar survey of the enterprise is carried out in terms of the presence of possible risk factors.
When making long-term investment lending, one does not need to pin high hopes on a variety of standard types of loan repayment security. The most reliable collateral in the case when banks provide loans to investment projects is considered to be a fully developed investment project, as well as a high-quality business plan for its implementation. They reflect the actual state of the enterprise with all the existing risks and even more reliably than the future state of the business they are aimed at achieving. A skilled analyst can learn a lot from such sources. The partial information provided in them or its complete absence can also indicate to an experienced specialist about the actual situation at the enterprise.
With the development of the project method of doing business all over the world, the need arose for introducing a fundamentally new mechanism for raising funds that allows you to carry out work without initially having any cash collateral. Next, we consider what project financing is, and how it differs from other types of raising money in the public and corporate sectors.
Project finance concept
Project finance is a way to raise funds to ensure long-term. It is also called investment loan. A feature of the method is that the money is not issued against a state or corporate guarantee and not against the security of property, but against the cash flow that the project will generate after its completion. From the point of view of traditional lending, a loan looks poor and risky.
Not everyone succeeds in obtaining state guarantees, and obtaining collateral against cash assets can be complicated by their high degree of depreciation and, consequently, low cost. In an investment loan, the main guarantees for lenders may be a license, development and use of particularly valuable assets, the right to use, and production.
In the world, the practice of investment lending is already quite developed, however, for Russia it is still an unusual thing. Loan funds for a promising, but risky startup, most banking organizations will not risk it. However, when a team of well-known professionals is formed, and the initiative itself promises good profit, the chances of getting the necessary capital increase significantly.
In the form of financing instruments for an investment loan, equity (direct investment), letters of credit, bank loans, leasing, and sometimes commodity loans can be used. Projects with potential high profitability are in demand, such as the construction of housing, industrial and commercial facilities, the launching of a new type of product that is in demand on the market, and the reprofiling or modernization of an enterprise.
In order to obtain this kind of financing for the implementation of ideas, a project company is necessarily created in the form of a separate legal entity. Money is allocated for the implementation of certain goals, cost items are clearly defined, and the borrower cannot change it at will. If with corporate financing all risks are borne by the organizing company, then with an investment loan the risks are divided between the initiator, the creditor bank and the borrower.
In Russia, the full amount for the entire initiative is very rarely allocated, most often bankers require the borrower to invest part of their own funds, usually in the amount of 25-40% of the total amount.
In this case, the initial work (FEED, feasibility study, project documentation) is paid by the initiator of the plan, and credit days are connected at the construction stage. After the end of the investment phase, the new created assets are pledged to the bank under the loan.
To reduce the likelihood of losses with such risky lending, banks conduct a detailed examination, draw up business plans, feasibility studies, financial models, and marketing research. This forces all parties to delve deeper into the specifics of the business, to understand the processes that occur in it. If we are talking about building "from scratch" or modernizing an existing facility, then attention is drawn to the availability of property or long-term lease of land. In addition, the organization that will carry out construction and installation works is of great importance.
There are two main forms of allocation of funds for this type of provision of the initiative:
- Co-financing. Under him, all creditors are combined into a single pool (syndicate, consortium), and a single loan agreement is concluded with the borrower.
- Parallel Independent Financing. In this case, each banking organization provides money for its subproject (part of a common undertaking) by concluding a separate loan agreement with the borrower.
An investment loan is sometimes referred to as “recourse financing,” that is, a loan repayment requirement. There are three main forms of allocation of funds:
Unlike conventional lending, before making a decision on investment lending, the term for consideration of the submitted application is longer and can last from several months to one and a half years.
The specifics of working with investment credit
Project financing is based on certain principles that apply to all such cases. Specificity is due to a high degree of risk for the parties, therefore, much attention is paid not only to the company receiving the funds, but also to the idea most proposed for implementation.
The project stands out separately from the main activity of the company, a legal entity is created through which all payments are made. This has its advantages and is necessary for several reasons:
- The implementation of the plan begins "with a clean face." Bringing all the manipulations into a separate structure allows us to avoid problems that may be related to the activities of the main company in the past, for example, inspections of fiscal services for previous periods, invalidation of individual contracts or lawsuits in other areas.
- The project is becoming more open and transparent. All payments and the planning of financial flows are well monitored, there is no intersection with other financial flows of the company. Transparency increases the appraised value of an idea and fosters trust between multiple partners.
All possible risks are thoroughly investigated. and events are held to minimize them in order to attract an investor. This work is carried out at the pre-investment stage. After considering potential dangers, each side takes on part of the risks that it is able to manage as effectively as possible, as well as control them. For example, risks can be distributed as follows:
- political give away to the involved state body;
- technological assign to equipment suppliers;
- market-based products are transferred to buyers of products and their partners through specialized contracts.
The participants in the undertaking give each other functional guarantees in the form of "comfortable letters" or by concluding a memorandum of understanding, preliminary agreements with customers. The ideal option is to receive state guarantees of preferential taxation or special conditions for a certain period, this is possible with the social significance of the initiative being implemented.
Financial modelsused in investment loans are very important for the stability of the implementation of the plan. Modeling is carried out by creating structured reporting proformas that are integrated into the calculations of the balance sheet of the project, its cash flows and expected profit. A good help for this is becoming the internationally accepted standards of financial reporting.
The financial model is built on the basis of assumptions regarding the key factors affecting the business that were made during planning. For this, specialists must carefully study the features of entrepreneurial processes in the right field and the relationship with key factors. The more accurately the expected activity of the object is modeled, the more reliable will be the assessment of its cash flow, which is the basis of the loan.
Quality management of the ongoing initiative directly depends on the professionalism of their own or invited managers, their willingness and ability to properly organize communications between partners and participants in the undertaking, to coordinate their actions. Management should qualitatively tune the issues of marketing, finance, logistics, information exchange.
It is often practiced to attract an experienced financial adviser to work, who can provide support in the analytical, legal and informational support of the idea. Most often, help is required in solving such problems:
- selection of the best project structure;
- preparation of a business plan, information and investment memoranda;
- organization of necessary examinations (technological and engineering);
- search for investors and shareholders, organization of negotiations with them;
- measures to reduce costs and maximize the expected price of the object;
- development of ways of interaction between organizers and creditors, solving current monetary and legal issues;
- regular preparation of progress reports;
- assistance in the development of control, management accounting and personnel management.
Project financing involves the allocation of funds for a long period, which is unusual for Russia, where "short money" is most often used. Rarely, the implementation of a large-scale initiative fits in 2-3 years, as a rule, the invested money will begin to return to the lender in 5-10 years. In this period, a year and a half are occupied only by preparatory work, economic calculations and the preparation of the plan.
All these measures require considerable investments, which can amount to 10% of the total cost and even more, and they fall on the initiator of the plan. At the same time, investors do not always take these costs into account when drawing up the agreement and require that they invest 25-30% of their money in the undertaking to confirm the seriousness of intentions.
Roles of process participants
As noted above, unlike the case with a traditional loan, an investment loan is possible only with the involvement of a wide range of participants sharing risks. These include such organizations.
Financial institutionsallocating funds. Typically, large banking organizations are ready for project loans, with the ability to allocate money or other assets with a deferred repayment period. Banks are trying to minimize the danger of losses by allocating funds not in a single use, but in separate tranches according to the approved schedule. If something goes wrong, you can stop supporting the project, avoiding large losses. There is also the opportunity to introduce your own controller into the project, who has the right to stop risky transactions.
Initiator. He is required to have management experience in the relevant field, since his area of \u200b\u200bresponsibility is the operational part and sales performance indicators (KPI). A good name and authority among buyers of products is desirable. It is easier to get a loan to well-known companies that have decided to expand their business. The requirements of bankers are more loyal to them than to individual customers who want to just start their own business.
Landowner.Often the practice is applied when the owner of the land transfers it to the landless initiator for management, receiving in return a share in the project. The cost of the plot directly depends on the location, the availability of roads and railways, the availability of energy, the availability of a building permit.
Technical customer. Such specialized organizations are attracted by banks in cases where it is necessary to perform complex construction work, to which typical options are not applicable. The technical customer carries out the whole range of works:
- engineering (surveys, approvals, design);
- supply of materials and equipment;
- construction (selection of a contractor, construction and installation, commissioning).
Risks of the technical customer - execution of work on schedule and budget. Overspending (rising prices by subcontractors, unaccounted work), he pays out of pocket.
Investor. As a rule, banks do not cover all the needs of the initiators, therefore, an investor is required who fully or partially closes all monetary issues for a share in the business being started. Investors are usually private individuals who do not expect to actively participate in the development of production subsequently. Their interests are most often limited by the desire to profitably resell their share to large market players after increasing its value or to receive dividends (passive income) from the intended use of the object. If it comes to the extraction of natural resources, it is possible to use a mechanism such as an agreement on the division of the extracted products.
Advantages and risks of investment lending
Project financing makes it possible to introduce a new initiative without being tied to the previous long-term activity of a company or organization. At the same time, unlike many other undertakings, with such provision the applied management system is of great importance, which automatically makes the project much better and more predictable.
In many business plans, marketing and financial justification are put in the first place, putting aside the issues of personnel selection and training, establishing a system of interaction, information and organizational support. When considering an application for an investment loan, all parties to the issue are carefully studied to avoid losses, which will have nothing to cover.
The main risks associated with project financing are as follows:
- a change in the political situation that can affect the key parameters of the plan;
- legal issues, in particular, obtaining the necessary permits and licenses;
- errors in economic calculations regarding the level of demand for the product and its profitability, which will not allow covering all expenses;
- rising prices for raw materials;
- failure to meet the deadlines for the construction and commissioning of the facility;
- significant excess of the approved estimate.
Russian conditions are not yet able to reliably protect business from external non-economic influence, therefore, banking institutions are very reluctant to provide long-term loans without reliable confirmation of highly liquid collateral or state guarantees.
Investment lending is not identical to long-term, although it also implies a longer period of use of credit resources, in contrast to short-term loans for working capital.
First of all, investment lending is characterized by the presence of a funded project, new or existing, for the implementation or development of which the loaned resources attracted by the borrowing enterprise are allocated. In this case, the investor bank actually assumes part of the risks associated with the implementation of the funded project. And the result of the decision in favor of lending to the project, respectively, depends on the income planned for the implementation of the project. Thus, the current financial condition of the enterprise, profit margin, growth dynamics, stability, creditworthiness, solvency of the enterprise are certainly taken into account, but the investment project itself is also of no small importance. When lending to an investment project, special attention is paid to the predicted result, to the planned “exhaust” from the implementation of the project.
At the same time, which is especially important for borrowers, attracting long-term resources does not reduce the limit on loan amounts for working capital replenishment, that is, the borrowing company has the opportunity to separately finance investment and current goals.
Investment lending traditionally divided into direct investment lending, project financing and financing of construction projects. Each area deserves a separate consideration.
Investment lending involves the injection of long (long-term) money into the enterprise, which is closest to the concept of long-term lending. This direction is less risky, since the actual indicators of the enterprise’s activity for the analyzed period are taken into account, forecast indicators are built, including, without taking into account the implementation of the project, since if the enterprise continued to carry out current activities under the same circumstances and at the same time would pay the costs of investment loan. As a rule, re-equipment, renewal of fixed assets, purchase of additional equipment, expansion of the vehicle fleet or fleet of equipment, purchase and launch of another similar line of equipment, purchase of another store and the like expansion of current activities are generally suitable for this area. That is, the company continues to move in the usual direction, or if it opens a new direction, then only if it is possible to cover all risks with the profit received from current activities.
Project financethis is the area of \u200b\u200blending where the creditor bank partly assumes the financing of the project, since it is supposed to finance the project that has not taken place, and the payback of the project is calculated from the expected benefits from the project. Accordingly, the company intends to pay the creditor bank for the loan due to the income received from the project. Project financing includes new self-sustaining business areas of an existing enterprise, or the creation of a new enterprise, new production. A creditor bank can even become a direct investor in an enterprise, that is, make investments directly in its authorized capital, if it expects to increase the cash flows of the company in the future and, accordingly, receive profit from its investments.
Construction project financingrepresents the provision of loans for the construction of residential, commercial and industrial facilities. As a rule, a bank finances a construction project if there is a ready-made package of necessary initial permits for construction and installation works, approved design and estimate documentation, and a land plot (long-term lease or property right). That is, bank financing is attracted at the investment stage of the project, when the preparatory phase of the project, design and other preparatory work is already carried out without the participation of the Bank. In this direction, the highest requirements are for the share of investments by the borrowing enterprise in the implementation of the project of its own funds. When considering the project, the economic effect of the intended use of the constructed areas is calculated, whether they will be leased or will be further implemented.
Basic requirements of the bank to the borrower
Lending to investment projects requires a well-developed business plan, a feasibility study and, in fact, contracts (agreements, deals) that provide for the supply of purchased property and the implementation of necessary work.
Of course, the borrower, or in some cases the guaranteeing company, must have a stable financial position, be able to provide quality service and timely repay the loan.
The bank does not undertake one hundred percent implementation, or rather financing of the project, the obligatory share of the borrower's own funds is required, which ranges from twenty to fifty percent of the total project cost. In this case, it is possible to set aside the investments already made by the borrower at the stage of preparing the project, but the term for such investments may be limited. For example, only funds spent by the enterprise on the project implementation not earlier than in the last six months will be taken into account as own investments.
Investment lending, like other types of bank lending, requires collateral, that is, loans are provided against liquid collateral.
When considering the project, the experience of the project initiator in the implementation of such projects is taken into account. This factor is not determining, but increases the likelihood of a positive decision of the bank to provide a loan.
Mandatory analyzed affiliated (interconnected) with the borrower of the enterprise.
Basic conditions for investment lending slightly different from short-term loans:
- willingness to invest own funds in the project or to document the investments made;
- monthly interest repayment (less often quarterly), but a slight delay in payments is also possible;
- a loan term of up to seven, in some cases up to ten years, especially if the borrower implements a project with state support. The payback period of investments should not exceed the loan term;
- The debt repayment schedule is agreed with the borrower and directly depends on the parameters of the funded project;
- collateral is required;
- the loan is provided both in rubles and in foreign currency (if, for example, imported equipment is purchased abroad);
- various lending regimes are permissible depending on the specifics of the project;
- a loan can be provided for the purpose of financing previously incurred costs or refinancing existing debt to other credit organizations, attracted to finance investment costs.
Risks of hidden lending to investment projects from short-term sources
In the case of attracting short-term loans with the expectation of a subsequent extension or “re-lending” (since “short” loans are easier to obtain, fewer documents, and so on) to finance long-term goals, the borrower risks in the future or does not receive a loan on the same conditions or, even more dangerous, receive a refusal to provide the next loan.
If the goals of the enterprise correspond to the attracted investments, both in quality and in terms of time, the borrower receives guaranteed invariability of the loan conditions for the project implementation period (provided there are no force majeure circumstances). Also, the benefit for the borrower is to reduce the cost of registration of collateral (especially requiring registration) for long-term loan agreements compared to short-term ones, which require payment of registration of each encumbrance. In addition, with long-term investment lending, organizational costs, labor and time costs for collecting documents for processing and prolonging short-term loans are reduced.