Project
finance -
HIGH-POWERED
BUSINESS
-m
18
corporate finance
What's NewS Issue 1 January 1996
Energy, Utilities, telecommunications, media -
all of these sectors fall within the target range
of our project finance team. But what is
1
project finance? Why are these non-F&A
O
sectors so attractive for the bank? And how
risky is this business? Dick Vaarties of project Project finance team: f.l.t.r. Roger Jansen, Marjan Brouwer, Dick Vaarties,
Marcel de Goeijer, Monique Koelink and Wim Blaasse.
finance explains.
'Essentially, project finance means you
provide cashflow-based financing,'
Vaarties says. 'By that I mean, someone
comes to us with a project which is always
a green-field operation - a factory, power
plant or whatever - which has to be built.
The repayments come out of the cashflow
subsequently generated by the project.
Because you're putting in the basically
finance at the construction stage, you're
financing something which has potential,
but isn't even built. For the project to be
interesting, it has to meet certain criteria.
The most important one is that the future
cashflow has to be as secure as possible. If
you take a power plant as example, then
before you become involved, you have to
be sure there is an off-taker who is
contractually committed to purchasing the
power generated by that plant.'
FUTURE CASHFLOW
Projects are financed on the basis that
during construction no repayments are
made. 'That is why you only become
involved in viable projects,' Vaarties
1 PROJECTFINANCIERING
De Rabobank is de grootste verlener
van projectfinanciering aan Nederlandse
energiebedrijven. Waarom zijn deze en
andere niet-agri sectoren zo interessant? En
hoe risicovol is het financieren van nog niet
gebouwde projecten? Dick Vaarties heeft de
antwoorden.
continues. 'Most contracts run for
15 years, starting after construction is
completed. That's when you enter the so-
called operational phase and you get your
money back from then on. So, it is
essential to have guarantees on off-take
because our repayments come out of
future cashflow.
All projects have so-called "sponsors".
These are major corporates which act as
shareholder in the project. Although
formal guarantees from shareholders in a
project are not possible, or only to a
limited extent, it is still important to look
carefully at the quality of these
"sponsors". Normally, you have at least
two per project because no party will
usualll own more than 50 percent of a
project. This is crucial to keep the
investment off-balance sheet for both
parties.'
LOW RISK
If all this may sound like fairly risky
business, Vaarties is quick to argue that it
is often less problematic than
straightforward credit lines. 'We only do
project finance for very specific sectors,
and only after extensive and very careful
analysis. Again, energy is a good example
here. When you do a deal on an energy
project, you know it will be able to sell its
product for at least 15 years to come at a
specified price. Further more the bank has 1
a grip on the cashflow through project I
accounts held by us, so you see the actual I
performance of the project through its
cashflow. On the contrary providing credit
to a corporate which is based in part on
past performance can be more risky - at
least, we think so. Balance-sheet and P/L
statements can be manipulated more easily
than real cashflows.'
POWER FOCUS
Project finance was started in the bank
around four years ago and the team has
gradually been expanded. 'We began with
only a few people and we're still not exactly
large, so we had to focus our efforts. As
Rabobank is strong on the domestic market
and because there were opportunities in the
electricity generating sector, we targeted
those.' And quite successfully it appears.
The team has managed to carve out a real
niche in this area, and has already become
the biggest provider of project finance to
Dutch Utilities.
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fc?:i i"H
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