If your corporation has just been awarded a new contract in the context of an infrastructure project, it's time to think about financing. Can you make a long-term financial commitment? What are the best financing structures for your project? Some key players of Quebec's energy sector, who understand that financing is the crux of any potential issue, are asking these kinds of questions — and with good reason.
Two Blakes partners in Montreal who have been at the heart of flagship projects share their experiences.
Ready-made solution…
Corporate financing meets the needs of working capital and increases a business's capacity to go forward with capital expenditures. It provides the necessary flexibility to cover some of the project's related costs. However, this financing method is subject to compliance with financial covenants, and the liens may affect all of the business's assets. Shareholders may also need to act as sureties for the borrower's obligations.
"It is a classic financing solution, but is also subject to certain constraints, notably regarding compliance with leverage ratios, and more particularly constraining if such business is exposed to several large projects," says Aude Godfroy, Blakes partner in Montreal.
… or custom-made solution
Project finance is particularly valued for large infrastructure projects in the public and private sectors, notably the renewable-energy sector. Although this financing method generally costs more due to a limited range of assets, due diligence and complex legal documentation, it also offers flexibility and certain advantages.
"When the Seigneurie de Beaupré wind farm project was presented, the promoters, Boralex and Gaz Métro-Valener, relied on this method of financing in order to implement an 'independent project structure' and optimize its financing," explains Sébastien Vilder, practice group leader of the Financial Services group in Montreal.
Project finance also provides significant leverage and long maturities, a better allocation of resources and risk diversification for the project's promoters. Moreover, recourse against the project's promoters is limited, if not non-existent.
How does it work?
The key to project finance is establishing its structure by forming an ad hoc legal entity. The project's financing eligibility essentially depends on its ability to generate a certain level of cash flow, meaning cash inflow and outflow with a high degree of predictability. The project's revenues ensure the debt repayment while liens on the project's assets, notably the important contracts, secure the financing.
How to succeed?
One needs to reduce risks that can affect a project's operation and leverage, clearly define the investment, avoid exceeding the construction costs and deadlines, use proven technologies, and ensure a stable regulatory and contractual environment.