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Pre-purchase/Advance payment ways finance a capital project

Power Purchase AgreementHello Proformative Community, My firm is a mid-market engineering company with offices in the US, UK and Brazil that's in designs and does the project management and training of specialized processing plants. We have a major foreign client who would like us to design, build and now operate a plant for them. The foreign client is happy to guarantee the purchase of the output and guarantee the raw material. My question is if any one in the Proformative Community has had experience in financing projects through a significant pre-pay agreement with their underlying anchor customer? The pre-purchase/pay would get the client a discount on their purchases of the plant output over 5 years... that would exceed their cost of capital. How common is something like a pre-purchase agreement in project finance scenarios? Thank you,

Answers

Topic Expert
Jim Quinlan
Title: CFO, Managing Director
Company: Trinity Group, BlueGold, Genergy, Wellco..
LinkedIn Profile
(CFO, Managing Director, Trinity Group, BlueGold, Genergy, Wellcount) |

Look into the energy industry for PPAs (Power Purchase Agreements). A wind deal in Oregon closed and completed by using such to finance the construct.

However, like any contingent-repayment finance deal, since the risk is higher, the cost is higher.

Wish you well.

Atul Madahar
Title: Director
Company: Anonymous
(Director, Anonymous) |

Thanks Jim, That was interesting...

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

In a previous life, I headed the project finance group of a major US finance company. You describe a classic project finance transaction. These loans rest on identifying and eliminating or mitigating various risks that could undermine the financing arrangement and repayment of the loan.

A key element in such loans is a strong, creditworthy entity that contracts to take the output from the project. Without this, the project will be difficult to finance. The more certainty in the contract, the greater the comfort level of the financing source. Examples included take-or-pay arrangements, reliable output forecasts and known pricing (perhaps with escalators).

The length and success of your firm's design/build/operate experience for similar projects will be a critical consideration. It should speak to the fact that the technology is proven and that the people who will actually manage and operate the project have directly relevant experience in doing so (and, ideally, in working with each other).

Based on your brief description, take care in choosing the term of the PPA contract. Generally, lenders prefer that the contract term match or exceed the time required to repay the project financing loan in full. Five years sounds short.

Finally, you don't mention the size of the project, the amount of financing need or the location. Political and currency risk knowledge and appetite vary widely among lenders. You, obviously, want a financing partner that knows what it is doing and, ideally, has experience with similar projects and in the target country. Transaction size will affect the range of potential lenders. Ask lenders for references that are relevant to your opportunity and choose a lender carefully. In project finance, it's not uncommon for something to go wrong or fail to meet expectations. You want a partner to work with you to devise effective long-term solutions.

Atul Madahar
Title: Director
Company: Anonymous
(Director, Anonymous) |

Jim, thank you for such useful and experience response... very helpful...

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

Anon,

You're welcome. I'm glad you found the information helpful.

If you decide to proceed with exploration and analysis of this project, I could introduce you to someone I used to work with. He's now an independent advisor in this field. His skill and experience could provide valuable insight and assistance for structuring the transaction, identifying and obtaining financing and negotiating a successful deal among all parties.

Atul Madahar
Title: Director
Company: Anonymous
(Director, Anonymous) |

Jim, does person have public website or linkedin page? I'd like to review his/her background and share it with my colleagues. thank you once again

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

Anon,

I prefer not to post someone else's contact information in this public forum. Please email me privately at JSchwartz56 AT comcast dot net. I will be happy to send you both his web page links and LinkedIn page.

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