Comment on Financial Indicators
In regard to indicative loan terms presented in this website, it should be noted that it is very difficult to generalize the loan terms as the data are dynamic. The data vary from one sector to another, and in a particular sector, the loan terms differ from one project to another depending on the projected cash flows and the creditworthiness of the project sponsors. The loan terms are also driven by market forces, monetary policy, fiscal policy, and other macroeconomic variables. Generally, international banks provide project finance in internationally convertible currency and the terms are broadly consistent across countries, given other risk factors are held constant, as country risk is the only risk factor. In general, some of the factors that determine pricing are
- exposure to market/revenue risk,
- exposure to foreign exchange risk,
- credibility of offtaker,
- credibility of sovereign,
- availability of export credit/multilateral support,
- “proven-ness” of sector and underlying technology, and
- financing market (such as global macroeconomic events) and regulations (i.e., Basel III).
It is understood that in project finance that lenders take all securities including security over the “rights” of the concessionaire to operate the asset and collect revenue. The stability of the revenue stream is most important, and most international lenders will require a sovereign guarantee from the Ministry of Finance for the paying authority’s obligations. In addition, from a commercial bank’s perspective, such sovereign guarantee has to be further guaranteed/insured by export credit agencies and/or multilateral lending agencies.
In general, local banks lending in local currency will have less stringent requirements on a project; however, they will also offer a higher financing cost. From previous market sounding, local banks can generally cope with higher debt–equity ratios, lower debt–service coverage ratio, and no explicit sovereign guarantee where international lenders would require it. They can also cope with some level of revenue and fare risk where international banks demand a guaranteed offtake for greenfield projects. Also, very often banks have the appetite and capacity to finance public–private partnership (PPP) projects; however, the lack of well-prepared and structured projects limits the progress.
Capital markets are expected to play a major role in financing infrastructure PPPs, but are relatively underdeveloped in majority of the developing member countries (DMCs) covered. Capital markets have played a muted role in project financing in such DMCs. DMCs with a relatively matured PPP market and a relatively developed capital market have witnessed some PPPs issuing bonds and raising financing from capital markets. Institutional investors such as insurance companies and pension funds are restricted from taking exposure to PPP projects during construction period due to their internal investment norms and regulatory requirements to invest in investment grade projects and investment avenues, which majority of infrastructure PPPs do not attain during the construction period. Hence, majority of such institutional investors take exposure to infrastructure PPPs during the operations period by buying out a part of the equity investment (as allowed by the PPP Agreement) of the project sponsors, or by retiring out bank financing for the project.