Project Finance Advisory

AfriZone Capital Ltd offers a full range of Project Finance & Transaction Advisory Services, such as Due Diligence, Credit Report, Credit Enhancement & Financial Structuring, Legal & Contracts, Tax Advisory, Financial Closing and Post-Closing Assistance.

Project Due Diligence – Project finance transactions generally rely upon a high debt-to-equity ratio and are often characterized by limited or non-recourse debt, available outside the project for debt repayment. Therefore, lenders must undertake thorough due diligence to try to assess whether a project is bankable, prior to allocating funds to it. This is particularly true for large-scale projects such as Public-Private Partnerships. For a PPP Project to be deemed bankable, lenders must ascertain whether the Private Partner is capable of servicing the debt raised to execute the PPP Project. For this to be the case, the Debt-Service Coverage Ratio (DSCR) must exceed 1.0 by an acceptable margin. In other words, the Private Partner’s net operating income must be sufficiently high to cover debt service, plus a satisfactory margin to hedge against the risk of variation to cash flows.

Credit Worthiness Analysis:

  • Project Owners Credit Rating (5Cs of Credit)
  • Business Plan and Implementation
  • Financial Condition and Solvency

Legal Structure of the PPP

  • Legal and Organizational Scheme of the Project
  • Contracts, Arbitration and Enforceability
  • Ownership Structure of the Project

Credit Enhancement

  • Performance Guarantees: SBLC, Demand Guarantees
  • Surety Bonds, Performance / Advance Payment Bonds
  • Insurances: PRI, ECG, Construction Risk Insurance, AADI

Feasibility Studies

  • Technical Solutions and Equipment under the Project
  • FX Risk Analysis & Hedging
  • Reports of Financial / Technical Advisors

Lenders will thus focus on the payment process and amortization schedule, while arranging contingent mechanisms to eliminate or mitigate risks that could adversely affect the expected revenue stream. Hence, our due diligence assesses both the technical feasibility and the financial viability of the project, considering all material risks, and how these are managed and allocated between the project stakeholders.

AfriZone assist clients with the creditworthiness analysis, legal structure of the transaction, credit enhancement structuring and, to avoid conflict of interest, would often assess feasibility studies carried out by third-party consultants.

Credit Enhancement – For a project finance transaction to be deemed viable, different lenders may require different credit enhancement structures. Some of these structures may be used in combination with each other; for instance, project bonds can be credit-enhanced in whole or in part through various means, including:

Guarantee. In a Public-Private Partnership, a guarantee to cover the Private Partner’s obligations might be provided by a project sponsor (provided it has a suitably high credit rating), a bank or a multilateral agency. In some cases, a guarantee might equate to wholesale credit substitution, as distinct from credit enhancement.

Wrap. This is the provision of insurance commonly offered by monoline insurers, which are highly rated private sector financial guarantors, insuring the underlying principal and interest payments on a bond. In terms of creditworthiness, the guarantor’s credit rating is substituted for that of the wrapped bonds.

Sovereign Guarantee. In some jurisdictions, public procurement law may provide for the host government to issue a sovereign guarantee, which is contingent upon the default of the main obligor. This credit enhancement structure may be part of a concerted government program to facilitate infrastructure investment.

Multilateral Product. Multilateral Development Banks (MDBs) have a long track record of providing guarantees for bonds. These guarantees generally focus on specific risks (such as political risk) that the private sector is unable to manage. An example of multilateral product is the Non-Honoring of Sovereign Financial Obligation (NHSFO), which can be used to underpin a sovereign guarantee to achieve credit substitution, thus making the transaction viable. MDBs and multilateral funding agencies are the ideal channel to provide this support, inasmuch as they have both the credit quality and the political influence to stimulate investor appetite.

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