equity bridge loan project finance

equity bridge loan project finance

The Role of Equity Bridge Loans in Project Finance

1. 1. Introduction to Project Finance

The major sponsors who ignite the development of a project and organize different sectors of their own expertise are given the additional title of “project sponsor” in the context of project finance. At the same time, the capital required to implement a project cannot always be fully met by the cash flows generated from the revenues of a project operation. In certain cases, the useful life of the project or collateral assets may not be enough to cover the long-term loans, but the expectation of future business opportunities related to the project enables project sponsors to carefully supervise and manage the project.

The purpose of this chapter is: 1) To introduce and explain the concept of project finance. 2) To explain the role of equity bridge loans in the development and structuring of a project finance transaction. 3) To present the results of a recent survey on the practice of the North American commercial banks in using equity bridge loans. 4) To outline unique features of and constraints in equity bridge loan financing in the context of project finance.

2. 2. Understanding Equity Bridge Loans

Its main features are that it is a loan – a form of debt – and a part of the shareholder’s contribution to the equity of the SPV. The purpose is to allow the debt structure to be set in place, and construction and other costs to be paid upfront, so that the project can proceed without the immediate need for all equity contributions in full. It helps developers mitigate a project’s risk because without it, they would have to wait several months and incur potential losses before starting construction before its financing is secured. It can cover an amount of equity, usually around 50 to 70 percent of other shareholders’ initial equity contributions.

An understanding of the role of equity bridge loans and the structural issues that need to be addressed in relation to that financing technique is an important building block on the way to an understanding of the drivers of the wider project finance loan market. Equally, we hope that this chapter will establish a context for the subsequent chapters. The head of the equity bridge loan will be an immediate outflow, but it is expected – and may be committed – that shareholders will provide such monies to the Special Project Vehicle (SPV) as contributions to equity as part of the bridge facilities.

3. 3. Key Features and Benefits of Equity Bridge Loans

Unlike a fully paid-up option or outright share issue, an EBL facility locks in a minimum value relative to the sponsor’s currently-reduced Purchase Equity stake at a pre-agreed finished point, in case market conditions deteriorate over the building phase and the sponsor is reluctant to bring additional capital into a problem project to protect bulk-holding projects. Sponsors are often required under main loan documentation to provide third-party completion guarantees, at a considerable time-related fee and an on-demand performance clause. Finance Documents impose suitable safeguards against undue retention of completion risk once construction has commenced. Sponsors can directly obtain such protection by using an EBL facility instead (at a much more favorable time cost), with no need for sponsor-hedge arrangements to the degree where the cost of issuance exceeds that of an EBL. A security notice promptly affording the interim facility the benefit of the new EBL pledge can then protect potential clawback (in the unlikely event, it will be necessary).

Comparable time-cost and early stage protection to guarantee issue

In any financing, sponsors have strong bargaining power, being the only ones able to place the ultimate borrower in default (outside of EBL arrangements), and thus the ability to dictate many aspects of debt documentation favorable to themselves, which is a characteristic of project financing. Given this leverage, it is not surprising that EBL financing in this market is often offered at more borrower-friendly terms as compared with freely-negotiated stand-alone junior financings in other contexts. In the commercial context, procurement of security for junior finance is often a difficult and time-consuming process requiring extensive negotiation and reliance on the ability to place the company in default (which existing senior lender consent prevents), sometimes requiring creditors to enforce creditors. Subject to restrictions in a “best efforts” covenant included as part of the main loan documentation, the sponsor has the right to capital call additional equity at any time and enjoys other less material safeguards, all of which implementation is straightforward.

Strong legal protection and control rights

The main benefit to the project sponsor of taking out an EBL security package with EBL lenders is the lower EBL margin that can be negotiated, as a result of favorably subordinating the EBL to the main loans in a manner that offers substantial protections to the project lender group (including by failing expensive sponsor hedges that run against the main loan exposures).

Favorable Subordination

4. 4. Case Studies and Real-World Applications

One of the characteristics of the projects realized by a large amount of capital, which financing is difficult, is the desynchronized funding of the various sources of finance. The difference arising for the allocation of the share of the capital required for a project between the equity of equity sponsors and the debt granted by the bank consortium causes a need for the equity sponsor to have access to such financing. The increase in the significance of project financing implies the formulation of new ways enabling equity sponsors to access the equity required. The equity bridge loan is one of these methods. The equity bridge loan is one of the financing techniques used in the financing of infrastructure projects.

In this article, an equity bridge loan will be discussed with its creation, development, and the like in the light of the applications of the four equity bridge loan models, which are the default model, the contribution model, the project model, and the value model, according to the provisions of the Agreement of Loan (AL), the provisions of the Sale Agreement (SA), the provisions of the Shareholders’ Agreement (SHA), and the source of financing of the remaining portions of unpaid capital of an equity sponsor from the lenders’ point of view.

Equity bridge loans are used in the project financing of infrastructure projects as a means of financing the equity of equity sponsors, who are an important source of financing. In recent years, during which a divergence was seen in the lenders’ loan pricing conditions, various equity bridge loan models were used, allowing equity holders to contribute smaller quantities of their own capital at the beginning by means of deferred funding and contribute the remaining portions of unpaid capital at later stages by means of a default or by project, by the value of project assets.

5. 5. Conclusion and Future Trends

There remains a certain reluctance within the moral community to openly embrace this technique. Some argue that there would be fewer problems if the lenders all showed a little more maturity in understanding and tolerating the equity pattern of repayment. There is a fine balance here, with proper equity support assisting the project commercially, while the absence of this facility could lead to very negative impacts for all parties. The depth of support, and the length of the repayment period, together with the circumstances given rise to the equity shortfall, are issues which require to be judged on their merits. There are two differing trend factors: the commercial help provided to projects by equity bridge loans, which has resulted in profitability and value generation, contrast with enhanced special project facilities and the increased numbers of cases. An evaluation of the impact of the equity bridge loan could illuminate future trends.

Equity bridge loans are commonplace, but they are not normally spoken about in the context of project finance. It is a shareholder support operation not seen in many other financial transactions. All parties recognize the utility of the transaction in maintaining a project schedule and avoiding the negative impacts of a project bankruptcy. These types of loans are really nothing more than conventional corporate loans, and hence the loan documentation is far more straightforward than other more complex project finance structures. The standard methodology applies to administer the loan and to protect against erosion of its security. Given the knowledge that the sponsors have a requirement and the inevitability of an earnings uplift, there is an opportunity for the commercial banks to arrange the facility and earn some money themselves. Equity bridge loans are a reality and are growing in the number of transactions and the total size dedicated to this purpose. It seems advantageous as a deliverable solution for line problems.