cibc project finance

cibc project finance

Exploring the Role of CIBC in Project Finance

1. Introduction to Project Finance

The critical importance of proper project structuring, regularly focusing on project participants as well as on project revenue and expense flows, makes the term “project finance” a neat and logical label for a methodology that, applied at any scale, greatly enhances the chances of successful implementation of development projects. The financing techniques that support project financing, while not particularly novel, can be and frequently are combined in fresh ways to mitigate specific aspects of project risk, extending project finance to types of development projects that not so long ago looked unfinanceable on a long-term fixed-rate basis without a government guarantee. What may indeed be new, if it is true that the supply of project finance responds in significant measure to the type of projects being pursued rather than being limited by the availability of conventional lending techniques. In this view, project finance is a necessary ingredient of several categories of projects whose success is attractive to private capital.

When is a project finance? When it is properly structured from a business standpoint to generate revenues large enough to meet debt service and when the participating interest-groups, particularly those deciding the investment terms, are both benefiting from the success of the project and able to live with the business risks to which their capital is exposed.

2. Key Concepts and Principles in Project Finance

Financial intermediation is a business of creating money using other people’s money. In a neo-classical economy, financial intermediation is convenient and more efficient for investing in projects with a short-term return above the term portfolio return rate and a low long-term default risk. These targets can be met through financing enterprises that have sufficient capital, management, and contractual structure to ensure a profitable flow of short-term net income. Furthermore, standard real and financial market transactions are generally sufficient for the implementation and control of these investment operations. Project finance is a recent specialized enterprise of financial intermediation whose main target is to finance a project employing a limited amount of money, time, and technology relative to obtaining the same short-term income flow to service the project.

Project finance is being increasingly used to back the development of major projects in developing countries. The same is true for Canadian development finance institutions, like CIBC, in funding such projects. A knowledge of the principles of project finance, including its unique attributes and risks, will help CIBC credit officers in their review of such financings. This knowledge will help to identify the economic, financial, and structural features in the contracting of a financing and provide the framework for a meaningful dialogue with the clients, the legal advisors, and the consultants. Moreover, it will help advisors in CIBC to deliver services effectively and to respond knowledgeably to inquiries about ‘likes’ and ‘dislikes’ of particular features in the financings of a project. These matters are dealt with in this paper.

3. CIBC’s Involvement in Project Finance

One of the mechanisms by which CIBC is engaged in arranging and assuming financial risk in a large project is project finance: the general concept of project financing in non-regulation-exposed industries is not complex. The essential idea of project finance is to have the project itself, rather than a parent company, provide security or credit enhancement for the loans needed to finance the project. Rather than the traditional method of finance for which the assets in the project sponsor’s balance sheet provide the overwhelming bulk of credit support for financing, in non-recourse finance the lender relies on the cash flow from the project’s operation as the primary source of repayment. Due to the lack of protection afforded by the credit of a sponsor, the lender relies more heavily on the security provided by the project’s assets and its contracts, such as off-take agreements and supply contracts. Upstream on the development curve are commitments and assurances from users who are bonds to provide solid credit support for the value of the borrowers in the project.

4. Case Studies of CIBC’s Successful Project Finance Initiatives

This section describes eight of CIBC’s successful project finance initiatives. Performance results are included to give some idea about the level of structuring flexibility demonstrated by the clients and their ability to develop comprehensive strategies. Other objectives achieved through these structures, their consistency, and flexibility are also cited. Geographic dispersion, together with thematic continuity and the particular structure of leverage, demonstrates the broad applicability of project finance in general and its increased attractiveness among developing country investors. Of these eight long-term financings, several were initiated while the author was at CIBC. In the firm’s long-standing project finance experience, still other initiatives originated from the author and CIBC clients.

5. Future Trends and Opportunities in Project Finance

The funds drawn from these projects should be repatriated to participating countries for an opportunity to earn further investment. The engineering leaders of the limited groups of energy and construction companies with sound financial backed banking partnerships will foster future world growth and prosperity more than any other single business activity. The use of CIBC CAN, in the project finance framework to stimulate the activities used to build world-class large infrastructure facilities will develop strong, talented, domestically located engineering and construction companies capable of competitive excellence worldwide. The Japanese have the practice of amassing large capital reserves so that they may provide part of the necessary capital for large industrial projects which lead to large economic growth. The project finance approach can help the Canadian banks and Canadian businesses to play a significant role in world affairs.

Without a doubt, the future for project finance promises growth and further profitability. The continued involvement of national and multinational banking partnerships in the project finance sector is creating an environment which is energized to perform many of the valuable and urgent works required to meet the basic needs for expansion of civil infrastructures around the world. The synergism that can be developed among banking partners utilizing the project finance approach affords almost unlimited possibilities for undertaking present and future challenges in the solution of national problems. Just as management of multinational companies must become global, so must many of the financial services used in the management approach. Increments of efforts and working capital advanced to large projects will help to accelerate their completion and stimulate new larger and more sophisticated projects.