Contents

1. Why Project Finance vs Corporate Finance?
1.1 Typical developer company structure
1.2 How do developers finance projects?
1.3 Asset company structure typology
1.4 Example of development company corporate structure
2. Project Finance deal vs Corporate Finance deal
2.1 Risks assessment
2.2 Pricing
2.3 Structuration with collaterals/guarantees
2.4 Impacts evaluation
Advantage project finance

1. Why Project Finance vs. Corporate Finance?

This article provides the elements to reflect on the type of financing associated with an investment in the renewable energy sector.

Positive Energy Ltd decided to focus on project financing and not corporate financing very early in its journey for multiple reasons. In this document, we explain why “Project Financing” is the most suitable way for impact investors to allocate capital to decarbonization initiatives.

This paper takes a helicopter view on the topic. It does not go into the differences between the financing of solar, wind, biomass, waste-to-energy, hydropower, energy efficiency, and energy storage projects.

1.1 Typical developer company structure

To protect the development company from bankruptcy, if one of the projects owned or developed by the development company failed, renewable energy project developer will create one or several asset projects companies to hold their assets.

The typical structure of a developer is the following:

  • Development company: this legal entity hosts the operations of the developers (salary of employees, marketing, sales, engineering, company IP).
  • Asset project company: this legal entity isolates a project from the development company. The asset project companies are typically Special Purpose Vehicle (SPV).

The development company is then a majority or minority shareholder of the asset project companies. The development company can also provide shareholder loans to the asset project companies or owns a specific class of shares to replicate a debt structure.

If a developer operates internationally then it will most likely create legal structures that match its activity’s scope. This will result in the following structure:

  • Development holding company that owns local development companies in the countries of operations.
  • Asset holding company that owns the different asset project companies located in the countries of the projects.

The development holding company is then a majority shareholder of the asset holding company. The legal structure will also be designed for tax optimisation.

1.2 How do developers finance projects?

If a developer wants to finance the development and construction of a decarbonisation infrastructure project, then the development company has different options:

  • Corporate financing: Secure equity or debt financing at development company level and then finance the development or construction of the project on its balance sheet.
  • Project financing: Secure equity or debt financing at project company level to finance the project.

“Project financing” often refers to the debt financing of infrastructure project as the Asset Project Company level. It is the most common way used by banks to finance large infrastructure projects.

Corporation can use Green bonds to raise money to finance projects. Green bonds are more often issued by the development company, but they can also be issued by the Asset Holding company. 

The typical equity/debt ratio used for Project Finance is much higher than for Corporate finance.

In Europe, Solar or Wind project can be up to 90-95% debt-financed. The typical range for the debt-to-equity ratio in project company is 50% to 95%.

1.3 Asset company structure typology

Large projects will always have their own SPV. This is mandatory to get debt for your project from banks. SPVs are used in all countries. Nevertheless, it is common that investors request a specific investor and tax friendly jurisdiction for the SPV used to inject the investment. For example, many projects in South Asia will have both a local and Singaporean SPV.

Smaller projects can be aggregated / pooled in a single SPV. Nevertheless, it is important to ensure that the projects included in a SPV share the same risk and return profile to make the debt project financing possible and fair. It is common to group small Solar rooftop projects in a single SPV.

A developer may also group solar rooftop projects based on some criteria:

  • Off-taker credit risk
  • Off-take agreement type

1.4 Example of development company corporate structure

Below is a fictive example of possible corporate structure of an international developer

1.4	Example of development company corporate structure

2. Project Finance deal vs Corporate Finance deal

This section looks at the differences between a corporate finance and a project finance deal.

For every project finance transaction or M&A deal, the investor needs to perform the four following things:

  • Identify and evaluate risks
  • Define the pricing
  • Structure the deal and associated collaterals / guarantees
  • Evaluate impacts

Depending on the type of financing used, the work will be different. Let’s compare and benchmark corporate vs. project financing.

2.1 Risks assessment

The investor or lender needs to identify and assess all the possible risks associated with the investment. The scope of the assessment will be different depending on if it is project financing or corporate financing.  Below is a non-exhaustive list of items that comes into the picture for the risk evaluation.

Topic

Project finance scope

Corporate finance scope

General governance risks

Single Asset project company

Development company

All asset project companies and development companies

Tax risks

Single Asset project company

All asset project companies and development companies

Credit and revenues risks

Single Asset project company

All existing and future asset project companies

Technical / performance risks

Single Asset project company

All asset project companies

Contractual risks

Single Asset project company

All contracts for the development companies and the asset companies

Operational risks / feedstock supply risks

Single Asset project company

All asset project companies

Construction risks

Single Asset project company

All new asset project companies

Environmental risks

Single Asset project company

All asset project companies

Currency risks

Single Asset project company

All asset project companies

IP risks

Often non relevant

Development company

The complexity of assessing risks associated with an investment is higher at the corporate level than at the project level.

When investing at corporate level it is common for investors to ask the development company to use similar contracts and agreements to limit variability in the risk profiles.

2.2 Pricing

The investor needs to price the asset to invest. A lender will also need to perform a financial analysis to size the debt financing effectively and understand the risk profile to define the correct premium. The scope of the assessment will be different for project financing or corporate financing. Below is a non-exhaustive list of items taken into account for the pricing.

Topic

Project finance scope

Corporate finance scope

Valuation scope

Single Asset project company

 

All asset project companies and development companies

Existing and future projects.

IP and brand of the company.

Management team of the company.

Valuation method

Discounted Cash Flow (DCF)

Discounted Cash Flow (DCF), Comparable Analysis (Comps or Multiple), Precedent Transactions

Valuation outcome

For debt: debt amount, Loan-to-value-ratio (LTV), Debt service coverage ratio (DSCR), Interest rate

For equity: asset co share price

For debt: consolidated debt amount, Loan-to-value-ratio (LTV), Debt service coverage ratio (DSCR), average Interest rate

For equity: dev holing co share price

Potential upside for deal

Almost none

Growth of Dev Company

IP of the Dev Company

Brand equity of the Dev Company

Customer relationship of the Dev Company

Core team of the Dev Company

It is possible to standardize and create relatively simple financial models to perform a DCF analysis of a single asset (greenfield or brownfield). Such models make the pricing of the Project Finance deal relatively easy.

The complexity of pricing a deal at the corporate level is much higher. Investors often need to use other valuation methodologies based on multiples as advanced financial modelling may be too complex or expansive to achieve.
A development company typically has several operational projects and a pipeline of possible projects they want to develop/build in the future. The valuation of this pipeline is a tricky exercise. The big four audit companies publish some papers on how to value projects inside a portfolio depending on their maturity stage.But it means the buy-side will have to run a due diligence process on all underlying assets under development or built by the development company to price the deal correctly. The development company has most likely built some brand equity and some Intellectual Property (IP) over time. As a result, these intangible assets need to be fairly valued to match the developer’s expectations.

Consequently, it can be harder to align on a fair price between a developer and an investor for a corporate finance deal.

2.3 Structuration with collaterals/guarantees

In the table below, we review the differences in scope between project finance and corporate finance when structuring a deal.

Topic

Project finance scope

Corporate finance scope

Deal structure

Single Asset project company

 

All asset project companies and development companies

Collaterals

The physical assets and contracts of the single project

All underlying assets and companies

Can be complexed due to different lending or shareholder agreements

Guarantees

Guarantees provided by the EPC and equipment suppliers of the single project.

Project performances guarantees.

Off-taker’s guarantees.

Sometimes guarantees provided by the development company.

Personal guarantees if any

Shareholder guarantees if any

Most likely cause of default

Default to achieve complete permitting.

Off-take agreement breach.

Curtailment.

Exceptional event resulting in plant failure or downtime.

Dev Co Cashflow issue.

Delay in project execution.

Failure of multiple operational projects.

Default recovery mechanism

Equity: Liable for the single project default event.

Debt: Depending on seniority level. If investor is the most senior lender, then investor gets ownership and control of the complete asset project.

Equity: Liable for any project default event.

Debt: Depending on seniority level. If investor is the main lender, then investor gets ownership and control of the development company.

Debt project financing is an effective way to invest and secure debt investment. In case of single project default, the most senior lender of this project will be in the best position to recover part of its investment. Other actors and especially the equity ones will end up in a tricky position.

When a company uses different debt instruments at Corporate and Project level, it can become very complex to understand which actors get priority in case of default. A detailed analysis of the different shareholder agreements, the loan agreements, and the local regulations will have to be done to understand the situation clearly.

The complexity of structuring an equity deal at corporate level is similar as an equity deal at project level. Nevertheless, the number of stakeholders involved at corporate level tend to be higher. This can make the discussion more difficult and reduce the investors’ negotiation power when discussing the deal terms. The development company shareholders may also be more sensitive to dilution at corporate level than at project level.

Again, the complexity of structuring a deal is much higher at corporate level than project level.

2.4 Impacts evaluation

With the growing concerns about Climate Change and a fast-growing sustainable finance movement, most investors want to measure more effectively the negative and positive impacts of their investments to ensure they translate into the positive changes they support.

Most advanced investors will measure the returns for their investments not only in financial terms but also for their environmental, social, economic, and governance attributes (ESG).

Positive Energy Ltd supports the financing of decarbonization power projects to support climate change mitigation through tangible emissions reduction.

In collaboration with the Steward Red Queen (SRQ), Positive Energy Ltd developed a simple ESG assessment framework to help investors assess the impacts of renewable energy project investment opportunities.

In the table below, we review the differences in scope between impact assessment at the project and corporate level.

Topic

Project finance scope

Corporate finance scope

GHG emission reductions

Carbon intensity of the energy created by the project (lifecycle CO2-eq per kWh)

Resulting emissions reduction for the given project in the local market. Can be calculated using the Net Present Carbon Savings formula.

Sum of all emission reductions for all underlying asset project companies taking into account the emissions of the development companies.

According to the latest EU taxonomy on sustainable finance, power generation project carbon intensity shall not exceed 100g CO2-eq per kWh.

Job creations

Job creation associated with the single project (including jobs created along the value chain)

Job creation associated with all projects (including along the value chain)

Job creation at the development company.

Environmental and Social impacts

Environmental and Social impact study for the project.

According to the Equator Principles, such assessment is mandatory for all project with Capex higher than 10Mln USD.

It can also include specific project KPIs relevant for the investors (water saving or circularity for example).

Environmental and Social impact study for all past, current and future projects with Capex > 10Mln USD.

Economic and Social impacts

Other project KPIs relevant for the investors. It can be related, for example, to energy access, energy costs reduction.

 Similar but for all underlying assets.

Governance

Adherence of the project company to a chart and/or other specific KPIs defined by the investor. Often covers topics associated with gender and diversity, ethic, anti-corruption and bribery.

Adherence of the development company and all project companies to a chart and/or other specific KPIs defined by the investor. Often covers topics associated with gender and diversity, ethic, anti-corruption and bribery.

The evaluation of the impact of the invested funds is simpler and more accurate at the project level than at the corporate level. There is also less overhead included in the financing. Indeed, project finance is an effective way to control the usage of funds. The funds can be made available step-by-step according to the project development and construction progress. By doing so, the impact investors can maximize their impact per capital deployed. They can also be more selective in the types of projects they support.

3. Advantage project finance

To simplify the execution of the deals and manage their asset portfolio, we recommend impact investors to invest at the project level and not the corporate level.

We recommend investors use similar approach/structuring as a bank that provides debt project financing. But impact investors can bring additional values compare to banks to a project. For example, investors can be faster in making investment decisions, accept to come earlier into the project lifecycle, support more impactful or innovative projects, be more flexible with the credit assessment of the project sponsor.

Equity Corporate Finance deals can offer more securities to the equity investors as all the underlying assets of the development company can be used as collateral. To compensate for this, project equity investors can use – if necessary – warrants (at the corporate level) to ensure that they will be compensated in case of a default event at project level.

Investing at the project level also allows investors to capitalize fully on the PEL digital platform that simplifies through standardisation and automation the project level investment process.