Key Considerations for IGA Capital's Project Finance

August 13th, 2024

IGA Capital Finance

West Palm Beach, Florida

1. Sponsor Equity

- Sponsors and strategic equity investors must be committed to providing significant equity to cover project capital costs, potential cost overruns, and any contingent equity requirements.

- A successful project sponsor typically has strong access to capital and may provide guarantees from their parent company to support the project if needed.

- It is crucial for sponsors to contribute a substantial portion of equity to the project’s financial structure, with leverage tailored to the specific characteristics of each sector.

2. Advanced Project Development

- Sponsors should be well-advanced in their project development, with completed permitting processes, feasibility studies, Front End Engineering & Design (FEED), and Environmental & Social Impact Assessments (ESIA).

- A preliminary finance plan should be in place, and sponsors should have engaged legal and financial consultants to prepare for discussions, due diligence, and financing activities with IGA Capital.

3. Binding Shareholders Agreement

- The Binding Shareholders Agreement outlines the ownership structure, voting rights, equity contributions, capital injection commitments, dispute resolution, exit strategies, and change of control provisions.

- IGA and commercial lenders require that projects are backed by experienced and creditworthy sponsors who are responsible for funding equity, managing operations, and fulfilling debt obligations.

4. Project Sponsor Criteria

- Sponsors should demonstrate strong creditworthiness, a solid reputation in the industry, and experience in successfully operating similar projects.

- A qualified management team with experience in overseeing projects in the relevant sector and country is essential for ensuring the project’s success.

5. Management Team

- The management team should have a proven track record in developing bankable projects and be free of any significant reputational or legal issues.

- Strong corporate governance is crucial, and the team must be well-established in the sector with relevant experience in managing similar projects.

6. Technology

- The chosen technology provider should be financially strong, experienced, and capable of meeting working capital and warranty obligations.

- The project must utilize proven technology, and where newer technologies are involved, appropriate risk mitigants such as insurance should be in place.

- IGA will often seek performance guarantees and warranties to mitigate risks associated with technology failure or delays.

7. Resource Feedstock Supply

- Resource or fuel supply should be stable and reliable, with long-term contracts that include volume commitments and pricing stability.

- Near-finalized supply agreements that meet market terms can be submitted initially, with final agreements to follow.

-IGA will conduct due diligence on the quality and reasonableness of the resource or supply through third-party consultants.

8. Construction Delays & Completion

- Sponsors should engage in negotiations with creditworthy and experienced EPC contractors, ensuring that contracts include sufficient liquidated damages for delays.

- IGA typically requires Date Certain EPC contracts with liquidated damages provisions to safeguard against delays that could affect commercial operations and debt service obligations.

9. Operations & Maintenance (O&M)

- The project should have a reliable O&M operator with a strong track record in managing similar assets.

- Long-term maintenance agreements, preferably with original equipment manufacturers, and provisions for major maintenance activities should be in place.

- IGA will assess the quality of the O&M contractor and the sponsor’s commitment to minimizing operational risks.

10. Project Financial Model

- A comprehensive financial model is essential, detailing capital sources and uses, revenues, expenses, debt amortization, and debt coverage ratios.

- The model should include a Debt Service Reserve Account and incorporate stress tests to assess potential downside scenarios.

- IGA looks for strong financial models that demonstrate the project’s long-term viability, revenue predictability, and the ability to meet debt service obligations.

11. Off-taker Contracts

- Long-term off-take agreements with creditworthy entities are crucial for project success. The concentration risk of off-takers should be minimized.

- IGA prefers off-take contracts that exceed the life of the financing tenor and are backed by investment-grade enterprises or sovereign guarantors.

12. Commodity Price Risk

- Sponsors should offer hedging products or price floor guarantees from creditworthy entities to mitigate commodity price risks.

- Merchant-based agreements, due to their higher risk, may require additional due diligence.

This framework highlights the critical aspects that project sponsors need to consider when planning and executing successful project financing. At IGA Capital, we ensure that our partners and clients are well-prepared to navigate these complex requirements, leading to sustainable and profitable project outcomes.

For more information or to submit your project please write to info@iga.capital