By Diana Capetillo, Associate Director.
Understanding project finance in Latin America
Project finance schemes dominate infrastructure financing in Latin America, typically featuring a high degree of gearing and either non-recourse or less common partial recourse structures. This raises a critical question: is project bankability bankable under current terms, or what steps are needed to achieve bankability?
In this, there is a lot to consider, including securing a reliable payment source, ensuring stable feedstock supply (where applicable), and establishing controlled commercial risk through guaranteed off-take agreements.
Success also depends on proven technology and/or ECA insurance, the sponsor’s track record, and robust compensation mechanisms. Equally crucial are well-structured safeguard clauses, properly assessed liquidated damages, and early termination provisions that, as a minimum, ensure outstanding balance payments.
Key components of project bankability
Private vs public off-takers: two approaches
These elements collectively determine whether project risks can be effectively mitigated and allocated—ultimately confirming whether banks and financial institutions will commit to participation.
We can divide projects into two groups from an off-taking perspective: the ones that have private off-takers and the ones that have public off-takers.
The private off-taker advantage
Projects with private off-takers take a slightly simpler analysis.
Generally speaking, companies should be solid enough to commit to a long-term off-taking agreement. Hence, they should have already gone through a public or private credit rating process, whether by banks for corporate purposes or by credit rating agencies. For the source of payments to be deemed reliable and stable this credit rating must be of at least investment grade and preferably a local AAA rating. .
In addition to a simpler or pre-existing credit rating analysis, for private off-takers when not reaching the required classification, the process of amending terms and conditions and adding guaranties may be smoother as well. For instance, a straightforward solution may be to pledge corporate or personal shareholders properties as collateral.
Also, financing documents when a private off-taker is involved are rather standardised in terms, conditions and timelines.
Navigating public off-taker complexities
Where public off-takers are concerned, it might take a longer and more thorough process, especially when it comes to assigning a credit rating and determining whether the source of payments is reliable and stable.
The primary reasons behind this are :
1. The complexity of public finances
2. The proper assignment (labelling) of certain resources to the project only.
Additionally, financing documents might take longer than in the case of a private off-taker as tendering documents are not usually modified regarding financial impact clauses. As such any risk that arises from them must be mitigated/assigned in the financing documents instead. When it comes to the Direct Agreements, the sign-off can require the involvement of several entities, which also takes time.
The critical path to project success
The path to bankability often requires multiple approval stages when modifying terms and conditions, creating a complex and time-intensive process.
For instance, if the implementation of an alternate source of payments is needed because the province or state doesn’t meet the required rating classification or there’s commercial risk of some sort, the process may require the involvement of public entities at either national or federal level.
Regardless of the nature of its off-taker (private or public), its importance, social and economic benefits and degree of progress, if a project is not considered bankable, the establishment of a Project finance structure might not be possible.
But what happens when the project seems bankable, yet the country where it is to be developed has an uncertain regulatory framework that might lead to negative financial impacts?
Join us in our next post covering this topic.
In the meantime, contact us to find out if we’re a great fit to work with you on your project finance scheme.
