Routes of Funding
Routes of Funding
Our Discussion Points
There are three types of route of funding namely sovereign guarantee, banking guarantee and cash collateral. The explanation of these funding routes as below:
Sovereign Guarantee:
One of the most attractive features of project financing is that it allows the sponsors of a project to guarantee the obligations of a special purpose project company in lieu of incurring direct obligations. HJGS assures about the quality of services and integrity of the business under Sovereign Guarantee.
Sovereign Guarantee is approved by the relevant authorities and departments namely the Central Bank and Ministry of Finance in the respective countries. Sovereign guarantees are given by these authorities and departments to assure project lenders that the government will take certain actions or refrain from taking certain actions affecting the project. In some cases the Sovereign Guarantee may need to be confirmed by a Commercial Bank Guarantees, Bonds or other Bank Debt Instruments issued by banks rated ‘BB+’ or better, but this can be reviewed on a case-by-case basis.
HJGS is a hybrid funding provider that charges a percentage of the total project value and fulfills overall funding requirement of the client.
This can be understood by example below
For Instance, if there is value of a project is 1 billion (USD, Euros or Sterling Pound), then we would need to consider a Sovereign Guarantee with a minimum value of 40% of the whole project value. There will be need for us to monetize these instruments. Generally, a Sovereign Guarantee would take approximately 6 months to monetize.
Use of Sovereign Guarantee:
Financial guarantees are issued by States in order to financially promote projects that are related to public welfare or interest. The guarantees are used as economic incentives for the capital market to finance the projects. In Sweden, for example, financial guarantees have in the past been used to promote agriculture, fishing, housing construction, shipbuilding and energy supply. From the beginning of the 90’s, they have primarily been used to alleviate the Swedish bank crisis and for promoting investment/funding in infrastructure.
Advantages:
In comparison with on-lending, financial guarantees have the following advantages:
A) High flexibility:
Guarantees are very flexible. The fund can be provided to meet the current financing needs of beneficiaries in terms of the amount, the maturity, the interest structure and the terms of repayment. On the other hand, the funds are on-lent by the State; the borrowing must normally be adapted to total public sector borrowing in terms of foreign exchange, maturities and interest rate risks, etc.
B) Quick access to credit markets:
Guarantees bring the Beneficiary into direct contact with the credit markets, which offers an important spin-off, particularly with large-scale projects. Through direct contact, the beneficiary can have quick access to developments in financing arrangements and risk management.
Moreover, it is also easier for the borrower to appoint a proficient finance manager to access finance in the market than solely contact to the State for financial requirements.
This can be understood by example below
For Instance, if there is value of a project is 1 billion (USD, Euros or Sterling Pound), then we would need to consider a Sovereign Guarantee with a minimum value of 40% of the whole project value. There will be need for us to monetize these instruments. Generally, a Sovereign Guarantee would take approximately 6 months to monetize.
Use of Sovereign Guarantee:
Financial guarantees are issued by States in order to financially promote projects that are related to public welfare or interest. The guarantees are used as economic incentives for the capital market to finance the projects. In Sweden, for example, financial guarantees have in the past been used to promote agriculture, fishing, housing construction, shipbuilding and energy supply. From the beginning of the 90’s, they have primarily been used to alleviate the Swedish bank crisis and for promoting investment/funding in infrastructure.
Advantages:
In comparison with on-lending, financial guarantees have the following advantages:
A) High flexibility:
Guarantees are very flexible. The fund can be provided to meet the current financing needs of beneficiaries in terms of the amount, the maturity, the interest structure and the terms of repayment. On the other hand, the funds are on-lent by the State; the borrowing must normally be adapted to total public sector borrowing in terms of foreign exchange, maturities and interest rate risks, etc.
B) Quick access to credit markets:
Guarantees bring the Beneficiary into direct contact with the credit markets, which offers an important spin-off, particularly with large-scale projects. Through direct contact, the beneficiary can have quick access to developments in financing arrangements and risk management.
Moreover, it is also easier for the borrower to appoint a proficient finance manager to access finance in the market than solely contact to the State for financial requirements.
A) Diversification:
Guarantee provides diversification when the State borrowing requirement is already large. In that case, small and cheap loans with a specific structure may not be suitable for State borrowing.
Such loans may therefore suitably be channeled to the Beneficiaries. However, the State may decide the minimum amount of loan on the basis of the borrowing requirement and administrative constraints.
B) No increase in state borrowing:
Loans raised under sovereign guarantees do not increase State borrowing. This factor is important when the requirement of large funding at any given time.
Banking Guarantee:
Banking Guarantees have a minimum value of USD 150 Million and it would take approximately
2 weeks to monetize. After this, funding can be generated. (Please be advised that the BG cannot be a leased instrument). BG can be prepared on cash & asset basis, depending on the bank.
Cash Collateral:
This is an option for our clients who cannot provide us any state guarantee or sovereign guarantee. In that case they can use this criteria.
We at HJGS and our partners require 20% of the project value to provide funding with a minimum of cash collateral for projects. The cash collateral has a lower requirement value as compared to a BG/SG, as there is no need to monetize and funding can be done within 30 days of the funds being transferred into a JV non-depletion account.
A) Diversification:
Guarantee provides diversification when the State borrowing requirement is already large. In that case, small and cheap loans with a specific structure may not be suitable for State borrowing.
Such loans may therefore suitably be channeled to the Beneficiaries. However, the State may decide the minimum amount of loan on the basis of the borrowing requirement and administrative constraints.
B) No increase in state borrowing:
Loans raised under sovereign guarantees do not increase State borrowing. This factor is important when the requirement of large funding at any given time.
Banking Guarantee:
Banking Guarantees have a minimum value of USD 150 Million and it would take approximately 2 weeks to monetize. After this, funding can be generated. (Please be advised that the BG cannot be a leased instrument). BG can be prepared on cash & asset basis, depending on the bank.
Cash Collateral:
This is an option for our clients who cannot provide us any state guarantee or sovereign guarantee. In that case they can use this criteria.
We at HJGS and our partners require 20% of the project value to provide funding with a minimum of cash collateral for projects. The cash collateral has a lower requirement value as compared to a BG/SG, as there is no need to monetize and funding can be done within 30 days of the funds being transferred into a JV non-depletion account.