What Can EXIM do for "Small" Projects?
EXIM Bank can make a credit decision about a potential project in one of three ways:
- Based strictly on the balance sheet of the borrower;
- As limited recourse project finance with a special purpose company borrower and project cash flows as the source of repayment;
- Or, as a structured finance transaction with the borrower's balance sheet enhanced by special features.
Many projects are too large to be feasible strictly on a balance sheet but too small to merit the time and expense associated with project finance transactions. "Structured" finance may be an alternative.
What is Structured Finance?
Structured finance is applicable to both large and small projects and involves elements of both corporate and limited recourse project finance. Like corporate finance, it involves full recourse to the project sponsor's balance sheet. Like project finance, it involves special features to enhance the credit of the borrower, including (but not necessarily limited to) one or more of the following:
- Special purpose accounts, including offshore payment accounts, escrow or reserve accounts, or other accounts that would be subject to EXIM Bank's control;
- Covenants and default provisions such as financial ratios or debt service coverage requirements that would, if violated, prevent payment of dividends to the sponsors;
- Insurance requirements that might be more strict than those typically applicable under corporate insurance policies;
- Letters of credits or other sources of funds that would be pledged by the sponsor to EXIM Bank through a bank or other third party.
Structured finance projects include some of the above but would almost certainly not use all the elements of a project financing.
When and Why Would "Structured Finance" be Appropriate?
Especially in developing countries, many companies lack sufficient credit strength in terms of asset size, operating history, or cash flows to provide reasonable assurance of repayment for multi-million dollar projects. For example, when a smaller company's balance sheet isn't strong enough to justify a large but beneficial expansion, pure corporate finance, which relies on a company's existing assets, is not an option. For these borrowers, structured finance can provide the credit enhancements necessary to push EXIM Bank finance terms "across the goal line" and meet EXIM Bank Board standards for reasonable assurance of repayment.
In contrast, the same borrowers may lack both the experience and the money required to pay legal and financial advisory costs required for project finance. Or, even if they have the resources necessary for project finance, they often cannot justify such expenses, which often run into the millions of dollars. For these projects, structured finance offers a cheaper and faster option than traditional project finance.
When is Structured Finance an Option? When is it not?
Structured finance depends on an existing company that represents a reasonable credit in many respects, but may be lacking in one or a few areas that can be addressed through structured finance credit enhancements. For example, the company may have a reasonably large asset base and good cash flows but lack a sufficiently long credit and operating history. Or, the company may have a long credit history and strong income, but lack the size required to take on a large expansion.
A company with no such strengths, with no more than a concept and a site, is not a candidate for structured finance because credit enhancements cannot be expected to correct such deficiencies. Sponsors of such project should consider alternative finance strategies such as partnerships with more established entities.
What are the Likely Advisory Costs for Small Project, Structured Finance?
Structured finance transactions, in most cases, involve some advisory costs that are project-specific. As a general principle, these costs are much less than for project finance. For a project finance transaction EXIM Bank might hire a full slate of advisors including a financial advisor, a lenders' engineer, a market consultant, and an insurance advisor. A structured finance transaction may need only one or two such advisors. In some cases involving straightforward credits, EXIM Bank can work without any outside advisors. The project's sector and circumstances determine the precise level of advisory services needed.
Outside legal advisory costs for small project structured finance would likewise be considerably less than with project finance. Unlike project finance transactions, legal advisors would not typically get involved during the early stages of a structured finance. Outside legal expenses for documentation are considerably less for structured finance than for project finance because the structures are much simpler. There would less documentation for special credit enhancement provisions because there would be fewer such provisions.
How Quickly Would Loans be Processed?
Loan processing for structured finance is considerably faster for structured finance than for project finance. Every case is different and no up-front commitments can be made without formal assessments. The time to process any case depends much upon the cooperation and participation of the borrower, as well as realistic expectations regarding additional enhancements that may be needed. Nonetheless, as a general principle, borrowers should expect the amount of time for Board approval and funding to usually be a few months.
How to Apply?
Structured finance transactions need to meet all applicable EXIM Bank guidelines including environmental, shipping, and other requirements. These depend primarily upon a project's sector and size. Information about environmental requirements is available on EXIM Bank's website.
The credit information required for structured finance consists of the materials outlined in the General Information section of "Attachment G: Credit Information" of EXIM's Preliminary/Final Commitment application for corporate transactions, plus a few items that are listed in "Attachment F: Project and Structured Finance" including:
- Project Summary (item a.1 listed in Attachment F)
- Projected financial statements (item a.5)
- (For most transactions) Market Information (item a.8)
- Contractor and operator experience (item b.4)
- Estimated operating costs (item c.2)
- Environmental assessment (item c.5); and
- (For most transaction) Status and strategy for obtaining government approvals (item d.4)
The EXIM Bank application currently reads: "'Structured' transactions will have an established corporation as the borrower but may rely on sources of collateral or security in addition to the corporation's balance sheet. The information required for a structured finance application is the same as that requested in 'Attachment G' plus any additional data describing the proposed structure and security package."
Prior to submitting their applications, borrowers are strongly encouraged to consult with EXIM Bank staff to confirm the necessity of the above information requirements and to determine if other information items may be necessary. Borrowers are further encouraged to work with potential guaranteed lenders or other financial advisor to assist them with completing the application.
Once EXIM Bank Staff has received the application, staff will advise the borrower if more information is required. The need for additional information will depend on the specific details of the borrower's project and financing application, as well as on the sector and country in which the project is located.
Borrowers and other parties interested in small project structured finance should contact:
Structured Finance Division
phone: 202-565-3690
e-mail: projectfinance@exim.gov