Project Lending Mechanism
Project financing is a type of bank lending for investment projects, in which the lender partially or fully assumes the risks associated with their implementation. In this case, the loan is repaid due to the income from the project.
While in the case of ordinary lending, the bank studies the borrower's credit history, in project lending, the focus is on project analysis. In assessing the financial performance of the project, the following indicators are mainly calculated: NPV (Net Present Value) - net present value of the project, IRR (Internal Rate of Return) - internal rate of return, ROI (Return of Investment) - payback period.
When assessing the risks of the credited project, such methods as the assessment of the sensitivity of the project, the definition of "break-even point" are used. Depending on the distribution of risks of the investment project implementation between the lender and the borrower, the project lending can be classified as follows: 1) without the right of recourse (turnover) of the lender to the borrower; 2) with limited regression; 3) with full regression.
At present, project lending has ceased to be a purely private bank loan. Participants in syndicated loans include: international financial institutions (IMF, WB and others); Eurocredits that are provided on a rollover basis by bank syndicates; government agencies of expert projects.
For the borrower of funds for project lending, in addition to obvious advantages, there are quite tangible disadvantages:
- increased interest;
- high costs at the pre-investment stage;
- a long period from the application to the loan agreement;
- tight control over the activities of the borrower;
- the risk of loss of independence by the borrower.
Therefore, borrowers often prefer bank loans or company loans to project lending.
Along with project lending, leasing is widely used on the international credit market. Leasing  is a long-term loan in the form of a leasing from a lessor to a lessee for renting tangible assets for different periods. For these operations, special leasing companies are created. The purpose of leasing is to provide companies with expensive equipment, ships, airplanes, etc., for rent for a period of 3 to 15 years without the right to transfer ownership.
Features of leasing are as follows:
- the object of the transaction is chosen by the lessee, and not by the lessor;
- the term of leasing is less than the period of physical depreciation of equipment and approaches the term of tax depreciation (3-7 years);
- at the end of the leasing contract, the client can continue to rent at a preferential rate or purchase the leased property at the residual value;
- in the role of the lessor is usually a financial institution - a leasing company.
The need for leasing operations manifested itself quite clearly in the 1970s, when the international credit market could not cope with the borrower's objective need for long-term lending for 10–15 years (due to the rapid development of ship and aircraft construction and other capital-intensive industries).
The sector of leasing services in the modern international credit market is distinguished by a variety of forms, a rapid growth in volumes, and an expansion of the geography of loans. Leasing operations are not engaged in banks, but special leasing companies that compete with banks. Leasing has a number of advantages:
- the vastness of the package of services in the framework of leasing;
- the possibility of obtaining the object "turnkey";
- the client agrees on all credit terms with the lender - the leasing company;
- Leasing obligations in accordance with international practice are not included in the volume of a country's foreign debt.
There are two types of leasing: direct and indirect. In direct leasing, the lessor is the manufacturer of the property; with indirect - the lessor is a third party. According to the method of lending distinguish urgent and renewable leasing. In case of urgent leasing, a one-time lease is carried out, and in case of renewable (rollover) leasing agreement is renewed upon expiration of successive periods. There are also operating and financial leasing. In case of operating leasing, an enterprise enters into a leasing contract, having no intention to acquire an object in ownership In financial leasing, the lessee combines the lease with the subsequent purchase of the object at its residual value. Depending on the characteristics of the leased object, leasing of movables (equipment, ships, aircraft, etc.) and immovable objects (administrative buildings, manufactures, warehouses, large stores, garages, etc.) are distinguished. Leasing of movable property is more common, and leasing of real estate is usually used in construction, with subsequent leasing of the constructed object.
When assessing the risks arising from leasing transactions, the following factors are usually taken into account:
- commercial and financial reputation of the company - the lessee;
- - the sale price of the transaction volume and the dynamics of changes in this price in the secondary market over the next years; - the operating conditions of the leasing object by the company - the lessee. The leasing agreements are divided into two types: the lessee; - a full leasing agreement, under which the lessor undertakes maintenance and other expenses associated with the use of the leasing property. The leasing period is the period of validity of the leasing contract The contract during which leased equipment is on the balance sheet of the lessor and is used in the business of the lessee. The leasing period is divided into primary and secondary. Primary - this is the main period of the contract, when the lessee has not paid the full amount of depreciation and interest accrued to the lessor. The secondary period appears in the case when the lessee has fully paid off with the lessor, but the latter does not transfer to him the title to the object. The lessee continues to operate the facility with payment of symbolic interest. The following forms of leasing are used on the international credit market. Standard leasing. Returnable leasing (“Liz-back”), the essence of which is that the owner of the equipment sells the equipment to the leasing company and then rents it, that is, the equipment seller becomes the lessee. “Wet Leasing” - provides for the lessor’s services to the lessee (maintenance of equipment, repairs, insurance, production management, fuel supply, etc.). This type of leasing is more expensive than others. “Net leasing”, when the lessee assumes the main responsibility for the equipment operation. Leasing on residual value of equipment - applies to used equipment. The term of such a lease is 1–4 years.6. Leasing with full service is similar to “wet”, but the contract provides for the provision of a number of additional services. Leasing to a supplier is similar to leasing back-end leasing . The supplier acts in a double role: the seller and the main tenant, who is obliged to find subtenants and surrender the equipment to the sublease.8. Renewable leasing, when periodically replacing previously leased equipment with more modern ones. This leasing is most common when renting computer equipment.9. A vendor leasing is when an association of manufacturers together with a leasing company or a bank acts as a leasing company. Leasing operations have advantages for the lessor, the lessee and the equipment manufacturer (tab. 11.3).financial, economic and political situation in the country