Project Financing or Money for the Idea

An Expert's View about Foreign Direct Investment in Ukraine

Last updated: 7 Jul 2011

Any business, like any living organism, grows, develops, has its ups and downs, changes and takes new directions under the strict guidance of its creator. Flair, creativity, unconventional outlook and willingness to take risks, in familiar areas as well as in new and prospective ones, help the company keep floating and outpace other participants of the race.

Developing a new project and implementing an idea requires a detailed analysis, planning, and financing. And when it comes to the last one, it often turns out that there's not enough facilities. Is it necessary to have them at all, if it's possible attract loans?! Then, as ever, many questions arise, each one deriving from the most important one - who would subsidize the idea?

Competent presentation is the key to success

As a rule, it all starts with turning to the ... banks. However, everyone who has done that, always faces a number of difficulties: long-term decision-making procedure, high interest rates and stringent collateral requirements. But the main problem remains the lack of long-term money in Ukrainian banks. As a rule, about 10 - 200 million euros are needed for the period of 5 - 15 years.

There's too much risk, thus almost nobody wants to finance the idea for the sake of a brighter future. Moreover, local companies, seeing an attractive objective, do not want to pay due regard to many obstacles on the way. Since the last ones do not simply disappear, it's better to be aware of them, and to be well prepared for the attainment of the goal.

Borrowing abroad directly from foreign financing banks is the cherished dream of many Ukrainian companies, since it's faster, cheaper and easier.
Project finance is no exception to this rule. "It's not an easy task to get a considerable amount for a relatively long period at low interest rates for the implementation of a start-up in Ukraine. It is worth recalling that our country is still at the lowest seventh risk level according to the Organization for Economic Cooperation and Development (OECD) rating, which means that investors are still very prudent when establishing cooperation with the Ukrainian business.But raising foreign financing for Ukrainian companies projects is still possible, even if you run a company start-up. It depends not only on the prospects of the project itself, but also on what and who is behind it," - says Managing Director of IBcontacts company Kateryna S. Barabash.

Thus, we come to the most interesting and most difficult thing - project structuring. Many factors matter when forming the structure of the project, the most important thereof is the way to arrange financing. The structure of the project, as well as the sequence of its stages, depends on a possible way of raising financial resources.

The structure is the essence

Project financing was the major issue covered by the representatives of one of the largest export credit agencies (ECAs) in Germany and worldwide Euler Hermes, during the First International Seminar on Trade Finance, organized by the IBcontacts company in May 2011 in Ukraine. Underwriting Division specialists Thorsten Nissen, Corneliu Stirbu, and Kathrin Meier represented Euler Hermes at the event.

The role of ECA in organizing overseas project financing cannot be overestimated. The answer to the crucial question whether the project will be implemented, depends on ECA's decision regarding the risk coverage of foreign financing banks and suppliers. So what is the advantage of foreign underwriters in the implementation of such transactions, and the most important thing, under what conditions is it possible at all?

"The answer is the presence of a foreign element, at least 50% of the total funding, in a project. A foreign element in such instance would be the equipment manufactured abroad, technologies, and the involvement of a foreign contractor. In this case, as well as in trade finance, foreign ECAs will promote their countries' production and exports: they will insure the risks of national suppliers and banks for a project implementation abroad", said Thorsten Nissen at the Seminar.
In addition to the above mentioned, the foreign element would also be an overseas parent company involved, and some other important factors that will help attract money to your idea.

"However, both the ECA and the financing bank will carefully examine the project documentation. The main goal hereof is to confirm the profitability and prospects of the project. In addition, we will consider possible forms of support: existing SPV (Special Purpose Vehicle - a company created for the purpose of the project implementation) or purchased property, as well as future revenue from product sales", continued Mr. Nissen.

So, if you believe that your idea will lay golden eggs, generating the necessary financial flows, it is half the battle. This fact is, perhaps, the main condition for the successful raising of foreign project finance, which is displayed and properly proved in our project documentation and financial model.

Full version of the article is available in the fourth issue of IBobserver newspaper at the IBcontacts company website

Posted: 07 July 2011, last updated 7 July 2011

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