PROJECT IMPLEMENTATION - THE MOST CRITICAL PHASE FOR CORPORATE BANKER
Mar 15 - 21, 2010
Successful project implementation is as important for the corporate banker as it is for the sponsors. After approval of the financing arrangement by the bank's board, the bank itself becomes the major stakeholder for the simple reason that its exposure is usually far greater than that of the sponsors. A project approved for financing ñ on a 60:40 debt/equity basis, say - may have as high a bank exposure as 80 percent in case the bank is also committed to take care of the bridge financing need of the project. The security against bank finance normally agreed upon for such cases is a first exclusive charge on all project assets, including land and building. The charge may become a pari passu first charge in case a bank consortium is formed with a view to risk sharing. Normally well-established big groups, by virtue of their market and industry clout, resist the idea of additional collaterals in the shape of mortgage of sponsors'/directors' private property or lien over personal marketable securities. The bank's loan repayments, therefore, become entirely dependent on successful implementation and commercial launch of the project that ensures a continuous flow of revenue, a portion of which could be utilized for repayments.
A major portion of the funds committed by the bank is utilized for importing plant and machinery for the project. As already discussed, the project land and a portion of building and civil works is generally financed by sponsors' equity. Immediately after the financial close - the final approval of the financing arrangement by a bank or a consortium of banks - the sponsors' endeavor would be to establish the letter of credit (L/C) for the import of plant and machinery. The corporate banker would invariably like to see the L/C established at its own bank. This maneuver not only ensures additional business to the bank but also gives it additional control over the project. In case of a consortium, the L/C will normally be established at the lead bank - the consortium leader.
The corporate banker should invariably see to it that all documentation and completion of required formalities takes place before the L/C is established. It should also make sure that the sponsors have spent their share of financing (or at least a major portion thereof) in acquiring project land and in carrying out necessary building and civil works. To have a control on all project expenditure, the standard practice is to open an escrow account with the amount of sponsors' share of investment and make all project payments through this account .which is to be operated jointly by the bank and the sponsors. In case the entire share of sponsors' investment is not spent till the opening of L/C then it is implied that the balance will be utilized to meet the local rupee cost of import that is payment of duties, taxes, clearing charges, transportation etc.
Implementation schedule that forms an integral part of the company feasibility and bank's project evaluation report, becomes a vital document after the financial close is reached. The schedule sets time targets for completion of different project activities seriatim, for example acquisition of project land, start and completion of building and civil works, opening of import L/C, shipment of plant and machinery, arrival of machinery at the port, arrival of machinery at the project site, arrival of foreign engineers and plant erectors, completion of plant erection and commissioning work, start of trial runs, start of commercial production etc. The sum total of these time targets is the total implementation period. Each and every individual activity should start and conclude in accordance with the given timelines. Any major time variances may jeopardize the financial viability of the project as time overruns are invariably translated into cost overruns. Although the financing agreement executed between the bank and the sponsors clearly spells out that all cost overruns are to be financed by the sponsors from their own resources, the sponsors invariably turn to the bankers to seek solution to the problem of additional financing.
In such cases, the available options boil down to the restructuring of the financial plan. This is not a welcome situation to the corporate banker as it entails additional bank exposure in a project that could have been delayed for a variety of reasons that may range from entrepreneurial ineptitude of the sponsors to the changed market or political conditions. Putting additional money in such a project could well be a highly risky venture. A strict bank supervision of project activities in accordance with the implementation schedule is, therefore, imperative. There could be genuine delays, anyway. In such case, the bank should take an objective view and try to work out a solution with the sponsors. The solution might be the restructuring of repayment schedule without committing additional funds. Normally 6-12 months are allowed by the banks as grace period which means that the first repayment installment will fall due 6-12 months after the start of commercial production. A restructured repayment schedule might, therefore, increase the grace period by a few months putting the incidence of additional interest charges during the construction period on the sponsors.
In order to keep track of the project activities, periodic project visits are to be undertaken by the team of bank engineers and finance personnel. The company is required to draw its financial accounts in accordance with the statutory requirements. These accounts should reflect the total funds invested in the project till the date of preparation of these accounts. The finance personnel of the bank should critically examine these accounts and carry out physical verification wherever required. As pointed out earlier, the non-serious sponsors, particularly those looking to benefit from political loans, try to invest from their own resources as little as possible. They frequently undertake foreign travels with a view to selecting suppliers for their plant and machinery. Such unscrupulous and phony sponsors are interested in over-invoicing of the machinery to receive lick-backs from the machinery suppliers. The banks should be highly vigilant in such cases and involve their branch or representative offices in the country of the machinery suppliers to forestall any such shady deals.