The Threat From Arms-Length Project Financing

By John Richardson

THE increasing use of non-recourse financing has raised the cost of projects financed since 2007 in a very difficult economic climate, warns a senior industry source.

“I look at how some recent projects have been financed and worry,’ he adds.

“Until 2007 money was plentiful, making it very easy to get board approval. Now you have a new generation of project financing where a project is treated as a purely separate entity, with financing the entire responsibility of a particular joint venture.

“As a result, anything financed since 2007 is Libor plus a great deal rather than the old days of Libor plus a minimum.

“The added problem is if a project gets into trouble a lender is unlikely to offer much flexibility because there is no head-office support.

“A further problem is national debt positions. Governments have been facing downgrades on their debt ratings – or in some cases have already been downgraded – because of the huge amount of money spent in fiscal stimulus. This is further adding to the cost of financing in certain locations,” he says

In the final analysis it will be interesting to see whether head offices always will keep their distance in the event of major financial problems with projects.

Perhaps shareholders need to start asking tough questions ahead of H2 2010 – when lower growth in China could combine with the long-awaited great supply flood in polyolefins.

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