PPP project financing channels and methods: financial leasing

PPP project financing channels and methods: financial leasing

What are the characteristics of financial leasing in PPP project financing? What are the channel methods? How much relevant information do you know?

Financial leasing is one of the important financing methods for PPP projects

Although PPP projects are currently popular, financing problems may become a roadblock. PPP project financing methods can be divided into equity and debt financing, which can involve 19 major financing channels and 36 specific financing methods, which are complex and diverse. Because PPP projects are mostly long-term contracts, they need to be matched with stable medium and long-term funds to avoid cash flow management risks during project construction and operation. The financial leasing model is very suitable for this demand. For gas supply, water supply, power supply, and toll roads, It is especially suitable for PPP projects with both cash flow and fixed assets such as tourist attractions and tourist attractions. Therefore, financial leasing will be one of the important financing methods for PPP projects.

Financial leasing is a combination of financing and property financing, trade and technological updates. It essentially uses property financing to achieve the purpose of financing, and is suitable for large-scale, long-term PPP projects such as infrastructure. The main models of financial leasing include direct financial leasing, equipment financial leasing and sale and leaseback.

In direct financial leasing (or equipment financial leasing), the leasing company invests in purchasing equipment or real estate and leases it to the project company for use. During the lease period, the ownership of the equipment belongs to the leasing company. The project company has the right to use and earn income from the equipment and pays rent to the leasing company in installments. This model can solve the financing problem of large-scale equipment or real estate with high acquisition costs, and relieve the pressure on infrastructure funds in the early stages of the project.

In the sale and leaseback process, the project company sells its own equipment or real estate to a leasing company and then leases it back for use, which has the effect of revitalizing large stocks of assets and improving financial status.

Compared with other financing methods such as bank credit, the above-mentioned model has obvious advantages of less restrictions, simple procedures, flexible methods, the ability to adjust taxes, improve financial conditions, a long period of use of funds, and less debt repayment pressure on the lessee enterprise. , reducing the intermediate links and expenses for the lessee's direct purchase of equipment; and through "financial leasing", not only can valuable funds be raised, but more importantly, it can realize the expansion of corporate assets, adjust the operating structure, revitalize existing assets, and realize Transform the operating mechanism and upgrade management to achieve the maximum value-added goal of capital. Therefore, it is very suitable for PPP projects that have both cash flow and fixed assets, including gas supply, water supply, power supply, toll roads, tourist attractions, etc., to solve funding problems through financial leasing.

According to statistics, there are currently 15,966 projects in the PPP project database, with a total project investment of 15.9 trillion yuan, involving energy, transportation, water conservancy, environmental protection, agriculture, forestry, major municipal projects, etc. Therefore, it is time for the financial leasing business to intervene in the development of PPP. Financial leasing companies should also play an important role in the PPP trend, actively and better participate in the public service field, and seize business opportunities in the infrastructure PPP model. ?Dr. Zhu said during his lecture.

In fact, as a new option for PPP project financing, the financial leasing business model also complies with the central government’s policy call to vigorously promote the PPP model, which is conducive to local governments revitalizing existing assets and reducing local government debt burdens. The General Office of the State Council's "Guiding Opinions on Accelerating the Development of the Financial Leasing Industry" (Guobanfa [2015] No. 68) puts forward overall development opinions on the financial leasing industry and clearly proposes to increase people's governments at all levels in providing public services. , purchasing financial leasing services in infrastructure construction and operation?, providing policy support for the involvement of financial leasing business in PPP projects.

Financial leasing must be used flexibly and well in PPP projects

Objectively speaking, there is not much practice in using financial leasing in PPP projects in my country. This model It is still in the exploratory stage, so on the one hand, PPP projects need to actively introduce the financial leasing model and make good use of the financial leasing method; on the other hand, financial leasing companies must also have an innovative spirit and actively participate in PPP projects.

1 PPP projects must grasp the introduction model

That is to say, PPP projects must choose the financial lease model of direct financial lease, equipment financial lease or sale and leaseback according to the requirements of project financing.

2 Make good use of intervention forms

Financial leasing companies can intervene in PPP projects through traditional intervention or in-depth intervention.

Traditional intervention means that financial leasing companies participate in PPP project financing as fund providers. This method is mainly used in the construction phase of PPP projects. The business model is "direct leasing" with a term of 3 to 5 years. It can also be adopted as "sale and leaseback".

? Deep involvement? refers to the way in which a financial leasing company, as a social capital party, directly invests in a PPP project. It is essentially an investment behavior, that is, a financial leasing company, as a social capital or one of its parties, invests in an SPV company. And participate in the entire construction and operation of PPP projects, with the goal of obtaining long-term and stable income.

3 Master the operating methods

For example, when the government adopts the financial leasing model, it should first establish an SPV company. Before the PPP project begins, the SPV company first signs relevant contracts with social capital (such as a financial leasing company). At this time, the SPV company is equivalent to the lessee and the social capital is equivalent to the lessor. According to the bundling characteristics of the PPP model, the project can be divided into two phases: construction and use. After the contract is signed, the construction phase begins, with social capital building the infrastructure. During the use stage of the infrastructure, the SPV company provides supporting services and is also responsible for maintaining the infrastructure, while the public sector authorities provide appropriate subsidies to the SPV company and regularly pay unified financial lease rents to social capital. When the lease period specified in the contract expires, the infrastructure is owned by the government department.

4 Financial leasing companies must guard against risks

PPP projects involve many departments, complex approval procedures, and a high degree of specialization; and most of them are long-term contracts with large capital requirements and difficult payment collection The cycle lasts 20-30 years or even longer. Problems in any link will lead to extension of the construction period or even project termination. During the operation, you will face a lot of risks at any time. Therefore, when financial leasing companies intervene in PPP projects, whether it is "traditional intervention" or "deep intervention", they need to prevent risks during the operation.

The difference between PPP project financing and corporate financing

When using the project financing model, the project sponsor (usually the project investor or project sponsor) will usually serve as the project company’s Shareholders establish a special project company for the investment, financing, development, construction, and operation management of the project, with the project company as the main body, using the cash flow and all proceeds from the operating project itself as the source of debt repayment funds, and using all the project company's Assets are the main measure for credit enhancement (guarantee). According to the characteristics of the underlying assets of project financing and the division of recourse rights, project financing can be divided into two categories: project financing without recourse and project financing with limited recourse. Usually, the difference between project financing and corporate financing is reflected in the following aspects:

(1) The financing entities are different. The financing subject of PPP project financing is the project company, and the lender or fund provider provides financing based on the asset status of the project company and the profitability of the project after completion and operation. In conventional corporate financing, the financing subject is the project sponsor, and the fund provider or lender considers the subject's own creditworthiness, asset status, finance and guarantee situation more.

(2) Different funding channels. Project financing is mainly used for infrastructure and other projects, which are usually large-scale, long-term, and low-income, requiring the participation of diversified funds with more cost and scale advantages. Internationally, the main channels include policy banks, commercial banks, government funds or subsidies, insurance companies, pension funds and investment funds, etc. Conventional corporate financing, on the other hand, can be more elastic and flexible based on the project needs, the company's financial status and the actual capital market. The fund size and capital cost that the company can afford are more elastic and flexible. Therefore, corporate financing can better reflect the advantages of full-market capital raising.

(3) The characteristics of recourse rights are different. The most basic feature of project financing is that it usually has limited or even no recourse for the financing entity.

The lender cannot pursue other assets of the project sponsor other than the project assets and related secured assets or credit enhancement arrangements. In conventional corporate financing, full recourse is usually required. Once the financing entity is unable to repay the debt, the creditor can make up for it through the asset disposal of the financing entity (company).

(4) The sources of repayment are different. The repayment of project financing funds is mainly based on the project's own income, with the project's own income and assets as the source of repayment. In conventional corporate financing, the source of fund repayment is all assets and business income of the financing entity.

(5) The guarantee structures are different. Project financing generally has a relatively complex legal guarantee structure system to coordinate and balance the complex interest relationships of various participants and stakeholders, reasonably share risks, and achieve their respective optimal goals. In traditional corporate financing, the guarantee structure is relatively simple and the participants are relatively simple, such as equity pledges, asset mortgages, credit guarantees, etc.

(6) The quality and safety management system is improved. There have been no major production safety and quality accidents in the past three years. Investors have strong awareness of proactive prevention, effective measures, and good compliance. It has independent legal personality and can operate legally and compliantly in compliance with the contract.

What are the characteristics of equity financing in PPP project financing?

(1) Long-term nature: The funds obtained by the company through equity financing have no expiration date, so they are long-term as long as the company exists , there is no need to return the amount;

(2) Irreversible: The funds obtained from the company’s equity financing do not need to be returned to the investors, and the investors can only obtain the principal by selling the company’s equity;

(3) No burden: Equity financing does not require dividends in each period. Whether to pay dividends, the time and amount of dividends can be determined according to the actual situation of the company.

What are the characteristics of bond financing in PPP project financing?

The first characteristic of debt financing is its term. Unlike equity financing, debt financing is divided into short-term, medium-term and long-term, with time limits. Even the longest-term debt financing needs to be returned as agreed. The second characteristic of debt financing is that it has a higher priority than equity financing in liquidation. Therefore, the funds obtained from debt financing can only be used as a supplement to the company's working capital. Lenders will also consider risks and control the amount of funds lent. The company cannot completely rely on it to complete investment in new projects. The third characteristic of debt financing is that it brings leverage income to the company without affecting the company's control rights. It is reflected on the balance sheet as a liability, but it will inhibit the company's investment impulse and increase the possibility of the company's bankruptcy. Types of debt financing include bank credit, private lending, medium-term notes, corporate bonds, trust financing, project financing, leasing, etc.

How to understand the concept of off-balance sheet financing in PPP projects

The full name of off-balance sheet financing (Off-Balance-Sheet Financing) is off-balance sheet financing. In reality, it is often referred to as off-balance sheet financing. Financing or off-book financing. Some PPP projects (especially transportation projects using certain one-time assets) will use this type of financing.

Operating leases in PPP off-balance sheet financing

Operating leases are the most widely used off-balance sheet financing method, but it should be noted that financial leases that are also leases do not count. Off-balance sheet financing. The difference between operating leases and financial leases is that operating leases are leases to outsiders for the sole purpose of using an asset when the company needs to use it temporarily. The company does not want to own the asset, while financial leases are often made by When a professional leasing company purchases an asset and then leases it to the company, it is actually equivalent to selling the asset to the company in installments.

How to understand joint ventures in PPP off-balance sheet financing

Since PPP projects are usually structured as a single project company, there are fewer cases of joint ventures involved. Joint venture refers to the behavior of a company holding equity in another company but not controlling or actually controlling the company. At this time, the investment is shown as external investment on the balance sheet, and the operating income is not shown on the income statement. However, some PPP projects may use special purpose vehicles (SPV) at the structural level.

A special purpose company refers to a company that initiates the establishment of a new company for its own benefit, and the company only serves some of the interests of the sponsoring company. Such companies are often registered in some offshore areas such as Bermuda and the British Virgin Islands, with extremely high asset-liability ratios. The promoters hide behind them but bear all risks.

How to understand asset securitization in PPP off-balance sheet financing

Asset securitization reflects the process of placing assets in the financial market for circulation. Usually, the asset needs to have value or stable cash flow, and then be publicly sold in the financial market through issuance, so that the asset can gain liquidity. In addition to securitizing its own equity or project income rights, PPP projects can also securitize some receivables or some products (such as carbon emission rights for wind power projects) to quickly obtain liquidity. However, during the implementation process, you need to pay attention to whether the behavior meets local accounting standards and whether it needs to be included in the balance sheet. This method is more common in the United States, where the financial market is developed, and is now becoming increasingly popular internationally. A recent China-related PPP project financing case is the asset securitization of Hong Kong Disneyland, which sold the government's accounts receivable in the financial market. ;