Project Finance Risk is extensive and expected. Sponsors utilize Project Financing because it offers the best mechanisms for allocating and mitigating risk.
Project finance risk is considerable. However, project finance is the financing method which is best suited for managing, allocating and mitigating risks. Responsibility for dealing with risk in project finance falls squarely on the project finance provider. Global Trade Services has unparalleled expertise underwriting project financings to assess, allocate and mitigate the risk. We employ innovative sources and methods of project financing, and use a broad array of risk management tools to assess, manage and mitigate
Just as important as identifying and assessing project finance risk is allocating those risks to the project participants or stakeholders who are best suited to manage the risks.
Thus, allocating project finance risk is one of the most effective and cost effective forms of risk mitigation.
Origination Risk
Sponsor Risk
Construction Risk
Operating Risk
Market Risk
Country Risk
Political Risk
Emerging Market Risk
Due Diligence
Risk Mitigation
Lenders mitigate credit risk in a number of ways, including:
• Risk-based pricing – Lenders may charge a higher interest rate to borrowers who are more likely to default, a practice called risk-based pricing. Lenders consider factors relating to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimates the effect on yield (credit spread).
• Covenants – Lenders may write stipulations on the borrower, called covenants, into loan agreements, such as:
• Periodically report its financial condition,
• Refrain from paying dividends, repurchasing shares, borrowing further, or other specific, voluntary actions that negatively affect the company’s financial position, and
• Repay the loan in full, at the lender’s request, in certain events such as changes in the borrower’s debt-to-equity ratio or interest coverage ratio.
• Credit insurance and credit derivatives – Lenders and bond holders may hedge their credit risk by purchasing credit insurance or credit derivatives. These contracts transfer the risk from the lender to the seller (insurer) in exchange for payment. The most common credit derivative is the credit default swap.
• Tightening – Lenders can reduce credit risk by reducing the amount of credit extended, either in total or to certain borrowers. For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 to net 15.
• Diversification – Lenders to a small number of borrowers (or kinds of borrower) face a high degree of unsystematic credit risk, called concentration risk. Lenders reduce this risk by diversifying the borrower pool.
• Deposit insurance – Governments may establish deposit insurance to guarantee bank deposits in the event of insolvency and to encourage consumers to hold their savings in the banking system instead of in cash.
Global Trade Services provides international project finance, trade finance and monetization services in more than 100 countries worldwide. Whether you need financing once or many times every month, our financing and advisory expertise are unparalleled, as is our inexorable commitment to your success.
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