LIVING FROM THE AIR OF THE SKY

additional requirements.

Question: am I right in thinking that debt financing comes from a bank or financial institution?

Question: this is the first mention of the need to borrow money from a bank? Is that always the way? Or can it be done 100% from the community? Seems to contradict the previous para starting: ‘In a community project however…

Most importantly, the due diligence requirements. Even though a project developer will carry out a degree of due diligence on contractors, legal documentation, and the like, this is different when debt finance is involved.

As the bank will lend purely against the expected cashflow from the project, with the assets as their only security, their main risk sits in the quality of the EPC contractor and the performance of the project once it is completed.

Both legal and technical due diligence are therefore very important to a bank - which means additional cash out for the project during its development phase. Significant cash out as well, as due diligence like this goes easily into the tens of thousands of pounds, which is a lot of money for a community project developer.

Also, a bank is likely to put additional requirements on both the cashflow of the project and the EPC counter party.

For example, with regards to the cashflow of the project, the bank will ask to keep debt service reserves in a separate account, so that interest and capital repayments for a period of let’s say 6 months are guaranteed. The bank will also ask to have a maintenance reserve, so repairs and spare parts can be paid for in case they are not covered under a warranty, or in case the coverage is disputed.

With regards to the EPC counterparty, the bank is likely to have additional requirements both from a contractual point of view (Quality Assurance processes are typically very strict) and from a credit risk point of view. Think parent company guarantees, warranty bonds, retention of payments until the project has been operating for at least 12 months without problems, etc. These are also likely to push up the cost of the project.

The EP counterparty will also ask for guarantees from the developer, in order to ensure that the money is and will be there. They will have to order large volumes of kit, and will not necessarily have received all the

funds required to deliver the project. This is likely to put additional strain on the community developer.

Solutions typically can be found in financial structuring and in timing.

An example of financial structuring can be found in the instrument of underwriting. This basically means that a portion of the equity (or debt) part of the project is guaranteed by a third party (individual, financial organisation, etc). Typically this costs between 1 and 3% of the sum that is underwritten, and if the underwriting needs to be called, the interest terms are typically higher than the projected equity returns and the debt returns. It helps the