PROJECT FINANCING INSIGHTS | 28 JANUARY 2019 Greenfield projects considered high risk by commercial banks Absa | Corporate and Investment Banking > Insights and Events > Greenfield projects considered high risk by commercial banks Theuns Ehlers Head: Project Finance SHARE Commercial banks have reduced their appetite to fund greenfield projects because of the risks involved. The appetite of banks to fund greenfield projects in sub-Sahara Africa has tapered down from the active levels seen three to four years ago mainly due to volatile commodity prices and viability concerns of the projects. Funding focus shifts to existing projects On the other hand, there has been an increase in funding requests for existing (brownfield) developments across a number of commodity sectors. The demand for funding for brownfield projects is particularly from small and medium sized mining companies, who find it easier to raise funding for such developments on the back of existing operations and cash-flows to underpin debt servicing. Commercial banks are now more cautious when it comes to financing greenfield operations, and where they decide to provide funding, they are asking for additional credit support to mitigate against project completion risk. Up until three to four years ago, commercial banks in Africa were very active in financing for greenfield mining developments, across most commodities. But we have noticed that the appetite for the sector tapered down over the past few years. This is due to a number of reasons, including volatile commodity prices, technical difficulties to achieve promised production and cost levels and failure of a number of greenfield operations to reach completion on time and budget, all of which impacted on their ability to honour debt servicing commitments. Analysing greenfield versus brownfield projects In addition to commercial bank funding, many junior miners are looking to tap other sources of liquidity to develop their projects. These include commodity prepayment facilities or streaming facilities (typically provided by commodity trading houses), asset financing facilities for moveable equipment, as well as high yield bonds in the capital markets. Some projects are also being developed in a fully equity financed basis, with a view to re-finance a portion of the equity once the project is up and running and completion risks have been largely mitigated. Demand for funding for brownfield developments is increasing, and funding for such projects is relatively easier to raise and/or provide. Generally, commercial banks find it much easier to take credit risk against existing or operating mines and cash flows or a diversified portfolio of mining assets. We also find that the commodity price break-even levels for brownfields developments are much better or lower than is the case for new developments, because of factors such as infrastructure sharing and lower overall capital cost layout. Theuns EhlersHead: Project Finance https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles FINANCIAL SOLUTIONS Lessons from building a custody business during a pandemic Building and selling a business is a very personal journey and when you get the opportunity to reiterate on your original concept, there is something special about taking it to a whole new level. Our journey with Absa Investor Services gave us a chance to do just that. Read more CORPORATE BANKING Expert solutions for your Transactional Banking needs Yasmin Masithela discusses the importance of transaction banking for corporate clients. TRADE INSIGHTS New deal will mobilise over US$ 2 billion in trade over three years Absa looks to promote intra-regional trade and investment through a US$ 250 million trade finance deal. Read more
