International financing

International financing services of investment projects and trade transactions is becoming an increasingly important factor in business development.

Since the end of the twentieth century, the world economy has been developing under the influence of globalization, which establishes modern rules for building an interconnected, deeply integrated world. International finance is closely related to the cross-border flows of goods, raw materials, labor, financial resources and information, which initiate radical changes in all national economies.

The implementation of numerous international investment projects around the world is accompanied by the rapid development of markets and an increase in the share of exports in the gross domestic product of developed countries.

In 2018, global exports reached $ 19.45 trillion (an increase of 9.4% over 2011), while global imports increased to $ 19.77 trillion.

The globalization of key sectors with the strengthening of international value chains has become the basis for the global economic growth on the verge of the coronavirus crisis.

The architecture of the world economy has changed significantly in recent years thanks to the liberalization of foreign trade, the development of the international financial market and the fragmentation of international production. Multinational corporations are now becoming the driving force behind economic development, and international project financing has become a common practice for big business.

According to UNCTAD reports, in 2018 the number of multinational corporations in the world exceeded 82 thousand, and their number has increased almost 12 times over the past 30 years and continues to grow.

The top 500 largest multinational corporations currently control half of the world's industrial production, and their profits often exceed the budgets of developed countries.

International financing of investment projects, including advanced project finance tools, takes an increasing share in such industries as energy, chemical industry, mechanical engineering, electronics, oil and gas projects and many others.

GCAM Investment Group offers a wide range of advanced instruments for international financing of large projects, including investment loans, project finance (PF), corporatization, financial leasing and much more. The geography of our services covers almost the whole world, including the European Union, the USA, Latin America, Russia and the CIS, North Africa, the Middle East, as well as South Asia, East Asia and China.

Fully realizing the importance of implementing international investment projects for modern business, our financial team is actively working to improve analytical tools and develop new financing models.

We are ready to provide long-term loans for businesses from 50 million euros with a maturity of up to 20 years.

GCAM also offers a full range of services related to the organization of project finance, including the establishment and management of SPV / SPE.

Instruments for international financing of investment projects

Any company that implements large investment projects must have reliable access to funding sources.

Multinational corporations and companies operating overseas are no exception.

Sources of international financing for investment projects fall into two broad categories. Equity financing consists in obtaining financing through an increase in capital, that is, the issue of new shares. Debt financing means attracting borrowed funds through banks, financial institutions, investors, etc.

Multinational corporations or companies operating overseas, as opposed to companies operating only in the local or domestic market, tend to have a significant need for resources. In most cases, this need cannot be fully satisfied in the domestic market during the implementation of large capital-intensive projects. For this reason, companies strive to diversify funding sources and raise funds both domestically and internationally. International financing instruments for financing long-term investment projects are briefly discussed in this section.

The use of debt financing for international investment projects, such as the renewal of existing assets and the purchase of foreign companies, is widespread in many areas.

The effective use of debt instruments offers significant benefits to companies operating outside the country of origin.

The cost of debt financing may be lower compared to alternative sources. In addition, the interest paid on the loan is not taxed. Attracting affordable sources of debt financing for business development abroad helps to increase the return on equity.

According to the Alliance for Financial Inclusion (AFI), paying off debt forces managers to be more disciplined, which contributes to the overall efficiency of managing specific business projects.

However, the most common way to increase the capital of a multinational corporation is the issue and placement of shares on international markets. The characteristics of this source are described below.

Issue and placement of shares in foreign markets

Companies can issue shares in the country of origin in local currency or place their shares on international markets.

Companies are considering the possibility of an international issue of shares, mainly in order to obtain additional funds in the same currency in which they need to finance commercial operations or the implementation of investment projects abroad. The successful use of this instrument is highly dependent on factors such as the company's international image and liquidity guarantees for international investors.

The issue and placement of shares on foreign markets is divided into four main categories:

• Internationally underwritten domestic offers. These are registered offers, usually aimed at domestic investors with a significant number of foreign participants.

• Dual tranche offers. Most of the shares go to the domestic market of the issuing company through a public offering, and the rest goes to foreign markets through a private placement.

• Multi-jurisdictional offers. These are offers that include one or more public transactions registered outside the internal market (on which the public offering is also carried out).

• Euro-equity offers. The peculiarity of issuing shares in euros for foreign investors is that they are intended for professional investors and are available to the public through financial intermediaries. Another important feature is that they are offered in EU countries outside of the issuer's country of origin.

Each mechanism for attracting international financing of investment projects has some features of practical implementation, as well as advantages and disadvantages that should be taken into account when planning a specific project. GCAM Investment Group offers professional support for companies that are preparing an issue of shares to raise additional capital in the world markets.

Intra-group corporate loans

In multinational corporations, it is common to conclude centralized contracts for attracting external financing for projects, which are concluded at the level of the parent company.

This allows the subsidiary to get better conditions than it could get on the market on its own. Intra-group corporate loans create ample opportunities for the distribution of funds between subsidiaries, depending on their needs.

When planning expenses, it is important to take into account the numerous restrictions on transactions with other related parties so that the interest rate on the intragroup loan is in line with the market interest rate. In particular, it is recommended to evaluate the theoretical credit rating of a subsidiary and analyze the interest rate at which companies with a similar credit rating are financed.

Today, businesses often request funding for projects abroad from local financial institutions and organizations, setting an interest rate on an intra-group loan similar to the interest rate on proposals received.

Of course, preference is usually given to financing instruments that are less regulated, allowing companies to set variable rates depending on the results of the investment project and the company's performance.

Bank investment loans

An investment bank loan is a mechanism whereby a financial institution provides a company with a certain amount of funds to finance an international investment project.

The borrowing company, in turn, is obliged to make periodic payments, which include the repayment of the principal amount and the payment of the agreed interest.

The issuance of a large bank loan in the framework of international financing always requires an in-depth study of the operations by the financial institution's risk commission and, if necessary, the request for guarantees that cover the risk of default by the debtor.

The advantages of investment loans for the implementation of international projects include:

• The company can receive all the required funds after the loan is issued and can immediately use them to finance construction services, engineering design and so on.

• Investment loans do not require significant fixed costs for organizing the financing process, unlike project finance instruments through SPV / SPE. A pre-agreed debt repayment schedule allows the borrower to manage the project in the most rational way.

• The loan agreement is concluded on individual terms, which are adapted to the needs of a specific international project. It is also possible to establish a grace period during which the principal amount of the loan is not paid.

• Costs related to the repayment of the loan are usually not tax deductible. This creates opportunities for tax optimization, which are actively used by multinational companies.

Despite the obvious advantages of this international financing instrument, long-term loans have a number of disadvantages.

For example, obtaining a loan requires a complex application processing procedure, which is associated with the publication of the financial statements of the borrowing company and the disclosure of information about the project.

If you need a long-term investment loan to finance a large project abroad, please contact our specialists. GCAM with international partners participated in the implementation of a number of investment projects in Germany, Brazil, USA, Mexico, China, Saudi Arabia and other countries.

Our rich international experience, solid financial base and strong business relationships around the world will contribute to the success of your business projects, regardless of the scale and level of innovation.

Eurocredits

Eurocredits are a special instrument of debt financing in European currency provided by banks or groups of banks.

This type of loan is usually provided for a medium to long term and can be used to implement large capital-intensive investment projects with a long payback period. Borrowers can be both the corporate sector and the government.

The interest rate on Eurocredits can be floating because capital providers finance these funds with short-term instruments to provide rates. The most widely used reference rate is LIBOR (London Interbank Offered Rate) plus spread. Operations in Euro currency are not subject to the jurisdiction of the country of origin of the creditor bank. In addition, they are not subject to many of the restrictions in that country.

International loans are divided into tranches, so the currency, reference interest rate and spread may be different for each tranche. If a loan is expressed in different currencies, it is called multicurrency.

These loans may include a multi-currency clause, allowing the borrower to change the loan currency at the agreed rate during agreed periods, minimizing the risk of rate fluctuations.

Since international loans usually require significant financial resources, they are usually syndicated. The loans required for the construction of large power plants, roads, factories and reservoirs, for example, can easily exceed a billion euros. This significantly exceeds the financial capabilities of most commercial banks, making financing difficult.



Syndicated loans solve the problem of financing capital-intensive projects by allowing banks to distribute risks and costs among multiple members of the syndicate.

One of the first major projects implemented in Europe using a syndicated loan was the Eurotunnel project, which in 1994 had a total cost of £ 9 billion.

International project finance instruments

Project finance (PF) brings together large-scale mechanisms for international financing of investment projects, which are fully based on the ability of the project to generate cash flows to service debt.

Project finance instruments are built on multilateral contracts between stakeholders that jointly ensure the achievement of project objectives.

Project finance works through SPV / SPE, the sole purpose of which is the implementation of an investment project. A specially created and formally independent company guarantees that the assets will be used for the development of a specific project in accordance with the contracts. During the planning phase, such a project should be subjected to a detailed assessment to ensure financial, legal, environmental and technical viability and return on investment.

The most important aspects of PF are high leverage (on average, projects are financed by 20% by initiators and 80% by borrowed funds), a long implementation period (usually up to 20-30 years), as well as the use of the generated financial flows of the project for servicing debt.

The off-balance nature of project finance (the project's debt is not reflected in the financial statements of the initiator) facilitates the implementation of ambitious projects by small companies that are unable to provide sufficient collateral to obtain loans. In this case, funds are provided against the future cash flows of the project, regardless of the assets of the initiator.

In most cases, these are projects with mature technologies.

Increased investment in infrastructure and the tendency of governments to reduce their budget deficits have become fundamental factors in the development of project finance around the world.

This funding model allows governments and private companies to jointly complete risky and costly projects, often through public-private partnerships (PPPs).

The most important features of project finance are listed below:

• The project participants create a special project company (SPV / SPE), which acts as a borrower, is responsible for attracting financing and implementing the entire project.

• The initiator of the project usually makes a certain financial contribution to its development (usually about 10-30% of the cost), linking the financing of the project with its management.

• The project company enters into multilateral contracts with key stakeholders, including contractors, suppliers, capital providers, customers and government (if applicable).

• The project company operates with a high debt-to-equity ratio, so creditors have limited claims in the event of bankruptcy.

• Guarantee agreements aim to ensure that the project is profitable enough to meet the requirements of the capital providers as the upfront costs during the construction phase are very high and no cash flows are generated.

• Project finance usually involves the creation of a reserve fund, which is formed from the current cash flow and protects the project from unforeseen circumstances during the life of the project agreements.

Today, project finance is widely used in the energy sector (especially the construction of solar and wind power plants, the development of other renewable energy sources), telecommunications, transportation, infrastructure projects and capital-intensive industries of modern industry.

GCAM Investment Group specializes in organizing project finance schemes in the EU and beyond.

Our team is ready to attract debt financing for a large project in any country in the world. The geography of our services covers dozens of countries in Europe, North America, Latin America, Africa, the Middle East and East Asia.

We will be happy to advise you on any aspect of international financing for large projects.

International venture funds

Attracting funds from international venture funds is one of the most promising instruments for financing investment projects abroad, which is gaining popularity.

Since traditional financing through bank loans and bonds is not available for all companies, venture capital may be considered the most suitable financial alternative, especially in the case of innovative projects with high growth potential in the short term.



Venture capital does not require guarantees, collateral or bank approval. International venture capital funds invest large sums in exchange for a share of a promising company, which usually does not exceed 30%. A venture capital fund can actively participate in the management of the company and in making strategic decisions, but usually does not interfere with the day-to-day business activities.

Venture capital participation is temporary and usually lasts 10 years in the case of new ventures, or a maximum of 5 years for companies that already have some experience (in this case, we are talking about direct investment).

After the expiration of the specified period, the capital provider leaves the project, offering to buy out its share to the initiating company, selling this share to third parties or the government.

This source of international financing for investment projects is most accessible to companies that have high growth potential.

An important condition for attracting venture capital is the presence of a promising business idea, as well as an experienced management team capable of efficiently managing the submitted business plan.

Regular bonds and Eurobonds

The bond issue offers the business a fixed interest rate for a specific period, combined with the payment of the debt at the end of the period.

Bonds issued on international markets can be categorized into regular bonds and Eurobonds. In the case of regular international bonds, the issue is made by a foreign borrower in the currency of the country in which the bonds are placed.

For example, Yankee bonds if issued by a foreign company in dollars in the United States.

Eurobonds include bonds issued on the international market in any country other than the country in whose currency the issue is denominated. This could be the case for a German company that issues Eurodollar bonds on the Spanish market. The Eurobond market, with strong financial centers such as Luxembourg, the United Kingdom and Germany, is rapidly developing today and is playing a growing role in international financing of investment projects in the EU and beyond.

The main reasons for companies to issue international bonds are listed below:

• Companies are looking for markets with better opportunities to attract investors than the national market. Some countries offer a very limited pool of potential investors, which is why local businesses will seek funding in foreign financial markets.

• Companies may choose to finance specific investment projects in local currency to reduce their exposure to possible exchange rate fluctuations. This can be especially relevant for sponsors if you analyze the relationship between the loan repayment schedule and the receipt of cash flow from the project.

• Financing projects in foreign currencies with a lower interest rate may allow multinational companies to reduce the cost of their debt obligations, although they become exposed to potential exchange rate fluctuations.

International bonds have some specific characteristics that distinguish them from other bonds and alternative sources of international financing for investment projects:

• International bonds are negotiable instruments. Due to the wide geography of operators, a significant portion of Eurobonds is quoted on OTC markets, while others are traded in large centers, mainly in London and Luxembourg.

• The issue of bonds is carried out through a banking syndicate, which purchases the entire issue, insuring it. Individual investors can access the bonds through any financial institution that is part of the relevant banking syndicate.

• Interest rates can be fixed or variable. In international floating rate bonds (FRN), the coupon is periodically revised by means of a spread over a predetermined reference rate.

• Bond maturities usually range from 5 to 25 years, although there may be perpetual bonds with no specific maturity. Other instruments can also be used that determine the specifics of the redemption of a particular issue.

• The specified type of bonds can be denominated in any currency, however, issues of so-called hard currencies such as the US dollar, euro or yen prevail. International bonds can be converted into shares of the issuing company.

Structured bonds are securities, the yield on which is associated with the development of one or more basic assets, such as stocks, commodities, etc.

Structured bonds include derivatives (usually options) that allow the issuing company to link the yield of a financial product with the so-called benchmark assets.

If you need more advice on international bond financing, please contact the GCAM finance team at any time. Our specialists with rich experience in financing large projects will help your company organize the issue and placement of securities in the markets of Europe, the USA and other leading world financial centers.

What to consider when choosing international financing

It is important for participants in an investment project to carefully analyze all financing alternatives, as well as to establish the advantages and disadvantages of each of these options.

A professional project analysis enables companies to make informed decisions, select the best financing possible and therefore helps to maximize the value of the project.

The first factor that needs to be analyzed when deciding whether to finance a project abroad is the choice between domestic financing and international financing. In this sense, the obvious way to hedge the risk of fluctuations in the exchange rate of investments in different countries is to obtain financing in the same currency in which the investment is made. It should be remembered that changes in the exchange rate affect both the liabilities and the assets of the subsidiary.

A certain problem is presented by situations when an investment project is being implemented in emerging markets, where the financial system is underdeveloped and, therefore, access to financing is limited.

This makes the cost of borrowed funds very high, negatively affecting the the project.

In such cases, the company can also turn to structures created by international organizations and governments that offer financial support to launch projects in various countries. Examples of such structures are the European Investment Bank or the World Bank, as well as a number of national structures such as ICEX in Spain.

The second factor that should be taken into account when financing projects internationally is the choice between centralized financing through a parent company or an independent search for financial resources in the country of destination. Centralized financing through the parent company has a number of advantages, including uniformity in the criteria for managing financial risks and raising borrowed funds on more favorable terms.

Also, the broad capabilities of the parent company are a bargaining chip in negotiations with potential capital providers.

Finally, it is important for project initiators to determine the type of financing (equity, debt and combined) that is most suitable for a specific investment project and company. To select the best type of financing, financiers assess the company's current financial position, capitalization and debt levels. In general, it is recommended that the borrower has a well-balanced financing structure with no more than 50% of the total financing in arrears, which results in a financial cost of less than 3% of turnover and allows the company to maintain sufficient financial autonomy.

An important aspect influencing the choice of sources of international financing is the age of the company.

Typically, companies with less experience are financed with capital investments from partners and investors. On the contrary, it is easier for companies with rich experience and good credit history to access international financial markets and obtain large loans on favorable terms.

Other factors that need to be analyzed in order to select the most appropriate international financing instrument are guarantees. The analysis includes an assessment not only of the type of guarantees requested and their duration, but also of whether they should be provided in the country of origin or in the country of destination. The latter can be critical to ensure the security of the transaction. Finally, another factor to consider is the responsibility of the company and its shareholders.

Some countries also impose limits on the debt of foreign companies, and this fact may determine the choice of the structure of financing investment projects in these countries.

For example, China strictly controls the debt financing of projects with foreign capital, obliging such borrowers to finance a significant part of the cost of projects with capital contributed by partners.

In addition, access to bank lending differs significantly from country to country, and the ability to use intra-group loans for multinational corporations may be limited by law, especially in regulated economies. This underlines the critical importance of high-quality planning and legal support of investment projects from the earliest stage.

Our professional team is ready to provide a full range of legal and financial services for clients planning investment projects anywhere in the world.

Contact us to find out more.