Project Financing Methods – Equity, Debt & Hybrid Structures
The capital structure of a project determines the mix of equity, debt, and hybrid instruments used to finance it. Getting the structure right is critical for project viability.
Typical Capital Structure
| Source | % of Total | Cost | Risk | Return |
|---|---|---|---|---|
| Senior Debt | 60-70% | 9-12% | Low (secured, priority) | Fixed interest |
| Subordinated Debt | 5-10% | 13-16% | Medium | Fixed + equity k icker |
| Equity | 20-30% | 16-22% (IRR) | High (last claim) | Dividends + capital gains |
Example - ₹1,000 crore project:
- Senior Debt: ₹700 crore (70%)
- Equity: ₹300 crore (30%)
1. Equity
Contributed by: Sponsors (developers)
Characteristics:
- Last claim on cash flows (after debt)
- Highest risk but highest returns
- No fixed payment obligation
- Typically 20-30% of project cost
Returns: Dividends + capital appreciation (targeting 16-22% IRR)
2. Senior Debt
Provided by: Commercial banks, DFIs, Institutional Investors
Characteristics:
- First claim on assets and cash flows
- Secured by mortgage on assets
- Fixed interest (floating or fixed rate)
- Repayment tenure: 10-18 years
Cost: 9-12% p.a.
3. Subordinated Debt (Junior Debt)
Provided by: Sponsors, DFIs (IFC, ADB)
Characteristics:
- Second claim (after senior debt)
- Absorbs losses before senior debt
- Higher interest rate (13-16%)
- May have equity upside (warrants, conversion option)
Purpose: Credit enhancement for senior lenders
4. Mezzanine Finance
Hybrid between debt and equity:
- Fixed interest + participation in equity upside
- Unsecured or junior secured
- Cost: 15-20% IRR
Summary
- Projects use 60-70% debt, 20-30% equity
- High leverage magnifies equity returns
- Multiple layers: Senior, Subordinated, Equity
- Each layer has different risk-return profile
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