Projects have shapes
A regional airline, a ferry service and an eco-tourism park can sit in the same sponsor’s portfolio and have almost nothing in common financially. One needs large sums early and generates cash quickly once flying. Another builds slowly, phase by phase. A third may take many years to break even and was never designed to produce high returns. Financing all three on the same terms because the same investor is at the table is a common and avoidable error.
Words that are often confused
- Moratorium suspends payment for a period. It does not suspend the debt. Unless the instrument says otherwise, the obligation is still accruing and still owed.
- Deferral moves a payment to a later date. Whether interest runs on the deferred amount depends on the drafting.
- Simple interest accrues on principal only; compound interest accrues on interest as well. Over a long term the difference is large.
- Interest on cleared funds runs only on money actually received and available, not on a commitment that has not been advanced.
- Equity on funding and a contingent acquisition right are very different things. One transfers ownership when money arrives; the other only after defined defaults, notice and cure.
Match the moratorium to the build, not the negotiation
A moratorium that ends before the asset earns turns a sound project into a distressed one on schedule. The length of any payment holiday should be derived from the construction and ramp-up plan, with a margin for delay, not from what was accepted on the last project.
When the cheaper money is the wrong money
Some projects should not carry much debt at all. A venture with community and environmental aims, a long breakeven and modest returns can be made fragile by a loan that a faster business would carry easily. Patient equity, grants, concessional finance or a smaller first phase may be better answers. Recommending a different type of capital, or a smaller project, is part of the advice.
Test before recommending
Every proposed structure should be run against the project’s own model under a downside case: slower demand, higher cost, later opening. If the structure fails in a plausible downside, it is the wrong structure, however attractive the headline rate.
