By Greg Ahuy – April 8, 2021
In this article, we will take a look at revolving credit facility or revolver in project finance.
In project finance transactions, the project’s capex is typically funded by the debt, in the form of the construction debt, which is then refinanced into the term loan during the project’s operation, and, equity coming from the project’s sponsor.
However, during the project’s operation, the project may need a line of credit from the lenders, which is called a revolving credit facility.
Revolver, in project finance, is usually a stand-by facility, subordinated to the term loan, debt service reserve account, and maintenance reserve account. This is in contrast to corporate finance, where a revolving credit facility is usually a senior debt.
In the end, loan agreements will specify the seniority of the revolver with respect to the term loan, debt service reserve account, and maintenance reserve account, which shall be reflected in the project’s financial model.
Revolver, typically, has an established maximum amount, where the project has access to the funds at any time when needed.
This type of loan is mostly used for operating purposes, to cover the unexpected shortfalls in the cash flows.
Revolver is designed to be called upon in the event of emergency capital investment or significant fluctuations in working capital.
Revolver, as a stand-by facility, may also be required if the project company issues bonds to the public market and requires a rating from the credit rating agencies. Such a stand-by facility would contribute to making the project company bankruptcy-remote.
The revolver is often structured with a cash sweep provision.
This means that any excess cash flow, after servicing the term loan and funding the debt service reserve and maintenance reserve accounts, will be used by the bank to pay down the outstanding balance of the revolver.
Furthermore, if in any period, there is insufficient cash to pay the revolver’s interest expense, that interest expense is rolled over, or, in other words, the interest expense is added to the revolver’s outstanding balance.
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