The financial crisis has enhanced the precautions taken by risk committees at financial institutions in Spain, as elsewhere in the world, when approving new financing, particularly for certain projects and sectors.
The new harsh standards of control and preventive analysis of potential transactions have consequently increased the willingness of structuring departments to come up with innovative and risk-mitigation schemes to finance new projects. In such context, banks are progressively reshaping the traditional way of financing public works in Spain.
Traditional financing structures for these kind of projects used to involve a direct loan to the company constructing the project which was paid back by such company by using the future cash flows received from the Public Administration upon completion of the works.
This traditional structure was usually secured by a pledge over such future credit rights deriving from the payments to be made by the Public Administration and over any other rights owned by the constructor borrower.
In such structures banks did not have a direct access to the cash flows and required enforcement in order to be applied to the repayment of the loan. Additionally, despite the existence of any performance bonds, there was an interim period of uncertainty between closing the financing and actually achieving the works completion milestone, which triggered the Public Administration payment obligations.
In order to mitigate those two main risks, the Spanish financing institutions started using a new structure which has become very common in Spain. It consists of the lenders actually acquiring the future rights to be paid by the Public Administration in exchange for the construction of the project.
The purchase price would be the actual value of such cash flows at a certain interest rate. This way the financing institutions, instead of being pure lenders, become actual owners of the future cash flows, gaining direct access to them once such cash flows are actually due.
This structure is favourably accepted by the Public Administrations in Spain, which are duly notified of the transfer of their cash flows on closing date.
Additionally, to eliminate the risk of the works not being completed, the financing institutions request a first demand personal guarantee to be granted from official institutions in the Public Administration, which remain in place until the works are completely and duly executed and the credit rights actually exist.
As a result, Spanish lenders replaced private risk by public risk. The issue has now moved into the solvency of the Spanish Public Administration involved (local, regional or state). In any case, this structure has proved to be very efficient to fund projects involving public works and credit rights from the Spanish Public Administration.
Íñigo de Luisa and Agustín Cerdá
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