Don’t let a financeable asset go to waste

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Courtesy of Waste Advantage Magazine

Try going to the conventional financial markets and see what’s available in the project finance arena. Not much, is there? Even if you are lucky enough to have access to something, is it attractive? Chances are, unless you are well capitalized already (and therefore may not need financing), the debt markets will require a substantial equity position if not a majority position by the borrower, and the equity markets will require controlling ownership of your company.

There is a niche form of financing that has been around for decades but is commonly overlooked as a source for project finance. It solves many of the problems faced by new and established companies in virtually all industries because it is not based on the strength of the borrower, the underlying assets or the revenue projections of the project. It is based solely on the strength of future revenues, future capital commitments, or other monies coming into a company from credit worthy companies and municipalities.

There are some lenders that consider a company’s most valuable assets to be not their physical assets, but their relationships with the municipalities and other investment grade rated companies they do business with. When access to financing of this nature is not fully used, the opportunity to tap into financing that 1) doesn’t require giving up equity, 2) requires little due diligence and therefore has a very quick timeline to funding, 3) does not take first position on assets and 4) doesn’t impose covenants or restrictions on uses of funds, is wasted. Why is that important? The ability to use a different asset as collateral opens up doors even to companies with encumbered physical assets and companies without physical assets.

How Does This Work?
It’s actually very simple in structure. Let’s say a city’s landfill is reaching capacity and dumping into a neighboring municipality’s landfill comes at a steep price. The city is not in the position to build a new landfill or self-fund a recycling and/or waste conversion solution. Enter a waste-to-energy (WTE) company with the capability to build and operate an integrated solid waste management system, but doesn’t have the funds necessary to do so. By entering into the right agreement with the city, the WTE company can fully fund the project without giving up equity, without recourse and without having to have strong credit. Funding can also occur as soon as the contract with the city is finalized, regardless of permitting or stage of development. The city solves their waste dilemma without coming out-of-pocket, without raising bonds, and without hurting their own credit. All while saving money on tipping fees, creating jobs and doing their part to help their state meet the requirements of their renewable portfolio standard.

The applications are endless. As long as there is a motivated, credit worthy entity involved in the transaction, there may be a way to incorporate this credit-based financing into your capital stack. Financing is not only available for new projects, as previously illustrated, but also for any company with a contractually obligated future revenue stream.

Take a waste hauler who for years has been contracted by a county to collect and transport the county’s waste. In order to save money on fuel costs the waste hauling company wants to convert their fleet into hybrid vehicles. Instead of asking the county to fund the technological conversion, or self-funding if possible, the waste hauler could use their contract with the county as collateral for a loan covering 100 percent of the costs. This would not only increase the waste hauler’s bottom line, it may also cut down costs to the county.

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