BOOK_CONTENT
From Principles of Project Finance

13.4 INTEREST RATE AND FEES

Apart from the lenders advisors' fees (and the costs of the rating agency if the debt is rated), the main financing costs payable by the Project Company are:

  • If the loan is on a floating interest rate basis, the base interest rate (e.g., LIBOR) plus the interest margin, together with net payments under an interest rate swap (cf. 9.2.1)

  • If the loan (or bond) is on a fixed rate basis, the interest rate

  • Advisory, arranging and underwriting fees

  • Commitment fees

  • Agency and security trustee fees

International project finance loans at a floating rate based on LIBOR typically have interest margins in the range of 1 2% over LIBOR. Pricing is usually higher until completion of construction, reflecting the higher risk of this stage of the project, then drops down, and then gradually climbs back again over time. (Thus in a project with a loan covering a 2-year construction and 15-year operation period, the margin might be 1.25% for years 1 2, 1.1% for years 3 7, 1.2% for years 8 13, and 1.3% for years 14 17.)

Commercial bank lenders also require standard "market disruption" and "increased costs" provisions in their long-term floating rate loans; these provide that if the cost base (e.g., LIBOR) is no longer available in the market, or does not represent their true cost of funds, or a change of law or regulation has increased the costs of funding the loan, the full cost is passed on to the borrower (cf. 9.2.4).

If fixed-rate lending is being provided by an ECA or IFI on a subsidized or noncommercial basis, the...

Copyright Yescombe Consulting, Ltd. 2002 under license agreement with Books24x7

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