TABLE OF CONTENTS Once the debt:equity ratio has been agreed to with the lenders, the question arises about which is to be spent first, debt or equity? Sponsors often prefer to delay putting their cash equity into the project, since the later they invest their money, the higher their IRR (because the period of time between investment and return is shorter).
For example, in the annuity repayment structure financing in Table 13.5, it is assumed that the equity is invested at the end of the construction period, with loan repayments and dividends beginning one year later. In fact, the IRR would only have been as high as the 19% shown in the table if an equity bridge loan (see below) had been used, as otherwise the equity would have to have been invested to cover project costs before the end of the construction period. If, on the other hand, the equity is assumed to be invested 50% at the start of a 2-year construction period, and 50% one year into construction, the investors' IRR reduces from 19% to 14%.
Lenders would obviously prefer the equity to be invested first, or pro rata with the debt, but will not normally object to the debt being put in first so long as the Sponsors are legally committed to invest the equity (and will do so immediately if the...
