Energy Project Financing : Resources and Strategies for Success

140 Energy Project Financing: Resources and Strategies for Success

reused again without time-consuming reapplication procedures.

There is a well-known “catch-22 effect” in banking: If you are suffi-

ciently well-qualified to be approved for a loan, you probably don’t need

one. If your company’s financial statements show a $1,000,000 net worth

and positive net income for the past few years, chances are that you will

be approved for a loan for a $200,000 energy project. On the other hand,

if you have a similar net worth and income and you ask your banker to

help you with a $5,000,000 project, your banker will help you find the

door. Commercial banks understand financial statements, but they don’t

understand kilowatts.

GENERAL OBLIGATION BOND

A bond is a security instrument representing an obligation to pay

by the issuer (the “borrowing entity”) to the buyers (the public or in-

vestment companies). Bonds can be secured by certain assets or by the

good faith and credit of the issuer. General obligation bonds (known

as “GOBs” to bankers) are specialized bonds issued by local and state

government entities in order to raise money for general business opera-

tions. The interest rate paid by these bonds is based on the current over-

all interest rate market, as well as the credit quality of the state or local

government issuer. The process of preparing and issuing a general obli-

gation bond is long and complicated, but the interest rate that the issuer

will have to pay is relatively low. As of this writing, bonds are being is-

sued with interest rates in the range of 5%-7%. Cheap money is good as

long as it’s not too difficult or too time-consuming to get!

LEASE

Leasing has gained tremendous popularity in the 1980s and 1990s be-

cause of its flexibility and practicality. For example, many car buyers are

choosing to use leases instead of bank loans, because they can get a better

quality car for the same payment. They also prefer to return their car to the

dealership after a few years and get a newer model, instead of having to

go through the hassle and uncertainty of selling the car themselves. As you

may know, the dealer is more than willing to take the car back, because he

can estimate the car’s value fairly accurately and resell it at a profit.