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 inter-
est 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 12% over LIBOR. Pricing is usually higher
until completion of construction, reflecting the higher risk of this stage of the proj-
ect, 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 37, 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 in-
creased the costs of funding the loan, the full cost is passed on to the borrower (cf.
If fixed-rate lending is being provided by an ECA or IFI on a subsidized or non-
commercial basis, the rate will probably reflect the cost of funds for a AAA bor-
rower plus a small margin (say
8% p.a.). The rates for other types of fixed-rate
lending, including bonds, are based on similar factors to those that affect the pric-
ing of interest rate swaps. Bond pricing is usually quoted as a margin over the rate
for a government bond with a similar maturity to the average life of the debt.
Arranging and underwriting fees charged by bank Lead Managers are derived
from several factors:
The size and complexity of the financing
The time and work involved in structuring the financing
The risk that a success-based fee may not be earned because the project does
not go ahead
The bank’s overall return targets for work of this kind (bearing competitive
pressure in mind), taking into account both the fees earned and the return on
the loan balance that it keeps on its own books
The length of time the underwriting bank has to carry the syndication risk
§13.4 Interest Rate and Fees 297

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