Indicative Terms for alternative mid-market Project Finance
The following information does not constitute an offer to buy or sell securities.
In3 also works with a large, dedicated fund and an “alternative” investor also focused on middle-market project finance, $50 million or more, funding new construction, refurbishments/retrofits, and M&A transactions. This capital is more expensive relative to our Completion Guaranteed approach (more on CAP), but does not require a capital/completion guarantee, even for 100% financing.
In order to qualify for this alternative funding, projects must be “ready to turn dirt” with modest to zero remaining risks, with financial fundamentals that verifiably generate sufficient operational cashflows to afford higher-interest debt repayment (for shorter-term tenors, interest prepayment would be calculated in advance and built into the capital budget, an example of several capital costs that CAP avoids) and thus require unlevered IRRs of at least 10-12%.
However, there is no penalty to repay this 7%-10% APR debt early, after the initial period. There may also be high-ARP construction loans available, in some cases, though that is not our primary focus. If the developer selects a construction loan, the entire balance can be repaid (refinanced) once project construction completes.
This alternative funding also takes longer to arrange (typically 60-120 days to first draw) than CAP, and is far more risk averse, consistent with traditional project finance vetting and due diligence protocols.
The following are “indicative” (preliminary) terms and basic conditions, subject to change as market conditions evolve:
- Funder: Private “alternative” mid-market project funding based in the US with global reach. May require credit risk insurance in certain instances, or other insurances such as to address commercial, offtake, merchant, performance or other risk exposure.
- Size of investments/loans: Minimum: $50 million ($100m preferred). Maximum per project or portfolio: $1-2 billion range. Note that larger new construction portfolios can take longer to close.
- Stage: Any new or established project, seeking funding to finish construction and begin operations, or for retrofits, refurbishments, or M&A (rollups/acquisitions/buyouts). If not completely “shovel ready” with a strong package and presentation, but where insurance or other mitigants cannot be used, CAP funding will be the “faster, easier (more feasible) and better” option.
- Asset Class (debt or equity): Up to 100% of the required financing as senior debt (either a senior lien for Program 2 or UCC-1 filing for Program 5).
- Loan term, rate and fees: 5%-8% APR fixed.
- Program 2: 9%-16% APR fixed, based on unlevered IRR. $100,000 initial costs split into $25,000 vetting and $75,000 into an escrow account for a letter of intent and binding term sheet. Typical loan length (tenors): 5-20 years with up to 36 months interest-only. 15 years interest-only, non-recourse, no early repayment penalty.
- Program 7: 5.5%-11% APR, but note that no loans are available until after the US 2024 presidential election seasion.
- Equity: None.
- Profitability: Unlevered IRRs at mid-teens or higher. Ideally, at least 12%-20% IRR in 15+ years. The lower end of that scale can be acceptable if project has a strong team, faces a strong market, and the file is extremely well-prepared. Note: this rate of return aligns with the likely rate of interest for the loan (due to lack of a completion assurance guarantee, such as used for In3 CAP; see additional problems CAP solves), which is why Program 2 requires that the operating project will generate adequate cash for debt service coverage.
- Timing to reach closing & receive funds: Typically ~60-120 days.
- Draw schedule: Funding available either in two tranches (to decrease interest costs) or lump sum for Program 5. Thus, new construction, acquisitions/rollups, or buyouts are all possible with 15% ICA deposit.
- Cost: Aforementioned Loan Origination fee (subject to negotiation) plus $5,000-25,000 vetting and advisory fee and $75,000 to receive a binding term sheet for Program 2. Can reimburse outlay after closing.
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