What is a “Project Finance Information Memorandum”?
In project finance the Information Memorandum is a key fund-raising document, used to attract debt and equity investors to the project.
Its principal function is to outline the project’s main risks and benefits to investors, as well as the funding capitalization. Consequently, it is critically important to have high quality firms such as financial advisors, accountants and lawyers involved in the document to ‘quality stamp’ the information presented.
Key Learning Points
- The Information Memorandum describes the operational and financial features of the project, including the debt and equity capitalization required to fund the project
- The document presents the value case for the project, giving investors sufficient information to undertake their own independent valuation but stopping short of explicitly pricing the project
- Commonly, the information memorandum is used to sell an equity ownership stake in the project company or special purpose vehicle
- The project company may seek to sell debt securities such as bonds or notes, the information memorandum will detail the interest rate, maturity and other terms.
Operational and Financial Plan
The information memorandum will contain a high-level project overview, summarizing the project. However, this will need to be supported by a more detailed operational and in particular financial plan, with a specific focus on revenues, costs and cash flow for each phase of the project. Since funding will be incrementally drawn down as the project moves through each phase it is critically important that funding partners have a clear roadmap of when drawdowns will be required and the cost and cash flow implications of project milestone overruns and other risk factors.
Project Ownership and Sponsors
Documenting the people involved in the project is critical in order to attract investment. The financial advisors, accountants and lawyers are putting their name to the project, which acts as a quality stamp. The experience and competence of the core management team are of particular importance, which will be covered in detail in the information memorandum.
Whilst the information memorandum contains a great deal of factual information, which investors may rely on, it is important to recognize that it is also a key component of the project’s marketing message. The information memorandum must contain sufficient detail to allow investors to build out their independent valuation of the project, on which their investment decision will rest.
Whenever securities are sold it is typical to provide an accompanying prospectus or offer memorandum, project finance is no exception. Having built out the financial forecast, the project’s asset value can be established and consequently the desired capital structure can be determined. The next step is to market the offering to potential debt and equity investors to meet the project’s capital requirements.