1. PROJECT FINANCE PANORAMA
1.1 Sponsors and Lenders
Following the 2013 Cyprus financial crisis and the consequent bailout, the banking sector in Cyprus has witnessed a considerable reduction in its size and lending exposure. Nevertheless, the vast majority of lenders in the Cyprus finance market continue to be credit and finance institutions, duly authorised by the Central Bank of Cyprus to carry out such credit activity. The financial market has also seen the establishment of a number of investment funds, mainly falling under the alternative investment fund category regulated by the Cyprus Securities and Exchange Commission, which have in cases funded (through alternative structures) certain projects in the booming real estate industry on the island.
With new investors now risk averse or experiencing losses of their own due to the COVID-19 pandemic, it remains to be seen whether these property companies, which have been involved in the majority of recent high-profile projects in Cyprus, will eventually return to their over-leveraged past and expose both traditional credit institutions and other investment funds to uncalculated risks.
1.2 Public-Private Partnership Transactions
Public-private partnership (PPP) transactions in Cyprus are commonly project finance structures based on the build, operate and transfer (BOT) and design, build, finance and operate (DBFO) models.
A proposed PPP project is carefully evaluated by the public sector, which examines the project's costs and value for implementation with the PPP method, following such evaluation and pre-selection procedure. The set of rules regulating the evaluation and selection of PPP projects is established through the Cyprus Fiscal Responsibility and Budget System Law (N 20 (I) 2014). This set of regulations is based on the methodology used in the manual prepared by The World Bank, and on any instructions issued by the Minister of Finance in Cyprus.
Generally, three types of projects can fall under the PPP category – ie, where the private sector revenue comes from:
- user payments (eg, airports);
- the state (from a service purchase) – eg, hospitals, schools and prisons; or
- a combination of the two.
Other than the above-mentioned legislation, there are no further rules governing the roles and responsibilities of each governmental authority in the planning, negotiation and conclusion of PPPs. Therefore, any procedures for such PPPs are carried out at this stage on an ad hoc basis for each specific project.
1.3 Structuring the Deal
The offer of banking activities and credit operations on a professional basis in Cyprus is only permitted for credit institutions that are authorised by the Central Bank of Cyprus or that operate through a branch registered in Cyprus. Financial institutions established in another EU member state may also notify the Central Bank of Cyprus that, based on their existing licence, they intend to offer banking activities in the Republic.
This does not prohibit legal entities from entering into finance transactions where such provision of finance is an isolated transaction and not the ordinary course of business of such entity.
1.4 Active Industries and Sectors
The COVID-19 pandemic has shifted most of the financing deals towards the technology and pharmaceutical sectors. These industries have been growing significantly under these specific circumstances, attracting a number of new projects, including the most high-profile ones. Of course, the current circumstances have also created the need for many financing deals to be restructured and/or refinanced.
Originally published by 2021 Chambers Global Practice Guide on Project Finance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.