MODELING SHAREHOLDES LOAN IN PROJECT FINANCE

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SHAREHOLDERS LOAN

In Project Finance, modeling shareholder loan can be very tricky and sometimes complex, as it involves several intricacies.

A shareholder loan is a source of financing provided by shareholders that is subordinated to all debt holders. It is similar to debt but is treated as equity. The repayment includes both interest and principal, with the interest being set at arm’s length.

Key reasons that stand out for shareholders to contribute partly equity and partly loan include increased returns, tax shield, and avoiding trapped cash.

✔️ Increased Returns:
Shareholders will typically experience increased returns when contributing a combination of equity and shareholder loan, due to the interest and principal associated with the loan.

✔️ Tax Shield:
The interest on a shareholder loan, usually a tax-deductible expense, can help reduce the overall tax burden of the project.

✔️ Avoiding Trapped Cash:
Typically, equity distribution (dividends) is constrained by cash and profit. This implies that without any profit, dividends won’t be paid to shareholders. With a shareholder loan, however, shareholders can bypass these limitations, receiving interest and principal payments whenever there’s sufficient cash.

Many project sponsors and shareholders are exploring the benefits of integrating shareholder loans into their projects, allowing for a more flexible approach than the traditional 100% equity contribution.

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