Although there are several ways to achieve one or multiple projects' debt funding, many project developers opt for either of two possible instruments—EMTN or SLP—whose standard prices are very similar. The final pricing is, of course, contingent on the chosen solution and its selected extra features. In this summary, we will highlight the main differences from a debt investor’s point of view to provide a fundamental understanding of these two well-accepted alternatives.
The European Medium Term Note (EMTN) is a perfect debt format for established corporations that have a track record to show. However, limited liability companies, or companies without a long track record, have difficulties with this solution because the paying agent requires at least a client's corporation status. For investors, the lack of track record may become a serious trust issue.
An EMTN format can generally replicate a debt, equity, or hybrid payoff and is classified as a bond. In some cases, the note could reflect an outright acquisition into bankable and non-bankable assets (not further covered in this article). The debt investors thus hold a promise of payment from an underlying borrower. Usually, these EMTNs are additionally collateralised on compartment level, e.g., the land, in case of a real estate project, the shares or the company's liquidation proceeds owning the land or other assets. These collaterals are intended to mitigate the risk of an investment, which does not exclude the risk on the company's other activities. A relatively broad-based company could therefore be a risk factor. By setting up an operating company in between to potentially act as a borrower, a so-called Special Purpose Vehicle (SPV), which is established for the purpose of a specific project, this problem can be resolved. In this context, investors can understand the connection and the structure of such a solution.
Again, should the developer not have a track record, it will likely be challenging to attract investors into such an instrument. Once the money finds its way to the borrower, proper execution depends on the project developers. Every EMTN has a paying agent or administrator who facilitates the subscription and redemption process and manages all payouts linked to the note (coupons, corporate actions, and principal repayment). As regulated institutions, they are required to perform KYC checks on the parties and collateral involved and conduct AML checks on the note subscribers. The investor may find this very recomforting to know.
The GP-LP structure, also referred to as GP-SLP structure, in contrast to the EMTN, is a fund solution consisting of a General Partner ("GP"), e.g., a Luxembourg SARL, and an underlying fund—the Special Limited Partnership ("SLP"). The GP makes any activities and investments in the fund's name, acting as a legal entity towards the project's external parties. The project developer here is the SARL owner and can act as an advisor to the GP in the non-bankable field as covered here. Such a GP is managed by at least one local and qualified director (an example of a common and simple structure). Such a fund solution could be used in many ways, e.g., to manage a portfolio in bankables like listed equity or liquid bonds, but the requirements would be higher than in this non-bankable case. The GP's director is provided by an independent administrator who reviews the project-related documents and performs due diligence and an Anti Money Laundering (AML) check before executing any received payment instructions or contracts on behalf of the SLP. Thus, this structure offers the advantage that an independent party, namely the GP, validates any activity against an underlying script of the Fund, in the interest of all parties involved, especially the Limited Partners ("LP"). The investors, defined as LPs, acquire LP interests and can be remunerated through various payoffs, as with the EMTN. Therefore, the SLP provides a suitable solution for established project developers. The GP-LP structure also increases investor confidence for those project developers who do not have a long track record or fits clients who cannot launch an EMTN due to their limited liability company status.
Both solutions meet on an equal footing and could lead a project developer to his goal. We would not advocate the statement that an SLP is the better of the two alternatives, but it could very well make a difference under certain circumstances. Whenever possible, the project developer should look for the right anchor investor, who should finally make this choice with him. Both options are very flexible in their design, well-accepted with investors, and can map the same payoffs.
Please do not hesitate to contact us should you have any further questions or wish to discuss your project with us. We would be delighted to support you on your journey!