INFRASTRUCTURE project and capital-intensive businesses require significant upfront investment. These projects are typically supported by gradual cash flow generation over extended concession period or operating lifecycle.
An inefficient capital structure can potentially lead to higher cost of capital which reduces project viability and impact the overall valuation and investment returns of the project; misalignment between debt service obligations and project cash flows; reduced financial flexibility during period of market volatility or operational stress; and constraints on future expansion or refinancing opportunities.
In most cases, capital structures that were originally designed for the project may become sub-optimal as market conditions evolve, financing costs change or the project transitions from construction to operational phases. For example, when capital markets experience strong liquidity and intense competition among lenders, these market dynamics prompt companies to reassess their existing debt structures and explore refinancing opportunities to secure more competitive financing terms to improve liquidity.
Rather than approaching the original lending institution, companies should approach financial advisers to obtain an independent view on the optimal financing structure. Financial advisers can assist in structuring debt through mechanisms such as syndicated facilities, private placements or capital market issuances. By accessing a broader pool of lenders and investors, companies are often able to create competitive tension among financing providers, which may ultimately result in more flexible financing terms and lower overall borrowing costs.
Optimising capital structures in infrastructure and capital-intensive projects can be inherently complex due to the risk mitigation among multiple stakeholders, financing instruments and regulatory considerations.
Infrastructure and capital-intensive assets are typically financed through layered capital structures comprising various sources of funding, including promoter/shareholder equity, project finance debt, mezzanine and/or subordinated financing. While such structures often support project development and early-stage financing requirements, they can become less efficient as the project transitions from the construction to operational phases, or as the broader corporate group evolves.
The capital structure challenges that companies may encounter over time include:
> Refinancing risk: As the project matures, the cash flow outcomes may differ from those projected at the time of original financing was secured.
> Restrictive loan covenants: Investors may realise that the original capital structure limits operational flexibility, capital re-deployment and/or the ability to pursue strategic initiatives.
> Evolving investor expectations: As projects transition from development to the operational phase, investors change views about leverage levels, risk allocation and return profiles.
> Financing structures shaped by institutional mandates: Financing arrangements are typically structured within the respective mandates and risk parameters of the individual lenders. A broader review of the company’s capital structure may help identify financing options that would further optimise its overall funding strategy.
In assisting clients to optimise their capital structure, BDO can do the following:
> Independent capital structure assessment: Acting as an independent adviser to evaluate the company’s capital structure holistically across the group and project levels. This includes assessing financing efficiency, identifying opportunities to reduce the overall cost of capital and ensuring that the capital structure remains tax-efficient while maximising long-term value creation.
> Strategic stakeholder coordination: Managing communications and coordination among key stakeholders including management, financial institutions, investors, legal advisers and other professional parties. Through this process, BDO facilitates alignment among stakeholders and assists in developing an optimal funding strategy tailored to the company’s operational and financial profile.
> Comprehensive financial modelling and analysis: Developing detailed financial models that analyse the business at both the project and corporate levels. This enables us to evaluate different capital structure scenarios and provide financing recommendations based on the sustainability of cash flows against the overall financial position of the business.
> Structuring competitive financing processes: Work collaboratively with existing lenders while engaging a broader pool of potential lenders and investors. This may involve syndicated lending arrangements, private placements or other market-based financing structures to enhance competition among financing providers.
> More importantly, BDO’s capital structuring advisory leverages the broader capabilities of the firm, working closely with specialists across BDO’s Tax, Corporate Finance, Transaction Services, Audit and Assurance, and Risk Advisory teams. This integrated approach allows clients to benefit from multidisciplinary expertise, ensuring that capital structuring strategies are commercially robust, tax-efficient and aligned with broader regulatory, financial reporting and strategic considerations.
For many capital-intensive projects, promoters develop and operate multiple projects through separate special purpose vehicles (SPVs), each supported by its own project financing structure.
For example, an energy transition developer may invest in a portfolio of assets such as solar plants, wind farms in combination with thermal power plants. During the development phase, each project is financed independently through a SPV-level financing arrangement, reflecting the operating nature of the plants. This traditional structure allows lenders to ring-fence project risks when construction and commissioning risks remain significant.
However, once these projects become operational and transition from greenfield to brownfield assets, the underlying risk profile of the portfolio materially changes. Construction risks are largely eliminated, and the projects begin to generate stable and predictable operating cash flows.
At this stage, companies may explore opportunities to optimise their capital structures at the portfolio or holding company level. Instead of maintaining multiple separate project financings across individual SPVs, it may be possible to refinance the portfolio through a consolidated financing structure at the holding company level.
Such portfolio-level refinancing can unlock several potential benefits, including:
> Capital recycling opportunities where refinancing operational assets may release additional borrowing capacity due to the lower risk of brownfield projects compare to greenfield developments. This can enable companies to redeploy capital into new investments or expansion initiatives while maintaining a sustainable capital structure.
> Improved capital efficiency through consolidation of financing arrangements.
> Enhanced flexibility in managing cash flows across the project portfolio.
> Access to a broader pool of lenders and institutional investors.
> Potential to secure more competitive financing terms as lenders assess the diversified cash flows of the entire portfolio rather than the risks of individual projects.
> Through a structured capital structuring exercise supported by detailed financial modelling and stakeholder engagement, investors can evaluate whether such refinancing strategies can enhance the overall efficiency of their funding arrangements while supporting long-term portfolio growth.
This article is contributed byBDO Malaysia executive director, advisory Fang Li Wei (pix).
