Project Developers’ Perspective
- A risk when using direct lending is that the result of the project (i.e. flow rate and temperature) may not be enough to pay the fixed interest rate of the loan.
- Due to unexpected delays of the project (e.g. drilling risks or citizen initiatives), the projects can be delayed while the fixed interest rate must be paid in time.
- The loan has to be refinanced after the duration has expired, which also limits the flexibility during project development.
- If going through a financial intermediary this intermediary may ask for a high level of collateral, especially in risky phases (e.g. the drilling of the geothermal wells). However, this collateral may not be available.
- Green bonds as one instrument used in direct lending might not be applicable for single geothermal projects, so they may require the pooling of projects in a portfolio approach.
- One mitigation measure could be to raise funds through a convertible loan that can be converted into equity. This increases the potential of an upward return for investors and thus makes the loan more attractive for investors. It also increases the flexibility of repayments for the project developer which can be useful if the project results are delayed.
- Another mitigation measure is a (governmental) guarantee, so the loan can be repaid to the financial intermediary even if the project does not generate enough income (in time) for repayment, e.g. like shown in EIF 2019.
- Collaterals can be used to guarantee investors that a means to generate repayments is still available.
- Project developers can pool own projects or projects from several developers/investors in order to create risk profiles in line with the objectives of financial intermediaries. Bundling projects can reduce transaction costs and streamline investments.
Community Investors’ Perspective
- If a loan attracted directly in the market folds, there is no guarantee that investors will be repaid. The investment might be lost.
- By investing in a loan or bond, there is no form of participation in the strategy or risk choice of the company/project.
- The rewards are limited to the (fixed) return agreed in advance, as no shares in its profits are involved if the project is successful.
- Direct lending investors might not be able to invest in a specific project of own choosing, e.g. a local renewable energy project.
- If going through a financial intermediary, part of the revenue will go to the financial intermediary in the form of cost or profit.
A (governmental) guarantee would be a possible mitigation measure, so the loan can be repaid if the project does not generate enough income for repayment.
If the direct lending was attracted through the balance sheet of a financial intermediary, the intermediary can be responsible for the repayment. Non-bank financial intermediaries however do not fall under the nationwide guarantee of 100.000 € per bank account.
Related Core Services
 EIF (2019):
https://www.eif.org/what_we_do/microfinance/easi/easi-guaranteeinstrument/index.htm, accessed on 14.8.2020.