Director［ Kibe-log ］

Representative Executive OfficerPresident and CEOKibe Kazunari#５Non-recourse loans that are not true non-recourse
loans hinder infrastructure investment
I am Kazunari Kibe, the President and CEO of INFRONEER Holdings Inc.

Thank you for visiting "Kibe-log" again.
Thanks to you, INFRONEER’s "de-contracting" is gradually being recognized in the market. As a pioneer in theinfrastructure business, we will keep developing the market beyond the traditional construction industry. Thank you foryour continuous support.

The reality of non-recourse loans that are not "non-recourse"
Now, as a sequel to the "The secondary market of infrastructure will bring more investment" that I talked
about last time, I would like to give my personal opinions on the problems of project finance in Japan.
As I mentioned in the previous Kibe-log "The secondary market of infrastructure will bring moreinvestment”(https://www.infroneer.com/en/topics/blog_assets/attachments/23/kibelog_en_vol4.pdf), it
is indispensable for the expansion of the Japanese infrastructure project market to have a secondary market
where the completed "projects" such as renewable energy facilities can be sold.
In other words, we take the risk in the "starting project" part, in which we set up a project based on ourengineering capabilities and build social infrastructure. Then, we tailor it to a business that generates astable return over the long term. While handling operation and maintenance of the project, we would thenhand it over to investors such as pension funds at the appropriate time.
If this cycle is possible, high-quality infrastructure can be supplied to our society. At the same time, thepension funds that are expected to support the lives of Japanese retirees will be able to secure stable yields
on their investments. The social infrastructure that many people have used for a long time is the perfectinvestment target for pension funds.

-1-However, although I couldn't write it enough in the previous blog, building the secondary market isinsufficient.
We need to solve the issues of financing the project when we formulate it, specifically the issues of nonrecourse loans.

Stance of financial institutions seeking "one line for recourse”
When implementing an infrastructure project, it is common to establish an SPC (Special PurposeCompany) as the implementing entity, and it is financed by the companies participating in the project. At
the same time, the SPC borrows funds from financial institutions to build and operate facilities andequipment. It's so-called project finance.
Project finance usually takes the form of non-recourse loans. As translated as "non-retroactive financing,"
non-recourse loans are financing methods that lend money only based on the cash flow generated by actual
equipment, such as turbines for wind power generation and solar panels.
Due to the limited target of debt, even if the SPC goes bankrupt, the lending financial institutions cannot
ask the SPC's participating companies to repay it. In fact, non-recourse loans based on the revenue
generated by real estate are the norm in real estate development projects.
However, in Japan, non-recourse loans are a misnomer, and in most cases, the contract says, "If it becomesdifficult to repay the debt, the representative company will be responsible." This means that if the SPCdefaults due to bankruptcy, the representative company will be required to repay it. We cannot call it a true
non-recourse loan.
So why are non-recourse loans important for expanding infrastructure projects? That's because if they are
not true non-recourse loans, it's harder to sell SPCs in the secondary market.
Let’s consider the case where project finance is a recourse loan that is an existing corporate loan and goesbeyond the range of the asset in the project, such as the company’s assets or the personal guarantee of theowner of the company.
If the SPC raises funds with a recourse loan, it is necessary to refinance the loan when selling the SPC to apension fund or the like. However, when making project finance, it is necessary to investigate the value andrisk of the asset in detail. A legal check by a lawyer is also needed.
Similar due diligence is required for refinancing. As this adds an additional cost, the selling price is-2-

affected as well.

An impediment to selling SPC
Some companies may hesitate to sell infrastructure projects in the secondary market if the number of buyers
who can refinance is limited in the first place and the cost of selling is increased. It would be a risk forcompanies to be unable to sell infrastructure projects and need to keep them on their balance sheet for along time.
The INFRONEER Group has organized nearly 10 infrastructure projects so far. We adopted real nonrecourse loans without one line for recourse in all cases, as we were aware of the problems of non-recourse
loans that are non-recourse in name only in Japan.
When I signed loan contracts with financial institutions, I was always asked for one line for recourse, which
I mentioned above. But I stubbornly rejected that request. I told them "We explained that it was a nonrecourse loan at the bidding. Did you understand that and bid correctly?"
As I wrote in my last blog, we were able to sell our renewable energy facilities to another investor because
the debt portion of the SPC was a real non-recourse loan.
Non-recourse loans are risky loans for financial institutions, as they can lead to bad debt unless the value ofthe assets and future cash flows are accurately calculated beforehand.
If financial institutions lend it with a recourse like a corporate loan to avoid such a risk, their screening skills
are not improved. Rather, they may be able to change their way of thinking and adapt their strategy to use
screening skills as a source of their competitiveness.
Coincidentally, the Cabinet Office announced the "PPP/PFI Promotion Action Plan (Reiwa 4th Revised
Edition)" on June 3rd. The target of business scale for PPPs such as concessions is expected to increasesignificantly to 30 trillion yen in the 10 years from 2022. Many of these businesses will be subject to project
finance.
Non-recourse loans have been commonly adopted, especially in real estate financing. Isn't it time toswitch to a real non-recourse loan? I think that will lead to the expansion of infrastructure projects andthe improvement of the competitiveness of financial institutions as a result.

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