Project Finance Credit Risk Analysis
When assessing the creditworthiness of the borrowers in cases of project finance, in addition to the general provisions on the creditworthiness assessment set out in Section 5.2.5 and Section 5.2.6, institutions should follow the specific criteria of this section .
Institutions should assess the primary source of repayment of the loan, which is the income generated by the assets (project) being financed. Institutions should assess the cash flow associated with the project, including future income-producing capacity once the project is completed, taking into account any applicable regulatory or legal restriction (e.g. price regulation, rate-of-return regulation, revenues being subject to take-or-pay contracts, environmental legislation and regulations affecting the profitability of a project).
As far as possible, institutions should ensure that all the assets of the project and the present and future cash flow and accounts are pledged to the institution providing the lending or to the agent/underwriter in the case of a syndicated transaction/club deal. If a special purpose vehicle is established for the project, the shares in that special purpose vehicle should be pledged to the institution, to enable the institution/agent to take possession of the company if needed. In cases of syndicated transactions/club deals, inter-creditor agreements should regulate each creditor’s access to pledged funds and assets.
In the assessment of the development phase of the project, institutions should establish that the borrower:
- has a plausible business plan, including a rationale for the development and a projection of all costs associated with the development verified by an independent expert;
- has access to builders, architects, engineers and contractors for the project; c.has obtained or is able to obtain in the future all necessary permits and certificates for the development, as the project progresses.
Institutions should ensure that the calculation of costs associated with the development, as provided by the borrower, includes contingencies for cost overruns. Such planned contingencies should be included in the credit limit or equity. Institutions should assess the level of cash reserves and liquidity profile of the borrower or equity investors to ensure that they have the capacity to fund unplanned contingencies for cost overruns and delays, if any, above the contingency sum.
In addition to assessing the creditworthiness of the borrower, institutions should assess equity investors in the project, focusing when relevant on assessing their financial position, relevant expertise, experiences in similar projects, ability and willingness to support the project over the project’s lifetime.
- EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06