Project Finance

Definition

Project Finance is a method of financing in which the lender looks primarily to the revenues (cash flows) generated by a Project, both as the Source of Repayment and as security for the Exposure.

Project finance concerns typically the long-term financing of infrastructure and industrial projects. A related term is Infrastructure Finance.

Project finance involves the creation of a legally independent project company financed with non-recourse debt (and equity from one or more sponsoring firms) for the purpose of financing a single purpose capital asset, usually with a limited life.

In such transactions, the Lender (or more typically Lenders) is usually paid solely or almost exclusively out of the money generated by the contracts for the Project’s output, such as the electricity sold by a power plant.

Characteristics of Project Finance

• The initiator of a Project Finance transaction can be be either government or a corporate entity.
• The client is usually a Special Purpose Vehicle that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the Project’s cash flow and on the collateral value of the Project’s assets.
• A major proportion of equity is held by project manager or contractor so provision of management and finance are linked
• The special purpose company is highly levered. The project might be initially sub-investment grade and gradually evolve into investment grade (post-completion)

Subcategories

Project Finance typically involves large, complex and expensive installations and infrastructure that might include, for example

• mines (metal, other ores)
• power plants
• oil and gas projects
• (petro)chemical processing plants
• transportation infrastructure (toll roads, airports, rail infrastructure)
• environment infrastructure (water, solid waste, waste water)
• telecommunications infrastructure
• social infrastructure projects (social housing, health, education, defense, sports, corrective facilities)

Structure

A Project Finance Structure is a complex nexus of involved parties and stakeholders. In summary it involves:

• equity investors (also known as sponsors)
• A Syndication of banks or other lending institutions that provide loans to the operation.
• The provided credit is most commonly Non Recourse Lending which is secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors
• Project lenders are given a lien on all of the project assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.

See Also

• Equator Principles
• wikipedia:Project finance
• Project Finance versus Securitisation
• Project Finance versus Corporate Finance