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.

based upon the projected cash flows of the project rather than the balance sheets of its sponsors. 

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.

Subcategories

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

• power plants
• chemical processing plants
• mines
• transportation infrastructure
• environment infrastructure, and
• telecommunications infrastructure.

In such transactions, the lender 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.

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.

See Also

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