Project Finance provides long-term, limited recourse or non-recourse loans used to finance large commercial, industrial, infrastructure and sovereign projects in emerging market nations worldwide. Unique to project financing is the debt and repayment structure are based on the projected cash flow of the project rather than the balance sheets of the project sponsor. Usually, a project finance structure involves a number of equity participants, who can be project sponsors or equity investors, and a consortium of lenders that provide loans to the project.

Project finance loans are almost always extended on a non-recourse or limited recourse basis and are secured by the project assets and operations. Repayment of the loans occurs entirely from project cash flow, not from the assets or credit of the borrower. Underwriting for project development loans focuses on what is usually a business plan that includes extensive financial modeling and sensitivity analysis. The financing is typically secured by all of the project assets, including the revenue-generating components of the project. Lenders are granted a lien on all of the project assets and are further granted the right to assume managerial and operational control of a project, along with the mechanism to do so if the project doesn’t comply with the loan terms.

The borrower is typically a Special Purpose Entity or SPE which is created in the project documents specifically to own the project. The SPE ownership structure coupled with non-recourse debt effectively shields the assets of both the project sponsor and equity investors from collection efforts or deficiency actions if the project fails. With collection actions barred if the deal fails, project lenders often require a commitment from the project owners to contribute capital to the project to ensure the project is sufficiently capitalized and financially sound, and also to demonstrate the project sponsors’ commitment to the deal.  Project finance is significantly more complex than traditional corporate finance or real estate lending. Historically international project finance has been used for mining, telecom, transportation and communication, water and electric utility distribution, and major public infrastructure projects.

Allocation of the risk stack among project participants is a key component of project finance. Project developments are often subject to technical, environmental, economic and political risks, particularly in developing countries and frontier and emerging markets. If the lenders or project sponsors determine that the risk exposure is too great during underwriting, the project is rendered unfinanceable. Long-term contracts for construction, supply, off-take, operations and concessions, along with contracts establishing joint-ownership of the project are structured in extensive project documentation to best align the interests and incentives of all the project participants. They are also designed to dissuade bad behavior on the part of the deal participants. In this way, project risk is allocated amongst the deal participants who are best able to manage the risk.

The amounts involved in project development financing are often so vast that no single lender could or should provide the entirety of the project financing. Instead, the project financing is often syndicated to a consortium of lenders to distribute the risk. Project financing was used as far back as the ancient Greeks and Romans to finance maritime voyages. It was project finance that funded construction of the Panama Canal and the North Sea oil wells.

Today, most project financing is deployed in developing countries around the world where the need for project financing remains high and will for the foreseeable future. As more countries move from frontier to emerging economies demand for public utilities and infrastructure will continue to increase.