The following articles relate to project finance principles. They can be read sequentially, or individually, as you require.
If you have any queries or comments, please email me at email@example.com, or leave a comment in the comments section in the relevant article.
Project Finance Principles
Infrastructure projects Project finance loans are typically used to fund infrastructure projects. Examples of infrastructure projects include: Power plants, Water plants,Read more.
Project finance loans are typically non-recourse or partial-recourse. This is effected by setting up a Special Purpose Vehicle (SPV) whichRead more.
Cash flow lending
Project finance loans are typically made against the future cash flows of the project, rather than against the assets ofRead more.
Intensive due diligence
Because projects are typically technical in nature, project finance lenders rely heavily on advisors. A typical project finance transaction willRead more.
Risk pass through – counterparties
Projects using project finance will seek to pass as much risk as possible to other project counterparties. These project counterpartiesRead more.
The offtaker for a project is the counterparty, or counterparties, which purchase the output of the project. The creditworthiness andRead more.
Projects will need to have a revenue stream which is estimable in advance with a high degree of certainty. ThisRead more.
A project may also have a multiple offtaker business model. If this is the case, the project will need toRead more.
Provisions found in offtake contracts
Offtake contracts (particularly single-offtaker contracts) will typically contain provisions relating to the following: Price and price escalation Minimum supply obligationsRead more.
Engineering, Procurement and Construction
Projects will typically sign an EPC contract with a single counterparty, which will be tasked with delivering the full projectRead more.
Risk pass through to EPC Contractors
As discussed on the Project Finance Principles page, the Project will attempt to pass as much risk through to theRead more.
Provisions found in EPC contracts
EPC contracts will typically contain provisions relating to the following: Price and milestone payment schedule Scope of work, usually includingRead more.
Operations & Maintenance
Projects will typically sign an Operations and Maintenance contract with a single counterparty, which will be tasked with operating theRead more.
Risk pass through to the Operator
Similarly to under the EPC arrangements, the Project will attempt to pass as much risk through to the Operator asRead more.
Provisions found in O&M contracts
O&M contracts will typically contain provisions relating to the following: Price and price escalation Scope of work, detailing the Operator’sRead more.
Projects will often, but not always, have one or more supply contracts. Supply contracts are those for major items whichRead more.
Risk pass through to suppliers
Similarly to under the EPC and O&M arrangements, the Project will attempt to pass as much risk through to theRead more.
Provisions found in supply contracts
Supply contracts will typically contain provisions relating to the following: Price and price escalation Take-or-pay provisions. I.e. how much theRead more.
Asset classes used within infrastructure finance
There are four main asset classes commonly used within the Infrastructure Asset Class, not accounting for hybridisation, being: Equity Non-recourseRead more.
Project finance debt providers will seldom allow the project to be funded by debt. Consequently the project will almost alwaysRead more.
This is debt advanced on traditional Project Finance principles: Lent against projected cash flows; Either pre-contracted offtake arrangements with credit-worthyRead more.
Full recourse or corporate debt differs from non-recourse debt in that it is the sponsor that borrows the funds, ratherRead more.
Derivatives are used to hedge against uncertainty in macroeconomic factors influencing project cash flows, in particular interest rates, exchange rates,Read more.
A typical project finance term sheet
Equity injection style Up-front; or Pari-passu with debt; or Back-ended, subject to full acceleration rights and bank guarantees inRead more.
Project finance hedges
Project Finance hedges are typically vanilla interest rate- or fx swaps. Contractual protections are usually very similar to those ofRead more.
One of the key risk areas considered by the banks when lending to an infrastructure project is country risk. ThisRead more.
Guarantees from counterparties
Different counterparties to the project may be required to provide guarantees that their performance will meet a certain minimum standard.Read more.
Renewable energy yield analysis
The energy yield assessment is a fundamental requirement for any new wind or solar project, with both developers and lendersRead more.
Is volatility in a renewable energy yield assessment good or bad for lenders?
BAD! Or, at least, that’s the general view. As always, however, there isn’t a simple answer. I once made aRead more.
Infrastructure Project Lifecycle
As a project moves through the project lifecycle, it increases in value and new funders are required to invest atRead more.
Valuing infrastructure projects
From time to time an infrastructure project or its shareholders may need to know the value of the project’s equity.Read more.