This is debt advanced on traditional Project Finance principles:
- Lent against projected cash flows;
- Either pre-contracted offtake arrangements with credit-worthy offtaker or statistically predictable or provable retail offtake (e.g. toll road traffic, supported by traffic studies);
- Risk allocation to project parties, such as Engineering, Procurement and Construction contractor, Operator, etc; but…
- Usually no risk allocated to sponsor: Debt is non-recourse;
- Comprehensive due diligence process including technical, legal, insurance, tax and model audit;
- Complex legal documentation suite with back-to-back agreements.
Non-recourse debt is predicated upon the predictability and stability of the future cash flow stream, with the consequence that much time and effort goes into contracting away risk which may lead to the cessation of or volatility in such payment stream. This results in risk being allocated to as many third parties as possible outside of lenders and equity. A particular characteristic of such risk transfer is back-to-back provisions in the project contracts. For example, an event which gives rise to the offtaker gaining the right to terminate the offtake contract will usually be mirrored in the EPC and Operations and Maintenance (“O&M”) contracts, conferring the right to terminate such contracts upon the Project. Usually, and ideally, the threshold for obtaining such rights will be lower in the EPC and O&M contracts than the offtake contract.
Maximum liability for equity investors in a non-recourse financing is limited to their investment, while there may be carve outs to such limitation of liability in a limited-recourse financing.
A typical project structure is as below. Blocks represent parties, while arrows represent contracts and therefore contractual relationships.
Non- and limited-recourse debt is typically documentation-intensive, and the project documents and finance agreements are often voluminous.