Author: DLorimer

Project finance loans are typically made against the future cash flows of the project, rather than against the assets of the project. For this reason, project sponsors and lenders put significant effort into ensuring that the project’s cash flows are well known in advance, and relatively immune to adverse scenarios.

Mechanisms used to ensure this include:

• Pre-agreed offtake contracts with creditworthy counterparties specifying both price and quantum of offtake
• Statistical studies relating to the number of widgets which the project can produce and sell
• Pre-contracted operations contracts with long-term, certain pricing
• Pre-contracted engineering, procurement and construction contracts with pre-agreed pricing
• Passing of downside risk to counterparties – for example through pre-agreed liquidated damages relating to delivery failure
• Comprehensive modelling of the project’s cash flows

Project finance loans are typically non-recourse or partial-recourse. This is effected by setting up a Special Purpose Vehicle (SPV) which will enter into the financing arrangements with the lenders. Certain eventualities may require guarantees from the project sponsors or equity holders – for example they may provide indemnities (guarantees) to the lenders to cover eventualities where certain of their actions lead to the failure of the project.
As a comparator, under a full-recourse loan, the project sponsor guarantees repayment, irrespective of the outcome of the project.

Infrastructure projects

Project finance loans are typically used to fund infrastructure projects. Examples of infrastructure projects include:

• Power plants,
• Water plants,
• Toll roads,
• Mines,
• Telecoms infrastructure, and
• Oil and gas infrastructure.