projectfinance

Project finance is a method of funding in which repayment of debt is primarily dependent on the cash flows generated by a specific project rather than the general assets or creditworthiness of the project sponsors. A special purpose vehicle, or SPV, is created to isolate the project’s assets and liabilities, and lenders hold security interests in the SPV’s assets.

Financing is typically non-recourse or limited-recourse: lenders look to the project's revenues, contractually secured off-take agreements, and the project’s assets for repayment. Equity is contributed by sponsors or investors, and debt may be senior, mezzanine, or other structured finance layers. The financing often lasts for the life of the project, with long construction periods and greenfield risks.

Projects are frequently bundled with a detailed set of contracts: off-take agreements (e.g., power purchase agreements), construction contracts (EPC), O&M contracts, and supply agreements. The project includes risk allocation via contracts, guarantees, warranties, and insurance. Lenders require robust feasibility studies, financial models, and risk mitigation measures. Step-in rights and collateral mechanisms provide lenders with remedies if performance falters.

Key risks include construction risk, demand/price risk, operating performance risk, regulatory and political risk, currency risk, and sponsor defaults. Risk sharing, political risk insurance, hedging, and currency arrangements are commonly used to address these risks.

Project finance is widely used in energy (conventional and renewable), infrastructure (transport, water, social infrastructure), mining, and natural resources. It can offer off-balance-sheet treatment and sponsor limited downside exposure, but it involves high transaction costs, complexity, and long lead times. Governance typically involves sponsors, lenders, advisers, and an SPV board.