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Project finance is the financing of long-term infrastructure, industrial projects and public services based on a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project.
◙ Financing of long-term infrastructure, industrial projects, and public services
Project Finance is generally used in oil extraction, power production, and infrastructure sectors. These are the most appropriate sectors for developing this structured financing techniques as they have low technological risk, a reasonably predictable market and the possibility of selling to a single buyer or a few large buyers based on multi-year contracts (e.g. take-or-pay contracts).
◙ Non-Recourse/Limited Recourse Financial structure
Project Finance is the structured financing of a specific economic entity - a Special Purpose Vehicle (SPV) - created by the sponsors using equity or debt. The lender considers the cash flow generated from this entity as the major source of loan reimbursement.
Hence, if the borrower defaults, the issuer can seize the assets of the said SPV but cannot seek out the borrower for any further compensation, even if the SPV does not cover the full value of the amount defaulted.
◙ Payment from cash flow generated by the project
Cash flows generated by the SPV must be sufficient to cover payments for operating costs and to service the debt in terms of capital repayment and interest. Because the priority use of cash flow is to fund operating costs and to service the debt, only residual funds after the latter are covered can be used to pay dividends to sponsors undertaking project finance.
We play a significant part in funding projects in various industrial sectors, catalyzing public and private partnerships and reducing project risk using a mix of government credits, insurance and private lending.
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