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DIFFERENCES BETWEEN CORPORATE LENDING
AND PROJECT FINANCE
In the context of money and capital markets, the term project
finance refers to a specific discipline of financing. Project
finance is the financing of an asset with the lender primarily
relying on the cash flow from this asset as the source for
the repayment of the financing. The asset itself is the main
collateral. The lender has no or only limited recourse to the
sponsors of the project.
Thus, project finance is also described as “cash-flow based,
limited-recourse (or non-recourse) financing”.
Comparison corporate lending – project finance
Corporate lending
Project finance
Bank
Non-/limited recourse
Bank
Loan
Collateral
Loan
Collateral
Corporates
Corporates
(Sponsors)
Equity
Special Purpose
Company (SPC)
Project
Project
With classic corporate lending, the relationship is directly
between the company and the bank (or, in the case of a
bond, the investors). This is reflected by increased liabilities
on the company’s balance sheet. With project finance,
the financing agreement is signed between the bank and
the special purpose company. The financing is therefore
“off balance sheet” for the project sponsors, who are,
accordingly, not (non-recourse) or only to a limited extent
(limited recourse) liable for the financing.
With corporate lending, the banks usually have a balancesheet
history of the companies which apply for financing.
As a result, credit risks and changes in creditworthiness are
easier to assess. In contrast, the creditworthiness in project
financing is primarily determined by the quality of the
contracts between suppliers, owners, off-takers etc. and the
special purpose company.
One major risk of project finance is the completion risk. The
revenue basis for the repayment of the financing and for the
employment of the funds of the sponsors and investors is
only secured, if a functioning asset is finally taken over for
operation.
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