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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. 4
CONSEQUENTLY, PROJECT FINANCE HAS THE FOLLOWING CHARACTERISTICS: • Special purpose company The project sponsors establish a new project company for the single purpose of realising and financing the project. The company’s special purpose is exclusively to realise and administer the investment project. This company acts as the borrower of the project loans and collects the equity. • Risk allocation As part of any risk analysis, the risks associated with the project are to be identified, comprehensively structured and then allocated to those parties best suited to bear the individual risks. • Lending on cash-flow basis The financing is repaid from the cash flow of the special purpose company. The ability for the loan to be repaid depends on the profitability of the project. • Off-balance-sheet character The tangible and intangible assets of the special purpose company represent the collateral for the financing. The project sponsors assume no (non-recourse) or only limited (limited recourse) liability for the project loan. Consequently, the financing is not recognised in the balance sheet of the sponsor. Structure of a project finance transaction Client/public sector Concession contract Direct contractual regulations Sponsors Equity Special Purpose Company Loan agreement Banks Equity Turnkey contract Equity Financial investor Operation contract Equity Contractor consortium (construction company, suppliers) Operator 5
Page 1: www.investkredit.at PROJECT FINANCE
Page 6 and 7: THE STAGES OF PROJECT FINANCE TRANS
Page 8 and 9: EXAMPLES OF SUCCESSFUL PROJECT FINA
Page 10 and 11: REASONS FOR PROJECT FINANCE • Ren
Page 12: IMPRINT Published by: Investkredit

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