What is a Project Finance?
Financing of a specific project in which lenders relies primarily on the project's cash flow generated by the operation of the project as source for repayment of loans, with the project's assets, rights, and interests held as secondary security or collateral.
Project finance is especially attractive for the development of projects like machines, equipment, complete plants.
Characteristics of the project financings:
Special Purpose: project developed through a separate financial and legal entity
Off Balance Sheet: project assessment is not based on balance sheet position of the sponsors. Accounting treatment of project debt is completely separate from the sponsors' own borrowings in its consolidated accounts. Sponsors’ financial position is not affected
Highly Leveraged Structures: allows sponsors to maximize the debt to equity leverage of the project. A level of 70% to 90% debt is typical.
Non-recourse/Limited Recourse: financing is secured only by the project itself without legally recourse to the sponsors.
The use of a wide range of financial instruments is subject to the degree of financial market development where the initiative is implemented.
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