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Financing Real Economy

Project Financing

Project Finance can be characterised in a variety of ways and there is no universally adopted definition but as a financing technique, our definition is:

“the raising of finance on a Limited Recourse basis, for the purposes of developing a large capital-intensive infrastructure project, where the borrower is a special purpose vehicle and repayment of the financing by the borrower will be dependent on the internally generated cashflows of the project”

This definition in itself raises a number of interesting questions, including:

Comparison of Project Finance versus other wholesale financing techniques

Form of financing Parallels/commonalities Key differences
Securitisation (Asset Backed Securities)
  • • The borrower is an SPV
  • • A form of ‘off balance sheet’ financing for the originator
  • • The SPV issues bonds to fund
  • • A securitisation can only occur for cash generative assets (e.g. a loan portfolio which is generating interest payments).
  • • In a securitisation, there are typically a large volume of assets being financed via a single SPV (e.g. a portfolio of mortgages). The pool of assets may therefore be of a variable credit quality and hence the financing instruments (bonds) are usually tranched accordingly. In a project financing, a single (or very small number) of assets are funded via a single borrower, presenting a uniform credit profile for all Lenders
Venture Capital
  • • Discrete number of equity investors
  • • High focus on equity return of an investment
Venture Capital investments are speculative assessments of a company’s potential to generate returns. A project financing is predicated on robust, long term and highly predictable financial modelling of forecast cash flows
Leveraged Buy-Out (LBO) Highly leveraged transactions In a project financing, the shareholders to the transaction are not contractually at risk if the project vehicle (borrower) defaults on its loans
Corporate Lending
  • • Dependent on available cash flows to service debt
  • • Term loan structures used
  • • Under an (unsecured) corporate loan, the lenders have recourse to all the assets of the company itself (regardless of whether the proceeds of the loan are used to finance a specific asset or not) or in the case of a secured loan, a specific asset of the company
  • • In Project Finance, the borrower (the Project Company) is an SPV and the principle Lender security is are the future cash flows of the project itself – it is ‘cash flow lending’

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