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Project Finance

Project finance is a form of secured lending – and much of the required expertise is drawn from the discipline of banking. But project finance is much more than just a straightforward loan secured by a charge on some asset.

9 Modules

Overview

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Project finance is a form of non-recourse (or at least limited resource) financing for long-term capital-intensive projects, such as those associated with public infrastructure, power generation, and extractive industries.

It has a long history, with evidence that limited recourse lending was used to raise funds for maritime voyages in ancient Greece and Rome. Project finance was also used for the development of the Panama Canal in the late 19th century and a more recent major expansion to the same canal. Other well-known projects funded by project finance deals include Eurotunnel, Euro Disney (now Disneyland Paris), and the Taiwan High-Speed Rail (THSR).

Project finance gained momentum during the 1980s when greater computing power and availability made it easier to analyze complex cash flows. However, this form of financing received a major boost during the 1990s and 2000s when governments seized the opportunity to have the private sector assist in the development of projects under the Public-Private Partnership (PPP)/Project Finance Initiative (PFI).

At its heart, project finance is a form of secured lending – and much of the required expertise is drawn from the discipline of banking. But project finance is much more than just a straightforward loan secured by a charge on some asset.

Project finance deals are often complex transactions involving a large number of participants. They differ from traditional financing methods in that the project is separated from its sponsors, who set up a bankruptcy-remote special purpose vehicle (SPV) to hold the project assets. Funding is provided (often by a syndicate of lenders) on the assumption that the project will generate sufficient operating cash flow to cover debt service and still provide the project sponsor with an adequate return. As lenders have recourse only to the assets of the SPV, the sponsor is largely insulated from the effects of project failure.

These more complex deal structures, as well as the other features and characteristics associated with project finance, are the focus of this course.