Personal tools

Course Outline


  General project finance fundamentals

Download Course Brochure


Project finance, or limited recourse financing, has features which render it quite different from ‘normal financings’ and these differences permeate throughout the structure.

  • Features of project finance:
    • Differences of project financing from corporate lending
    • Differences between infrastructure financing and other forms of project finance
    • The limitation of recourse
    • The due diligences required
    • The choice of project vehicle
    • Debt risk vs commercial risk
    • The role of contract
    • The role of security
  • What is gained by structuring on a limited recourse basis

Contracts and cross-border enforcement


Project financings involve a spider’s web of contracts. These contracts are pointless unless there is an ability to enforce rights under them. In cross-border context this is often not straightforward. Litigation is not the answer:

  • The laws governing the multiplicity of contracts, conflicts
  • The ‘problem’ with litigation
  • The administration of the contract
  • Expert mediation
  • International arbitration

PPP and other infrastructure projects


Because most PPPs and BOTs have a contractually-based revenue, their structure and characteristics are quite different from other project financings:

  • Infrastructure projects contrasted with industrial/extractive industry projects
  • The advantages and disadvantages of the PPP format
  • Public sector procurement
  • The structure of concessions
  • Termination clauses, compensation, step-in rights

  Case 1: Public private partnership infrastructure project




Getting a project built and working as planned is the hardest and therefore the highest risk phase of most projects. Particular care is required in structuring the rights and obligations:

  • Standard form contracts – eg. FIDIC
  • Liquidated damages
  • Performance bonds and retentions
  • Fixed price, lump sum, liquidity
  • Variation and change orders
  • Turnkey EPC structures
  • Completion guarantees, refinancing risk
  • Technology, logistics and learning curve risks

Market and operating risks


Most projects have only one revenue source. The cash flow coming into the project needs careful structuring and due diligence:

  • Offtake agreements and the errors that often occur
  • Availability risk vs market risk
  • Take-or-pay features
  • Hidden recourse structures
  • Exclusions
  • Implications of market volatility
  • Currency exposures
  • Merchant power

  Case 2: Power project


Bond financing for Special Purpose Vehicles (SPVs)


An increasingly important financing option, but having very distinct disadvantages as well as advantages:

  • The history of bond finance of limited recourse SPVs
  • Cross-border bonds – prerequisites
  • Rule 144A – implications for emerging market projects
  • Rating agencies – approach to different sectors
  • Piercing the sovereign ceiling
  • The limited window for high yield bonds
  • Why use bond financing – advantages and disadvantages

  Case 3: Liquified Natural Gas (LNG) project


Export Credit Agencies (ECAs)


An explanation of how ECAs and their products work, and the pluses and minuses of getting them involved in the structure:

  • Buyer credits
  • Political and commercial risk cover
  • Concessional finance rates
  • Lines of credit
  • Advantages/disadvantages of ECA involvement
  • Multilateral agencies

Financier perspective


Total dependence on a single cash flow results in structures and covenants that are not found in other financings.

  • Risk – solvency risk vs volatility risk
  • Free cash flow – why is it fundamental to analyse
  • Cash management issues
  • Liquidity – creating ‘suspension’ for the special purpose vehicle
  • Why the financial covenants are different from conventional lending
  • Cash Available for Debt Service (CADS)
  • Loan life cover, project life cover, debt service cover (LLCR and ADSCR)
  • Surplus cash flows, lock-up, cash sweeps
  • Waterfall/cascade, reserve accounts
  • Contingency reserves
  • Designing structures to match cash flows
  • Dealing with default
  • Mortgage debentures/fixed and floating charges
  • Separating risk-taking and funding

  Case 4: An emerging market infrastructure project


Sponsor perspective


Sponsors need to have a disciplined approach to screen projects that are likely to deliver the benchmark IRR. There are number of potential pitfalls in the analytical approach.

  • The investment analysis without project finance
  • The difference in approach with a limited recourse structure
  • Project IRR contrasted with Equity/Sponsor IRR
  • The drivers of Sponsor IRR – and implications of negotiation of the financing term sheet
  • Evaluation of projects in emerging markets
Keep updated with the latest news and happenings  Follow us on Linkedin  Follow us on Twitter  Featured speaker presentations  Watch event highlights and exclusive interviews  Google+  Flickr-Informa Australia