Project financing is an increasingly popular platform used for the purpose of financing the development and construction of capital intensive projects where lenders, rather than basing loan approval on the credit quality of the borrower, assess whether revenues generated by the project can cover interest and principle payments on the loan. The quality of the project’s assets to be included as collateral for the financing can also play a role in the lending decision.
This type of financing delivers three distinct benefits to the borrower. They are:
- The most popular form of project financing is structured as a “non-recourse” loan – In a non-recourse loan, the borrower (also known as the project sponsor) is under no obligation to make interest or principle payments on the loan if project revenues fall short of estimates. This allows project sponsors some financial flexibility should revenues take longer than anticipated to materialize. Lenders can mitigate this risk to a degree by mandating guarantees from the sponsor or other parties affiliated with the project.
- The option to leverage the financing – With anticipated revenues, collateral, and guarantees standing behind a typical project financing deal, sponsors can finance development and construction costs at debt levels ranging from 80% to 100%. This type of leverage, especially when it’s tied to a non-recourse loan, enables sponsors to reduce their risk profile, transferring that risk to the lender.
- The option to keep project financings off the balance sheet – Non-recourse loans may not be required to be reported on the project sponsor’s balance sheet if they are structured properly. Keeping these transactions off the balance sheet can be vitally important in terms of covenants on other loans, especially if a company is carrying a relatively large debt load.
Project financing should be built to maximize these benefits; a practice that necessitates experienced handling. As structured by the team led by Dmitrij Harder at Solvo Group, a project financing delivers needed capital, reduces risk, and receives favorable accounting treatment to give companies and their projects the best chance for success.