Project Finance (PF) is the raising of finance on a Limited-recourse or on a Non-recourse finance (NF) for the purposes of the developing a large capital intensive infrastructure project, whereas the borrower is a special purpose vehicle and repayment of the financing by the borrower will be dependent on the internally generated cash flows of the project, both as the source of repayment and as security. In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility´s output.
The central issue in PF is the fact that the repayment of the loan depends primarily on the cash flows of the project and not on the overall financial strengths of the sponsor, whereas assets of the project represent only its collateral. The lenders are repaid only from the cash flow generated from the project or, in the event of complete failure (event of default or force majeure), from the selling value of the project’s assets.
PF has emerged as an important method of financing large scale, high-risk domestic and international business ventures. This is usually defined as non-recourse financing of a new project to be developed through the incorporation of a vehicle company (separate incorporation), giving such company a single purpose (“SPV”). This ensures that the cash flow generated by the project can be totally controlled and that it will be distributed in the order of priority set down in the financial model. The SPV is not permitted to perform any function other than developing, owning, and operating the installation of the project.
PF is suitable at funding specific investments in certain industries. Typically, PF is used for capital-intensive infrastructure investments that employ established technology and generate stable returns, such as ports, bridges, oil and gas, roads, telecommunications networks, electric power generation, and distribution facilities, airports and water and sewerage facilities.
One of the key comparative advantages in PF is that it allows the allocation of specific project risk (i.e. completion and operation risk, revenue and price risk, and the risk of political interference or expropriation) to those parties best able to manage them (i.e. cost overruns the EPC Contractor or the Sponsors, as applicable). If the project is not successful, lenders have no recourse (i.e. seek remedy against) or claim on the sponsoring firms’ assets and cash flows. The existing firms’ shareholders benefit from the separate incorporation on the new project into an SPV.
The key players in the PF are the project sponsors who invest and incorporate the SPV; the lenders, the legal, tax, technical and insurance advisors of the sponsors and the lenders, and the contractor(s) who would build the project and the offtaker.
For further information in connection with this matter, please contact the partner in charge of your matters or one of the attorneys mentioned as follows:
Luis Roberto Olea Hernández
Jesús Icaza Hornedo
Alfredo de Alba Michel
María Fionna Folino