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Introduction to Project Finance Toolkit
Practical Law Toolkit 8-554-3446 (Approx. 6 pages)
Introduction to Project Finance Toolkit
by Practical Law Finance
| Maintained • USA (National/Federal) |
A selection of resources to assist counsel in understanding project finance transactions, including the sources of financing, current trends, and industry specific resources.
Project finance is a structure used to finance on a limited recourse basis the development and construction of capital intensive projects, including pipelines, roads, power plants, mines, and airports. This type of financing is often preferred for these projects because it can better allocate and mitigate the costs and risks of these projects than a balance sheet transaction.
This structure may also be used to:
- Finance the modification, expansion, or rehabilitation of existing projects.
- Refinance existing project debt.
- Finance the acquisition of a single project or a portfolio of projects.
In a project financing, the lenders look primarily to the revenues the project generates or they receive from the sale of project assets following a default to repay the loans. Ensuring, therefore, that the project's cash flow and assets are protected is an important part of underwriting and diligencing the project.
Project finance attorneys should understand all aspects of the project being financed. Similar to a general lending transaction, they need to understand the parties' rights and obligations and any risks to the repayment of the loan. But the loan documents represent only one part of the transaction. These contracts must be understood, drafted, and negotiated in the context of the project's industry, regulatory framework, and other contractual arrangements (including construction contracts, operation and maintenance (O&M) agreements, offtake agreements and supply arrangements).
There is no standard or typical project finance transaction. The contractual arrangements and the rights and obligations of the parties vary depending on many factors, including the nature and location of the project. However, in all projects, counsel for the project owner and the lenders must understand:
- The project's sources of capital, whether commercial bank loans, Term B loans, project bonds, export credit financing, or government funding (whether in the form of loans, tax credits, or grants).
- The parties involved in the transaction, their roles and their relationships to one another.
- The nature of the project being built, modified, refinanced, or acquired and how it will generate the revenues to repay the debt.
- Any factors that can have an adverse effect on:
- the project's ability to generate the revenues to repay the debt;
- the lenders' rights to receive full repayment of the debt or to enforce their rights in the project assets; and
- the project sponsor's return on its investment.
The resources in this Toolkit:
- Include an explanation of project finance.
- Explain the factors and risks that may have an adverse effect on a project and the project participants.
- Describe the sources of capital for project finance transactions.