Although it is the most frequently asked issue in the industry, it is also the most difficult to answer because there is no widely accepted definition of project finance. Even worse, several of the most often used definitions of project funding disagree with one another. A clear definition of project finance does not exist, although there is almost universal agreement on the characteristics of project finance that are similar to all project financings.
Given the multiple project finance or subsidies in India characteristics present in all project financings and financial advisory, we turn to those characteristics of project finance to give context to our clients and visitors to our website. Awareness of project finance requires an understanding of the characteristics of project finance that are universal to all project financings. The fact that the financing you seek for your project incorporates all of the characteristics listed below virtually guarantees that project finance is the best course of action for you to take to finance your deal.
Public infrastructure, subsidies in India and public utility projects, for example, are examples of substantial multinational projects that are financed using project finance. However, there is no universally accepted definition of project finance. A consensus definition of project finance has yet to be reached by the industry, although more than $230 billion in project finance loans originated annually in the United States. Though virtually everyone disagrees about what project finance is and what it should be defined as, almost everyone agrees on the characteristics of project finance common to all project financing, which are described below.
Financing without recourse
In terms of individual shareholders, including the project sponsors, the most evident attribute of project finance is that it is a non-recourse debt with no recourse. In the case of a monetary default, non-recourse financing means that the borrowers and shareholders of the borrower are not personally liable for any of the debt. Since project companies are generally limited liability unique purpose entities, any recourse that a lender may have will be limited primarily or entirely to the project assets (including completion and performance guarantees and bonds) in the event of a default by the project company its debt.
An entity explicitly formed to own a project is a special-purpose entity project company. Because the project company lacks credit or financial advisory and assets, project lenders do not consider the project company when evaluating the project’s feasibility and viability. Since project loans are non-recourse and the borrowers do not have assets to use to pay shortfalls in the event of project default, underwriting is wholly focused on the project’s viability.
The project lender may, in extreme situations, seek some amount of limited recourse from the sponsors or investors if they are not happy with the project’s ability to repay the loan. This is known as limited recourse.