Project Financing: The Borrower’s View

Abstract

The term ‘project finance’ is almost a cliché — it is the in-phrase within the financial community, and most banks have resident project finance departments these days. What does the term mean? Any or all of the following may be considered characteristic of project financing if in sounding out prospective lenders a company:

• mentions that it requires the funds for general corporate purposes but that it has one or two projects under examination and may perhaps use some of the loan proceeds for them if they mature,

• goes on to identify the possible projects,

• specifies that a named project will proceed, and furthermore that the funds will be used only for that purpose,

• seeks to match the loan repayments cycle with the internal cash flow of the project, or link it to fiscal or corporate depreciation allowances available to those specific assets,

• considers hypothecating assets or dedicating the project’s cash flow to service specific debt — a preferred position over other creditors of the company,

• perhaps for fiscal, corporate structure or management philosophy reasons, hives off the venture as a separate, wholly owned affiliate of the sponsor but with the credit backing of that sponsor,

• indicates that the borrower is to be on his own, with lenders looking only to the strengths of the project for debt service and without recourse to anyone else.