Chapter 12 Project Finance David Gardner and James Wright HSBC
Introduction The purpose of this chapter is to provide an overview of Project Finance. This chapter will outline what Project Finance is, the key features which distinguish it from other methods of financing, the motivations and circumstances for utilising it and the typical structuring considerations therein. Moreover, it will be shown to be a method of infrastructure finance 1 which has become increasingly relevant in the wake of the Global Financial Crisis 2 . What is Project Finance? Project Finance can be characterised in a variety of ways and there is no universally adopted definition but as a financing technique, the author’s definition is: “the raising of finance on a Limited Recourse basis, for the purposes of developing a large capitalintensive infrastructure project, where the borrower is a special purpose vehicle and repayment of the financing by the borrower will be dependent on the internally generated cashflows of the project” This definition in itself raises a number of interesting questions, including:  What do we mean by ‘Limited Recourse’ financing – recourse to whom or what?  Why is Project Finance typically used to finance large capital intensive infrastructure projects?  Why is the borrower a special purpose vehicle (SPV) under a project financing?  What happens if the internally generated cashflows of the project are not sufficient to repay the financiers of the project? These points will be addressed throughout the course of this chapter. The terms ‘Project Finance’ and ‘Limited Recourse Finance’ are typically used interchangeably and should be viewed as one in the same. Indeed, it is debatable the extent to which a financing where the Lenders have significant collateral with (or other form of contractual remedy against) the project shareholders of the borrower can be truly