DEFINITION OF PROJECT FINANCE

The term project finance is generally used to refer to a nonrecourse or limited recourse financing structure in which debt, equity, and credit enhancement are combined for the construction and operation, or the refinancing, of a particular facility in a capital-intensive industry, in which lenders base credit appraisals on the projected revenues from the operation of the facility, rather than the general assets or the credit of the sponsor of the facility, and rely on the assets of the facility, including any revenue-producing contracts and other cash flow generated by the facility, as collateral for the debt.

In a project financing, therefore, the debt terms are not based on the sponsor's credit support or on the value of the physical assets of the project. Rather, project performance, both technical and economic, is the nucleus of project finance.

CONFUSION OF TERMS

The term project finance is often misused, owing to a general misunderstanding of the term. In some circles, it refers to raising funds to pay the costs of a project – any project. In others, the term is used to describe a hopeless financial situation remediable only with extreme financing options. The emerging meaning for the term is the definition above.

The term project finance does not necessarily imply that the underlying debt is nonrecourse to the project sponsor. As the definition indicates, project finance debt can be nonrecourse or limited recourse.