[An Introductory Note for Commercial
Lenders]
Extracts: What is “Project Finance”?
This question is capable of a number of widely differing
answers, depending on the standpoint of the person defining
it. A broad and very encompassing definition given by one
authoritative text author will, however, appear preferred
for most purposes:
“… project finance is financing the development
or exploitation of a right, natural resource or other asset
where the bulk of the financing is not to be provided by any
form of share capital and is to be repaid principally out
of revenues produced by the project in question.” [1]
Although project finance as a distinct discipline is gaining
prominence, the concept of a commercial lender looking principally
to the cash flow generated by a specific project to service
debt has a long history dating back to Athens of the 5th Century
BC.
In the 1980s project finance featured primarily worldwide
in mine developments, mineral processing plants, oil &
gas field developments, and pipelines. In the United States,
project finance was also during this period applied to public
sector infrastructure, where states and municipalities raised
debt against revenues derived from a particular source as
an alternative to borrowing against their “full faith
and credit”.
Privatisation (the voluntary withdrawal of the state from
economic activities it used to control and manage) and deregulation
around the world over the last two decades has, however, given
the latest boost to project finance; ….
Lenders’ Objectives –
The law
applicable to project finance is essentially general law,
equally applicable to both international infrastructure projects
as to, for instance, a domestic property development financing.
The nature of the project to be financed would undoubtedly
dictate the nature of the parties involved.
Part of the challenge of any project financing is to reconcile
the often times differing objectives of the various interested
parties…
Lenders to a project company who are not commercial banks
may, of course, have other or differing objectives. For example,
the export credit agencies in a particular country will support
a project in order to promote that country’s industry
and they may not, as a result, have as great a profit motive.
Bondholders will share the commercial banks’ objectives
but will tend to be less interventionist…. Shareholders
in a project company who lend it money may view their loans
as quasi-equity … and will usually accept a subordinate
position to other lenders.
Lenders’ Security –
These security types may be “offensive” (securities
which allow enforcement by disposal of specified project assets
to repay debt) or “defensive” (securities which
protect senior securities from actions by junior or unsecured
creditors).
A well-negotiated security package should contain arrangements
relating to:
· physical assets
· the legal rights and revenue stream of the project
· share pledges
There are, of course, alternatives to project financing of
even the largest projects, including the good old fixed and
floating charge bank loans.
Edward O. Vera-Cruz
- Project Finance, Graham Vinter,
1998[Return]
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