What is project financing?

Project financing means that the lender provides loan agreement financing to a specific project, and has the right to claim debt repayment for the cash flow generated by the project, and A type of financing in which the project assets are used as collateral guarantees. It is a financing method that uses the future income and assets of the project as the source of funds and security for repaying the loan.

Types of project financing

1. Project financing without recourse

Project financing without recourse

< p> Non-recourse project financing is also called pure project financing. In this financing method, the repayment of principal and interest of the loan depends entirely on the operating benefits of the project. At the same time, in order to protect its own interests, the lending bank must obtain property rights security from the assets owned by the project. If the project fails to be completed or fails to operate due to various reasons, and its assets or income are insufficient to repay the entire loan, the lending bank has no right to pursue the project sponsor.

Non-recourse project financing has the following characteristics in terms of operating rules:

1. The project lender does not have any claim on the project sponsor’s other project assets and can only rely on the The project's cash flow repayment;

2. The project sponsor's ability to utilize the cash flow generated by the project is the credit basis for project financing;

3. When the allocation of project risks is not When accepted by the project lender, it will be necessary for a third party to provide credit guarantee;

4. The project financing is generally based on a foreseeable political and legal environment and a stable market environment. .

2. Financing of limited-recourse projects

Financing of limited-recourse projects

In addition to using the operating income of loan projects as In addition to the source of repayment and obtaining property rights guarantee, the lending bank also requires a third party other than the project entity to provide guarantee. The lending bank has the right to seek recourse from the third-party guarantor. However, the guarantor's liability for the debt is limited to the amount of guarantee provided by each of them, so it is called limited recourse project financing. [1]

The limited recourse of project financing is reflected in three aspects:

1. Limited time.

That is to say, generally during the construction and development stage of the project, the lender has the right to have full recourse against the project sponsor. However, after passing the "commercial completion" standard test and the project enters the normal operation stage, the loan may become It becomes non-recourse.

2. Limited amount.

If the project cannot generate sufficient cash flow during the operation stage, the difference can be claimed from the project sponsor.

3. Limitation of objects

Lenders can generally only pursue the project entity. ;