project financing structure

8/12/2019 Project Financing Structure

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Project Financing Structure

Jessy P.J

Roll No.214thSem


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Types of Project Financing Structure

Two Types;

1) Full Recourse Structure

2) Limited Recourse Structure


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1) Full Recourse Structure

Traditionally , project financing involved full recourse asset-backed lending.T he salient features;

a) If it is a new company , the projects are fully secured by afirst charge on all existing and future assets of theborrowing company, by way of mortgage of immovable

assets and hypothecation of current assets.

If the project is implemented as an expansion ordiversification project of an existing company, whichalready has lenders with charges on assets , the lenders

for the new project get a pari passu charge on the entireblock of assets, including the assets of the new project.


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B) The viability of the proposed project is assessedon a stand-alone basis, the cash flows from theexisting as well as proposed activities are

considered to judge whether the existing as wellas the proposed debt can be serviced.

c) Apart from the charge on the assets, the projectsponsors provide personal guarantee for debt

serving. Further, in some cases the lenders mayinsist on a corporate guarantee from a groupcompany.


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2) Limited recourse structure

Private sector participation in infrastructure

projects , a relatively new phenomenon on theIndian scene, has been accompanied by a limitedrecourse, cash flow based financing structure, inline with international practice. The salient

features of this structure are as follows;a) The project is set up at a separate company,

called a special purpose vehicle(SPV). The SPV isnot supposed to handle any other business

activity without the prior approval of thelenders.


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b) The private sector promoter who sponsors theproject usually takes a substantial stake in the

equity of the project and enjoys the over-allresponsibility for running the project.

c) The sponsor provides standby support for costoverruns in the project, provided the quantum of

such support is crystallised prior to the financialclosure.

d) The security package for the lenders include aregistered mortgage / hypothecation of all assets,

a pledge of sponsor holdings in the SPV , anassignment of all project contracts anddocuments, and a charge on future receivables.


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e) The cash flow of the SPV is handled by anindependent agent (acting on behalf of the

security trustee). The cash flow is allocated in apredetermined manner to various requirementsincluding debt serving. After all the requirementsare met , the residual cash flow is available to theproject company.

f) In some cases the payment risk is mitigated by astate or central government guarantee.

g) Lenders do not have recourse to the sponcers

and their other businessesh) Being a separate entity, the SPV is bankruptcyremote from businesses of the sponsor/


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Financial ClosureMeans that all the sources of funds required for the

project have been tied up.In general financial closure is achieved soon when;

a) Suitable credit enhancement is done to thesatisfaction of lenders

b) Adequate underwriting arrangements are madefor marketrelated offerings.

c) The resourcefulness of the promoters is well

established.d) The process is started early and concurrent

appraisal is initiated if several lending agenciesare involved.

project financing structure

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