Essentials of Project Finance
Workshop on Project Finance
Sergio Pernice, PhD
Buenos Aires, Argentina
November 2005
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Definition of Project Finance
Project finance involves the creation of a
legally independent project company
financed with non-recourse debt (and
equity from one or more sponsoring firms)
for the purpose of financing a single
purpose capital asset, usually with a
limited life1.
1. B. C. Esty and A. Sesia Jr., “An Overview of Project Finance-2004 Update”, Harvard Business Review, 9-205-065.
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Main Parties to Project Financing
Project
Company
Lenders
(nonrecourse debt)
70%
Sponsors
equity holders,typically
have a controlling stake
in the Project Company
30%
Contractors
Customers
Suppliers
Host
Government
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Characteristics of Project Finance
A project is established as a separate company
A major proportion of the equity of the project company
is provided by the project manager or sponsor, thereby
tying the provision of finance to the management of the
project
The project company enters into comprehensive
contractual arrangements with suppliers and customers
The project company operates with a high ratio of debt
to equity, with lenders having only limited recourse to
the equity-holders in the event of default
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Project Finance Investment
Year
Bank Loans
Bonds
Total
% change
BLA & MLA
Finance
Equity
Finance
Total
2004
116.44
28.65
145.09
43%
18.75
70.22
234.06
Bank Loans
Bonds
Total
Bank Loans
Bonds
Bank Loans
Bonds
80%
20%
100%
472
86
247
333
Debt-to-total-capitalization ratio of 70%
Banks provided shorter-term financing (over 60% of bank loans mature in less than 10 years)
Bonds provided longer-term financing (over 75% of bonds mature in more than 10 years)
There has been a dramatic increase in the use of project bonds
Source: see footnote 1 and references therein.
Total Project-Financed Investment (US$ billions)
Percent of Lending by Type of Debt
Number of Projects With Average Size (US$ millions)
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Project Debt Credit Rating
Most project bonds have “negoti