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Project Finance
Project finance (PF), widely used in the energy industry, refers to a special form of financing for large-scale investment projects, where the debt is repaid from the future income of a facility under construction, such as a power plant, substation or power transmission line.
Features
Project finance is used when the classic corporate finance approach is not possible.
For the implementation of large energy projects, a legally and economically independent project company (SPV or SPC, Special Purpose Company) is usually established.
The equity capital is provided by the project sponsors (mainly institutional investors), while the borrowed funds are raised by the company from other sources.
This approach, in particular, is applied in the construction and expansion of solar power plants and wind farms, which usually consist of several phases, each of which can cost tens and hundreds of millions of dollars and require an individual approach to financing. Each project can be carried out through the SPC, which is created specifically for this purpose. The bank provides the company with a large long-term loan, which is repaid after the commissioning of the power plant from its cash flows.
Lending based on cash flow
All obligations of the project company (operational costs, interest and repayment) are covered by the future free cash flow of the energy project. PF lending is based on proof of the technical and economic viability of the project. In the absence of collateral, creditors are provided with special rights, such as the right to enter into contracts, the right to participate in the management and control of SPC.
Due to high project costs, long-term loans are often provided through banking syndicates.
Financing the construction of power plants under the PF scheme is usually long-term (15 years or more), taking into account the expected cash flows. The funds received are initially used to support the project, then the interest and principal are paid to the creditors, and finally the remaining funds are distributed to the capital providers.
