Project finance does stand in contrast to typical corporate or balance sheet and asset financings. In corporate or balance sheet financings, a financing decision is usually based on the entire corporate balance sheet of a company rather than on the cash flow generating capacity of a dedicated special purpose vehicle (SPV). In asset finance, the financing is based on the asset value (in which case the hard asset sale is expected to produce enough cash to service debt in a foreclosure scenario).
In contrast, project finance transactions are regularly characterized by
- investments with large capital requirements (e.g. infrastructure)
- the set-up of a dedicated SPV
- project sponsors funding the SPV partly with equity
- banks and other financial market participants funding the remaining capital requirement (high leverage)
- debt carrying capacity of the SPV determined on the basis of the contractually agreed cash flows of the SPV
- key project contracts, accounts and SPV shares pledged to the lenders as project security
- project sponsors not being liable for the liabilities of the SPV