Description

In this case, project-level lenders must be paid before any funds are paid to the project equity owners, making it the most “senior” element in the capital structure. A lien secures these lenders' claims on the project itself as collateral. Thus, this debt is also called “senior secured” debt.

Instrument category

Debt financing

Implementation status

High - much evidence available

Enabling conditions and success factors

• There need to be no regulatory barriers to project finance.
• Reasonably sophisticated financial market needed.
• High capacity needed in setting up Special Purpose Vehicles.

Instrument benefits

• Can fund large infrastructure investments.
• No personal or balance sheet liability as the project assets function as collateral.

Challenges and risks to implementation

• Due to its complexity, it is not suitable for small projects.
• Generally more expensive than corporate finance.
• Bankability requires long-term project contracts: lenders will frequently ask for government guarantees if state-owned enterprises or public entities are involved.