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.
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.
- 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.