PROJECT FINANCE

Advantages of Project Finance

 Avoidance of restrictive covenants in other transaction-because the project financed is separate

and distinct from other operations and project of the sponsor existing restrictive covenants do
not typically apply to the project financing.
 Favorable tax treatment-project finance is often driven by tax efficient considerations. Tax
allowances and tax breaks for capital investments etc. can stimulate the adoption of project
finance.
 Favourable financing terms-project financing structures can enhance the credit risk profile and
therefore obtain more Favourable pricing than that obtained purely from the project sponsors
credit risk profile.
 Political risks diversified-establishing SPV for projects in specific countries quarantines the
project risks and shields the sponsor from adverse developments.
 Risk sharing-allocating risks in a project finance structure enables the sponsor to spread risks
over all the project participants including lenders.
 Collateral limited to project assets: No recourse project finance loans are based on the premise
that collateral comes only from the project assets sometimes limited recourse to the assets of
the project sponsor required as a way of incentivizing the sponsor.

Disadvantages of Project Finance

 Complexity of risk allocation: Project financings are complex transactions involving many
participants with diverse interests. This results in conflicts of interest of interest on risk
allocation amongst the participants and protracted negotiations and increased costs to
compensate third parties for accepting risks.
 Increased lender risks: Since banks are not equity risk takers, this means that the availability to
enhance the credit risk to acceptable levels are limited which resulted in higher prices. This also
necessitates expensive process of due diligence conducted by lawyers, engineers and other
specialized consultants.
 Higher interest rates and fees: Process necessitate high cost.
 Lender supervision: In order to protect themselves, lenders will want to closely supervise the
management and operations of the project.
 Lender reporting requirements' enders will require that the project company provides steady
stream of financial and technical information to enable them to monitor the projects progress.
 Increased insurance coverage: The non recourse nature of project finance means that risks need
to be mitigated.