In order to finance facilities constructed under a privatized contract, private companies generally will turn to a project financing approach instead of corporate borrowing. In project financing, lenders look to the performance of the project for payment rather than the borrower's balance sheet. This enables the borrower to isolate the risks presented by the project, making the loan "nonrecourse" to the borrower. In addition, through the introduction of outside capital, the borrower can leverage its resources and expertise and undertake projects it would not be able to do if relying solely on the strength of its balance sheet.
Since the lender cannot look to the borrower's balance sheet for loan security, it will look to the project's structure and analyze the project on a stand-alone basis. The analytical process of reviewing a project's structure is used to identify the level of certainty at which the lender can expect timely payment of principal and interest. This involves
• identifying all transaction risks
• determining whether the risks are manageable
• assessing whether the party accepting the risk is capable of doing so
• identifying uncovered risks that lenders bear.
Based on this analysis, the lender can determine whether to lend to the project and how much interest to charge. Since the objective is to identify uncovered risks, this process necessarily involves a "worst case" outlook and begins with an analysis of projectlevel risks. These risks can be categorized as follows:
• Revenue Structure: Lenders will be concerned with die stability and predictability of revenues, generally requiring that fixed payments be structured at a level that matches debt service obligations. In addition, lenders will require that die contracts minimize die project's exposure to market risks, inflation, change-in-law, and force majeure ("Acts of God") events.
• Technology and Operations: Lenders will look for commercially proven technology and will seek assurances that the facility can be built within budget, on schedule, and as designed. These assurances can usually be found in the agreement the project sponsor has with its subcontractors). Lenders will investigate the background and capabilities of the subcontractors and the security packages (incentives, penalties, and warranties) provided to back their performance. Based on this analysis, the lender will gain comfort that in the event of a performance problem, whether in construction or operations, the cash flows of the project will be protected.
• Site Conditions: This covers a broad array of environmental conditions at the site on which the facility is being built. Since the facility's construction or operation could be affected by a site condition, whether it is the discovery of environmental hazards or previously unknown geological conditions, the lenders will require that a project participant absorb these risks.
• Comparative Economics: To the extent a substitute product or process exists, lenders will be concerned about the economics of the project. Specifically, if there is a cheaper way to accomplish the objectives of the project, lenders will want assurances as to the strategic significance of the project to the purchasers.
• Feedstock Risks: The cost, availability, and quality of critical inputs such as power, water, or other raw materials can dramatically affect the operations of a project and are therefore key factors in a lender's analysis. If costs can be fixed (e.g., long-term fuel supply agreements), the financeability of the project will be enhanced. In waste processing facilities, the most critical feedstock is waste, and lenders will require that the project cash flows be protected in the event of an interruption in waste feed or deviation in waste characteristics.
• Legal and Financial Structure: Lenders will analyze the capitalization of the project to ensure that the mix of equity and debt results in a structure wherein the contractor remains highly motivated. In addition, the lenders will investigate the legal structure of the project and require financial and ownership covenants that provide for contract enforceability; protect security interests in assets; and maintain strict controls on reserve funds, cash distributions, and the ability to obtain additional debt.
• Purchaser Credit Strength: Under this category of risk, lenders are concerned with the ability and willingness of the purchaser to pay for services. Under DOE's privatization programs, the contractor relies on the U.S. government as the sole purchaser. While the credit strength of the government is unmatched, lenders will be concerned about the willingness of the purchaser (i.e., government) to pay, and therefore will require that the timing and mechanics of purchaser payments be clearly defined under all foreseeable events. In general, single customer projects should be strategically significant to the purchaser and should enjoy broad political support.
• Forecasted Financial Results: Lenders and analysts will perform pro forma analyses of the project's cash flows, often subjecting the project to "worst case" conditions to assess whether there will always be adequate cash flows to cover all fixed obligations.