The debt finance for a Partnerships Victoria project is generally comprised of either bank loans or bonds (or a combination) for a specific term.
Debt finance is usually provided on a limited recourse basis under a finance agreement between the project company and the lender(s). This means that the lender is dependent on the cash flow from the project and typically has security or encumbrances over the project specific assets and cash flow. The lender has no right to call on any other assets of the sponsors or related parties activities, other than any project specific bonds or guarantees provided by the private party.
The debt provided for a Partnerships Victoria project is generally known as 'senior debt'. It is distinguished from any loans that equity providers may have made to the private party, which are a form of 'subordinated debt.' If the private party becomes insolvent, senior debt has a higher ranking, and must be repaid before other lending parties receive any payment. There is typically an inter-creditor document (as part of the finance documents) that governs the repayment hierarchy.
Through the restrictions and conditions associated with the loan, debt providers impose financial and management discipline on borrowers, which helps to encourage both initial due diligence in capital structure decisions, and ongoing incentives for good performance.
The costs associated with debt finance, whether in the form of bank debt or bonds, generally comprise the base interest rate, the credit or interest rate margin (margin), and fees.