Project Finance

Corporate Finance

No or limited recourse to sponsor's assets

Recourse to the private partner's or its parent company's assets

Bankability based on debt service capacity of the project

Bankability based on debt service capacity and collateral value

Debt service capacity based on future cash flows of a single activity

Debt service capacity based on future cash flows, taking into account prior performance of all the sponsor's activities

What is non-recourse Lending?

Under non-recourse project finance, lenders are paid only from the project's revenues without recourse to the assets of equity investors. That is, the project company's obligations are ring-fenced from those of the equity investors, and debt is secured on the future cash flows of the project. In non-recourse project finance, lenders need to undertake rigorous due diligence of project cash flows and the contractual structure. Generally, PPP projects are highly leveraged, with debt-equity ratios usually ranging from 70:30 to 60:40.

Some of the key advantages and disadvantages of non-recourse project finance are provided below.

Advantages of non-recourse finance:

1. It can improve the capacity to raise large amounts of long-term equity and debt finance.

2. Project sponsor balance sheets are shielded from risk. Investor capacity to borrow and take more projects increases as they can hold the debt "off-balance sheet".

3. Irrespective of project risks, the liability of the private partner is capped to its equity exposure. This may not be the case when the promoter guarantees for completion of construction etc. Owing to relatively lower risks, the private partner would be more willing to undertake projects under such an arrangement. This would mean greater competition for PPP projects.

4. Financing arrangements can be tailored to suit the specific project.

5. High leverage can make it easier to achieve the required equity rates of return.

6. Provides the advantage of relative ease of raising debt compared to equity.

7. There is better due diligence as the investor and lenders are expected to scrutinise cash-flows in detail.

Disadvantages of non-recourse finance:

1. Project finance transaction is complex and has a higher lead time as compared to corporate finance.

2. Non-recourse debt is typically more expensive than corporate finance.