LAWS8026 Chap.7 Project and Infrastructure Financing
Project and Infrastructure Financing
Project finance lends against one project's cashflows rather than a whole company's balance sheet.
This chapter sets out the five features the opening seminar lists, from the special purpose vehicle and external debt to limited recourse and detailed risk allocation, and walks through the typical structure linking sponsors, host government, contract counterparties, senior and subordinated lenders, export credit agencies and the security trustee.
It compares corporate, acquisition and project lending and prepares the Class 5 questions on MAC clauses, security and public-private partnerships. The organising idea is limited recourse.
Because the lenders can look only to the project's cashflows and assets, every risk that could interrupt those cashflows must be identified and placed with someone: construction delay with the builder, permits and concession terms with the host government, supply and offtake with contract counterparties, and residual risk with sponsors through equity and share security.
The chapter's structure diagram shows those relationships, and its comparison table sets project lending beside corporate and acquisition lending so that the first Class 5 question can be answered precisely rather than in general terms.
What this chapter covers
- 01
The five features of project finance
- 02
The SPV and limited recourse
- 03
Sponsors, government and contract counterparties
- 04
Senior, subordinated and agency-supported debt
- 05
Security over project assets and sponsors' shares
- 06
Public-private partnerships and concession risk
Worked example · free
Map the parties in a project financing
- +1Place the SPV at the centre as borrower and project owner.
- +1Add sponsors as equity providers who mortgage their shares to the security trustee.
- +1Add the host government for the concession and permits, and counterparties under project documents.
- +1Add senior and subordinated lenders under an intercreditor agreement, with any export credit agency support.
Key terms
- Special purpose vehicle
- A special purpose vehicle is an entity created for one project or transaction so that its assets and liabilities stay separate.
- Tripartite agreement
- A tripartite agreement connects the lenders, the project vehicle and a key counterparty to protect the lenders' position.
- Concession
- A concession is the right granted by government to build or operate a project.
- Public-private partnership
- A public-private partnership is a project in which government and private parties share the delivery and financing of infrastructure.
- Sponsor
- A sponsor is a party that initiates a project and provides its equity.
- Limited recourse lending
- Limited recourse lending confines a lender's claim to the project's own cashflows and assets.
Project and Infrastructure Financing FAQ
How does project finance differ from corporate lending?
Corporate lending has full recourse to an existing business with a track record. Project finance lends to an SPV for a discrete project, mostly with external debt, and the lenders' recourse is limited to the project's cashflows and assets, so risk allocation in the documents becomes central.
Why do project lenders take security over the sponsors' shares?
A mortgage of the sponsors' shares in the project vehicle gives the security trustee a route to control the vehicle itself if the project fails, complementing security over the project's assets and contracts.
What special issues does a PPP raise for lenders?
Government may appear both as the authority granting the concession and as a counterparty paying for or using the asset. Lenders therefore focus on what happens to the cashflows if the concession ends early, which the assigned reading addresses.
Why is the borrower in a project financing usually an SPV?
Using a special purpose vehicle confines the project's assets, contracts and debts to one entity. That is what makes limited recourse workable: lenders can assess and secure a single, self-contained project, and sponsors keep the project's liabilities off their own balance sheets.
Why are MAC clauses relevant in project documents?
A material adverse change clause gives lenders a way to react to deterioration that a specific covenant might not capture. The opening seminar flags that including a MAC event is often contentious, so the Class 5 answer should weigh lender protection against the certainty sponsors need to build.
Assessment move
Redraw the project structure without looking, then attach one risk and one protective document to each party. Use the three-column comparison of corporate, acquisition and project lending to answer the first Class 5 question in two minutes. Prepare the PPP question with one concrete concession-termination scenario.
Prepare one risk-allocation example for each party in the diagram and rehearse it as a two-sentence contribution: the risk, then the document that places it. Add the Chapter 13 reading reference beside each risk so that your contribution can cite its source.
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