Project Financing Structure

Jessy P.J
Roll No.21
4
th
Sem
Types of Project Financing Structure
Two Types;
1) Full Recourse Structure
2) Limited Recourse Structure
1) Full Recourse Structure
Traditionally , project financing involved full recourse asset-
backed lending.T he salient features;
a) If it is a new company , the projects are fully secured by a
first charge on all existing and future assets of the
borrowing company, by way of mortgage of immovable
assets and hypothecation of current assets.

If the project is implemented as an expansion or
diversification project of an existing company, which
already has lenders with charges on assets , the lenders
for the new project get a pari passu charge on the entire
block of assets, including the assets of the new project.

B) The viability of the proposed project is assessed
on a stand-alone basis, the cash flows from the
existing as well as proposed activities are
considered to judge whether the existing as well
as the proposed debt can be serviced.
c) Apart from the charge on the assets, the project
sponsors provide personal guarantee for debt
serving. Further, in some cases the lenders may
insist on a corporate guarantee from a group
company.
2) Limited recourse structure

Private sector participation in infrastructure
projects , a relatively new phenomenon on the
Indian scene, has been accompanied by a limited
recourse, cash flow based financing structure, in
line with international practice. The salient
features of this structure are as follows;
a) The project is set up at a separate company,
called a special purpose vehicle(SPV). The SPV is
not supposed to handle any other business
activity without the prior approval of the
lenders.

b) The private sector promoter who sponsors the
project usually takes a substantial stake in the
equity of the project and enjoys the over-all
responsibility for running the project.
c) The sponsor provides standby support for cost
overruns in the project, provided the quantum of
such support is crystallised prior to the financial
closure.
d) The security package for the lenders include a
registered mortgage / hypothecation of all assets,
a pledge of sponsor holdings in the SPV , an
assignment of all project contracts and
documents, and a charge on future receivables.
e) The cash flow of the SPV is handled by an
independent agent (acting on behalf of the
security trustee). The cash flow is allocated in a
predetermined manner to various requirements
including debt serving. After all the requirements
are met , the residual cash flow is available to the
project company.
f) In some cases the payment risk is mitigated by a
state or central government guarantee.
g) Lenders do not have recourse to the sponcers
and their other businesses
h) Being a separate entity, the SPV is bankruptcy
remote from businesses of the sponsor/
Financial Closure
Means that all the sources of funds required for the
project have been tied up.
In general financial closure is achieved soon when;
a) Suitable credit enhancement is done to the
satisfaction of lenders
b) Adequate underwriting arrangements are made
for market related offerings.
c) The resourcefulness of the promoters is well
established.
d) The process is started early and concurrent
appraisal is initiated if several lending agencies
are involved.