PROJECT FINANCE VS. CORPORATE FINANCE
In traditional or corporate finance, the sponsoring company (the company building the project) typically procures capital by demonstrating to lenders that it has sufficient assets on its balance sheets, to use as collateral in the case of default. The lender will be able to foreclose on the sponsor company’s assets, sell them, and use the proceeds to recover its investment. In project finance, the repayment of debt is not based on the assets reflected on the sponsoring company’s balance sheet, but on the revenues that the project will generate once it is completed.
The sponsoring company must consider several factors when determining whether to use a corporate or project finance structure. Such considerations include the amount of capital needed, the risks involved (political risks, currency risks, access to materials, environmental risks, etc.) and the identity of the participants (government, multilateral institution, regional bank, bilateral institution, etc.).
Project finance greatly minimizes risk to the sponsoring company, as compared to traditional corporate finance, because the lender relies only on the project revenue to repay the loan and cannot pursue the sponsoring company’s assets in the case of default. However, a sponsoring company can only use project finance where it can demonstrate that revenue streams from the completed project will be sufficient to repay the loan.
The following chart summarizes the key differences between the two types of financing :
Let's dig a little deeper now to see who are the many participants in project finance and understand their roles.
Follow this link to Parties to a project financing
Follow this link to Summary.
Follow this link to Parties to a project financing
Follow this link to Summary.
In case you need more information, or are eager to get into the details of Project Finance, I recommend the following reads , that I personally bought as to create the summarized information of this Project Finance website (Amazon links) :
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