Project financing / Project finance

Project financing is a form of financing for larger deals offered on unique terms.

The essence of project financing is that the valuation of credit risk is not based on the general risk of the enterprise implementing the project, but on the examination of the project's ability to generate income. It follows that the project's assets primarily serve as collateral for project financing. 

In the case of larger projects, it is customary to create an independent project company (SPVT, Special Purpose Vehicle) for the project. Thus ensuring that the general risk, revenues and costs of the company implementing the project are well separated from the risks, revenues and costs of the project.

The most active actors in project financing are the credit institutions and the consortia and syndicates created by them. In the case of some projects, financing can also be done through capital market issuance. The latter takes place in projects with really large and well-marketable assets.

The risk of assessment of the projects is therefore particularly emphasized in these transactions. In the so-called due diligence phase of risk assessment, it is not uncommon to involve engineering, economic, legal and financial experts together. 

The projects form an independent (closed) unit not only in terms of risk, but also in terms of cash flow. Project revenues must be able to independently meet all elements of debt service on schedule.

It also follows from the characteristics of project financing described so far that below a certain size limit (roughly 1-2 million euros) it is not worth thinking about such a solution. In this size range, the financing conditions (such as the interest, term, availability time, grace period, repayment schedule, etc.) are unique. They are determined according to the needs and possibilities of the given transaction. 

Real estate developments that generate regular cash flow, such as office buildings, commercial and industrial properties, can potentially be eligible as projects. This includes large-scale industrial investments. This could be, for example, the development of a power plant. The construction of an apartment building can also be such a project.