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What is Project Finance?

Author

Listed:
  • João Pinto

    (Faculdade de Economia e Gestão - Universidade Católica Portuguesa, Porto)

Abstract

Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself. Project finance, often used for capital-intensive facilities and utilities, is commonly used to segregate the credit risk of the project from that of its sponsors so that lenders, investors, and other parties will appraise the project strictly on its own merits. Project finance creates value by reducing the costs of funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding contamination risk, reducing corporate taxes, improving risk management, and reducing the costs associated with market imperfections. Besides describing the economic motivations for using project finance, this paper provides details on project finance characteristics and players, presents the recent trends of project finance market, and provides some statistics of project finance (PF) lending activity in Western Europe between 2000 and 2011.

Suggested Citation

  • João Pinto, 2014. "What is Project Finance?," Working Papers de Economia (Economics Working Papers) 01, Católica Porto Business School, Universidade Católica Portuguesa.
    • Handle: RePEc:cap:wpaper:012014
    as

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    File URL: http://www.feg.porto.ucp.pt/docentes/repec/WP/012014-Pinto-What_is_Project_Finance.pdf
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    References listed on IDEAS

    as
    1. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(2), pages 127-140, June.
    2. Francesco Corielli & Stefano Gatti & Alessandro Steffanoni, 2010. "Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1295-1320, October.
    3. Esty, Benjamin C. & Megginson, William L., 2003. "Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 37-60, March.
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    5. Bonetti, Veronica & Caselli, Stefano & Gatti, Stefano, 2010. "Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co," Review of Financial Economics, Elsevier, vol. 19(2), pages 60-71, April.
    6. Benjamin C. Estry, 1999. "Petrozuata: A Case Study Of The Effective Use Of Project Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 26-42, September.
    7. Richard A. Brealey & Ian A. Cooper & Michel A. Habib, 1996. "Using Project Finance To Fund Infrastructure Investments," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 25-39, September.
    8. Valerio Buscaino & Stefano Caselli & Francesco Corielli & Stefano Gatti, 2012. "Project Finance Collateralised Debt Obligations: an Empirical Analysis of Spread Determinants," European Financial Management, European Financial Management Association, vol. 18(5), pages 950-969, November.
    9. Stefanie Kleimeier & William L. Megginson, 2000. "Are Project Finance Loans Different From Other Syndicated Credits?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 75-87, March.
    10. Frederic Blanc‐Brude & Roger Strange, 2007. "How Banks Price Loans to Public‐Private Partnerships: Evidence from the European Markets," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(4), pages 94-106, September.
    11. Benjamin Esty, 2002. "Returns On Project‐Financed Investments: Evolution And Managerial Implications," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 71-86, March.
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    Cited by:

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    More about this item

    Keywords

    project finance; structured finance;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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