structures may just add to the time and cost of putting the deal together, or be too
rigid if something goes wrong, or add extra risks that cannot be foreseen at the be-
ginning. The ﬁnancial structure should therefore be kept as simple as possible; for
example, several different sources of debt should not be used if sufﬁcient ﬁnance
can be raised from one source, as it is far quicker and easier to deal with one group
of lenders (e.g. avoiding intercreditor problems). As far as possible, ﬁnancing
should also be kept sufﬁciently ﬂexible to accommodate changes in the project
It is also easy for both Sponsors and lenders to get so carried away by the detail
of structuring and negotiating the deal that the big picture of what really matters gets
buried. For example, lenders often fall into the trap of imposing unnecessary con-
trols over the Project Company’s activities, or an overelaborate system of informa-
tion ﬂow about the project, which both hinder the Project Company from doing its
job of running the project efﬁciently, and burden the lenders with information they
do not read or with the task of taking decisions that are a waste of their time.
§13.1 DEBT:EQUITY RATIO
As already discussed, a high ratio of debt is the essence of project ﬁnance.
Within prudent limits, therefore, Sponsors wish to limit the amount of equity they
invest in a project, to improve their own return, and thus to raise the maximum
level of debt.
Once the maximum level of debt a project can raise has been determined, the
difference between this ﬁgure and project costs in principle determines the amount
of equity acquired (although some of the gap may be ﬁlled with mezzanine debt
(cf. §3.3) or public-sector grants.
Two factors determine the level of debt that can be raised for a project:
Lender’s cash ﬂow cover requirements. There is obviously a fundamental
difference between a project with a Project Agreement that provides reason-
able certainty of revenues and hence cash ﬂow cover for debt service and a
project such as a merchant power plant selling into a competitive and com-
paratively unpredictable market with no form of hedging of the revenue
risks; it is evident that the latter type of project cannot raise the same level of
debt as the former.
Similarly, a project in a high-risk country cannot raise as much debt as the
same project in a low-risk country, because the lenders will consider the cash
ﬂow less certain, even if it is contracted through a Project Agreement.
284 Chapter 13 Financial Structuring and Documentation