Project Finance

CHAPTER 10Project Finance Market Developments and Finance Structures

The fundamental principles and tools used by project finance practitioners to address financial structuring and risk analysis, allocation, and mitigation have remained relatively unchanged over many years. However, there have been several new and innovative project finance market developments in recent years that merit mention as follows:

MINI-PERM FINANCING STRUCTURES

Prior to the 2008 financial crisis, debt capacity (both bank lending and project bonds) and debt tenors exhibited strong liquidity and credit capacity/availability as well as low cost of capital. The 2008 financial crisis had a double effect on both the bank lending market and the bond market. After 2008, bank lending capacity dried up as banks hoarded capital to buttress expected loan losses and reserved selective lending commitments for key clients. The other outcome of this was the decline in bank appetite to provide underwriting commitments for project finance deals due to the disappearance of the secondary loan syndication market and the resulting need for project sponsors to raise financing via club deals. Club deals entails banks committing loan capital on a pari passu take-and-hold basis, which renders deal execution more time consuming and loans more expensive as terms were dictated by the marginal bank. Credit capacity and liquidity in the project bond market was also negatively affected by the 2008 financial crisis due to monoline ...