Project Finance is an industrial/infrastructural project financed off-balance sheet in a Special Purpose Vehicle within a network of contractual agreements with key counterparts (contractors, purchasers, suppliers, operator agents, etc.)

• The borrower of funds is a project company set up on an ad hoc basis that is financially and legally independent from the sponsors (separate incorporation) (the SPV).
• All economic consequences generated by the initiative are attributed to the SPV that is designated to secure cash receipts and payments (because lenders finance a venture, not an operating firm).
• The assets of the SPV are the only collateral available to lenders together with the cash flow from the initiative (no-recourse financing).

Approval of the financing is primarily dependant on the project’s ability to generate cash flow, to repay the debt contracted, and also pay capital invested at a rate consistent with the degree of risk inherent to the venture concerned. Project finance is the financing of one specific project within an entity that is created with the sole purpose to developing and managing the specific project. Incorporating the new venture in a SPV is the optimal solution for sponsors:

• Limit responsibilities Limit losses
• Avoid negative effect of an increased weighted average cost of capital
• Financial flexibility is maintained intact.
• There is a possibly cheaper cost of funding of new financial resources for the initiative if compared to corporate loans (trade-off between cost saving and deal structuring/risk mitigation costs).
• There is also an avoidance of contamination risk.
• Incorporating the new venture in a SPV is the optimal solution for lenders/creditors:
• There is full control over the project cash flow.
• Monitoring is easier (focus on one initiative).
• A possible tie-up of management behaviour (covenants and restrictions) exists.