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Project Finance Guide
In project finance, the borrower is normally a special purpose vehicle (SPV) that owns a single asset, such as a solar plant, a wind farm, a toll road, a processing facility or a data centre. If you are new to that structure, see why SPVs are used in project finance transactions.
The sponsors fund part of the project cost themselves and senior lenders fund the rest. The sponsor contribution can take two legal forms:
Many projects use a mix of the two. A small amount of share capital gives the sponsor ownership and control, and the larger part of the sponsor contribution is injected as a shareholder loan. Some markets also use related forms, such as subordinated loan notes or preferred equity certificates, but the logic is the same: sponsor money that sits behind the senior debt.
Sponsors choose shareholder loans for practical reasons, not because they make the project less risky for themselves. The main drivers are:
Senior lenders care about one thing: that sponsor money is genuinely at risk ahead of theirs. A shareholder loan is acceptable to lenders if it behaves like equity in every way that matters to them. In practice that means the following.
The shareholder loan is subordinated to the senior debt through a subordination deed or an intercreditor agreement. Lenders typically want the loan to be deeply subordinated: no payments of interest or principal unless the senior debt is current and the distribution tests are met, no acceleration or enforcement by the sponsor while senior debt is outstanding, and turnover of any amounts received in breach of those rules.
The sponsor's rights under the shareholder loan are usually assigned or pledged to the senior lenders, together with the shares in the SPV. On enforcement, lenders can take over both the shares and the shareholder loan and sell them together.
Lenders size the senior debt against a required gearing, for example a stated maximum debt to equity ratio. A fully subordinated shareholder loan normally counts as equity for that calculation. A loan with any feature that gives it a claim ahead of, or alongside, the senior debt will not.
The timing and amount of the sponsor contribution is set out in an equity contribution agreement. Lenders may require equity to go in first, or pro rata with debt drawdowns. If the sponsor contributes later, lenders usually ask for the unfunded commitment to be backed by a letter of credit or similar credit support from an acceptable bank. For more on credit support tools, see credit enhancement and risk sharing in renewable energy project finance.
Terms vary by deal, but lender friendly shareholder loans commonly include:
Both instruments are sponsor money at risk behind the senior debt. The differences are in ranking among investors, how returns are paid, how tax applies and how quickly cash can come back to the sponsor. The table summarises the main points.
| Feature | Shareholder equity (share capital) | Shareholder loan |
|---|---|---|
| Ranking and subordination | Ranks last, behind all creditors. | Behind senior debt under the subordination deed, but ahead of share capital. |
| Return mechanism | Dividends, at the board's discretion. | Interest and principal repayment under a loan agreement. |
| Distribution lock-up and restricted payment tests | Dividends are restricted payments and must pass the lock-up tests. | Interest and principal are also restricted payments and must pass the same tests. |
| Legal limits on paying out | Usually requires distributable reserves under company law. | Repayment generally does not depend on accounting profits. |
| Tax treatment of returns | Paid from post tax profits; no deduction for the SPV. | Interest may be deductible, subject to thin capitalisation, interest limitation and transfer pricing rules. |
| Withholding tax | Dividend withholding tax may apply, depending on the jurisdiction and treaties. | Interest withholding tax may apply, often at a different rate; treaty relief may be available. |
| Ability to repatriate cash earlier | Limited where early accounting losses block dividends. | Generally easier, since principal can be repaid once the tests are met. |
| Lender view | Counted as equity. | Counted as equity for gearing if fully subordinated and pledged. |
| Insolvency | Recovers only what remains after all creditors. | A subordinated creditor claim; recovers after senior debt but before shareholders. |
| Flexibility and conversion | Reducing share capital is usually formal and slow. | Can be repaid, refinanced, transferred or converted into shares. |
| Accounting | Shown in equity on the SPV balance sheet. | Usually shown as a liability, unless its terms require equity classification under the applicable standards. |
In practice, the choice is rarely one or the other. A typical structure has a minimum level of share capital and a shareholder loan for the balance of the sponsor contribution. The split depends on local tax rules, company law requirements on capital, what the senior lenders will accept and how the sponsor's own investors want to be paid.
A shareholder loan is a loan from a project sponsor to its own project company. It funds part of the sponsor equity contribution, ranks behind the senior debt and is repaid from cash flow only after senior lenders are paid and distribution tests are met.
Usually yes, if the loan is fully subordinated to the senior debt, unsecured, has no events of default and its rights are pledged to the senior lenders. Each lender sets its own conditions in the term sheet.
It can be, depending on the jurisdiction. Deductibility is commonly limited by thin capitalisation, interest limitation and transfer pricing rules, and withholding tax may apply on payment. Local tax advice is needed for each structure.
Equity is share capital that earns dividends and ranks last. A shareholder loan earns interest, ranks ahead of share capital but behind senior debt, and is usually easier to repay early. Lenders often treat both as equity for gearing.
Yes, but only through the distribution waterfall. Payments are allowed when the senior debt is current, the DSCR lock-up test is met and no default is continuing.
PIK, or payment in kind, means interest that is added to the loan principal instead of being paid in cash. It lets interest accrue without creating a default when cash is locked up.
Financely is a fee-based arranger and advisor, not a lender. We help sponsors structure the capital stack, including the split between share capital and shareholder loans, prepare the lender materials and approach senior lenders. See our project finance debt and capital advisory services, our project finance advisory page and the project finance underwriting memo template for what lenders expect in a credit file.
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Your financing request goes straight to the principal. You receive a written diagnosis, the proposed structure and a one-off retainer before any work starts.
Recent mandates include a USD 150m revolving credit facility and a USD 12m acquisition closed in 21 days. We are an advisory and arranging firm, not a lender, and you close directly with the lender.
Financely is an advisory and arranging firm, not a lender or broker-dealer. All financing is subject to KYC, AML, due diligence and lender credit approval. No outcome or timeline is guaranteed.