What Is a Project Finance Transaction?

What Is a Project Finance Transaction | Definition, Parties, Contracts, Steps, Risks, Closing

What Is a Project Finance Transaction?

A project finance transaction raises capital for a single asset or a defined portfolio through a special-purpose company. Lenders are repaid from the project’s own cash flow, not from the broader corporate balance sheet. Once the asset is built and meets tests, debt is usually limited recourse or non recourse to the sponsors. The appeal is simple: higher leverage against predictable cash flow with risks allocated by contract.

Plain definition

A project finance transaction is the funding of a stand-alone project through a ring-fenced special-purpose vehicle (SPV) where repayment comes from that SPV’s revenues. Security is granted over the SPV’s assets and contracts. Cash moves through a controlled waterfall to pay taxes, operations, debt service, reserves, and then distributions.

Key features

Ring-fenced structure

An SPV owns the asset and signs all major contracts. This isolates risks from the rest of the sponsor group.

Cash flow based lending

Debt sizing and covenants depend on projected cash flow, not only on sponsor balance sheets.

Contracted risk allocation

Construction, operations, supply, and offtake risks are pushed to strong counterparties through clear contracts.

Who is involved

Sponsors and the SPV

Equity investors form the SPV, lead development, and provide completion support until agreed tests are met.

Lenders and support agencies

Commercial banks, private credit funds, export credit agencies, and development finance institutions provide debt and guarantees.

Counterparties and advisors

EPC contractor, operator, offtaker or concession grantor, fuel or input supplier, landholder, insurers, hedging bank, legal and technical advisors, account bank, and security trustee.

Contracts that make the deal bankable

Project-side contracts
  • Construction contract (EPC) with liquidated damages and performance tests
  • Operations and maintenance (O&M) contract with availability targets
  • Offtake, power purchase agreement, tolling, or concession agreement
  • Fuel or input supply and logistics agreements if relevant
  • Land lease or title, permits, and insurance policies
Finance-side documents
  • Common terms agreement and individual facility agreements
  • Security documents over assets, shares, and accounts
  • Account bank and cash waterfall agreements
  • Intercreditor agreement for senior, mezzanine, and hedge providers
  • Direct agreements with the EPC, O&M, offtaker, and key suppliers

Capital stack, covenants, and reserves

Debt and equity

Senior term debt sized to cash flow, often with mezzanine or holding company debt if there is a gap. Equity is drawn by milestones.

Credit tests

Debt Service Coverage Ratio (DSCR) by period and Loan Life Coverage Ratio (LLCR) guide debt sizing and distributions.

Reserves and controls

Debt service reserve account, maintenance reserves, hedging for rates or commodities, and clear distribution lock-up triggers.

Lifecycle of a project finance transaction

  1. Development. Sponsors secure site, permits, anchor contracts, and initial studies. SPV is formed.
  2. Indicative terms. Lenders provide pricing ranges and leverage markers. Advisors scope diligence and timeline.
  3. Diligence and approvals. Legal, technical, insurance, ESG, model audit, and credit committees. Term sheets are refined.
  4. Documentation. Finance documents, security, intercreditor, direct agreements, and account structure are negotiated.
  5. Financial close. Conditions precedent are satisfied and funds are available for drawdown against a budget and schedule.
  6. Construction. Draws follow an agreed plan. Tests and certificates confirm progress. Contingency and LDs manage slippage.
  7. Completion. Performance tests are passed. Completion support from sponsors falls away if tests are met.
  8. Operations. Cash waterfall runs each period. Distributions occur when tests and ratios are satisfied.
  9. Refinancing or term out. Once stable, the project may refinance to longer tenor or lower margin.

Major risks and how they are managed

Construction and performance
  • Fixed price EPC with liquidated damages and performance guarantees
  • Contingency budget and tested schedule
  • Insurance and step-in rights via direct agreements
Revenue, input, and market
  • Long term offtake or tariff regime with clear indexation
  • Fuel or input supply contracts with back-to-back terms
  • Hedging for interest rates and commodities where appropriate

Where project finance is used

Power and energy

Solar, wind, gas, storage, pipelines, and LNG with long term contracts or regulated revenues.

Transport and social

Toll roads, airports, rail, hospitals, schools under concessions or availability payments.

Digital and data

Data centers, fiber networks, and towers with long term leases and anchor tenants.

Industrial assets

Processing plants, water, and waste with take-or-pay or minimum volume commitments.

How this differs from a corporate loan

In a corporate loan, lenders look to the company’s full business for repayment and use broad covenants and security. In a project financing, lenders rely on the SPV’s cash flow and contracts. Controls are tighter, documentation is heavier, and leverage can be higher when revenues are stable.

Frequently asked questions

Is project finance always non recourse after completion?

Often yes, once tests are met. During construction, sponsors usually provide completion support that can fall away when the asset performs.

What ratios do lenders rely on?

Debt Service Coverage Ratio by period and Loan Life Coverage Ratio for the whole loan. These show ability to pay and overall cushion.

Why does it take longer to close?

Because lenders examine technical design, contracts, permits, insurance, and the model in detail. The payoff is stronger certainty after close.

Can a project later refinance on better terms?

Yes. After stable operations, many projects refinance to longer tenor or lower margin, or add a holdco layer for distributions or growth.

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Financely acts as advisor and arranger on a best efforts basis. We are not a bank. All transactions are subject to KYC and AML, sanctions screening, credit approvals, legal documentation, and third party diligence. Nothing here is a commitment to lend or an offer of securities. Terms vary by bank names, jurisdictions, and contract quality.

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