From Principles of Project Finance


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.

13.1.1 Level of Debt

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 reasonable 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 comparatively 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.

The certainty of the cash flow affects the level of cash flow cover (ADSCRs, LLCR, PLCR) that...

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