TABLE OF CONTENTS Non-recourse/limited recourse is one of the key distinguishing factors underlying project finance. Classic long term lending typically depends on cash flows but the facilities ultimate credit rationale resides upon the creditworthiness of the borrower, since the lender will have a claim over the company s assets.
In a project financing, this is rarely the case since the size of the operation may dwarf the size of the participating companies balance sheets. Moreover, the borrowing entity may be a special purpose vehicle with no credit history.
This is why it is useful to distinguish between non-recourse and limited recourse project financings.
Non-recourse project financing Non-recourse project financing means that there is no recourse to the project sponsor s assets for the debts or liabilities of an individual project. Non-recourse financing therefore depends purely on the merits of a project rather than the credit-worthiness of the project sponsor. Credit appraisal therefore resides on the anticipated cash flows of the project, and is independent of the creditworthiness of the project sponsors. In such a scenario, the project sponsor has no direct legal obligation to repay the project debt or make interest payments.
Limited recourse project finance In most project financings, there are limited obligations and responsibilities of the project sponsor; that is, the financing is limited recourse. Security, for example, may not suffice to fully guarantee a project. The main issue here is not that the guarantees offered fully mitigate the project but rather implicate the sponsor s...
