Project and infrastructure finance

Project finance is appropriate where a discrete, contract-backed asset — a power plant, toll road, water facility or similar infrastructure — is to be funded through a dedicated special-purpose vehicle rather than the sponsor's general balance sheet. It suits sponsors seeking limited or non-recourse funding, where lenders' recourse is confined largely to the project's own assets and cash flows rather than the parent company.

It is a poor fit for smaller or less contractually certain ventures, since the diligence and documentation cost of a project finance structure is only proportionate once the transaction reaches a certain scale and the contractual framework is sufficiently robust to support long-tenor, limited-recourse lending.

Repayment comes exclusively from the cash flows the project itself generates, which places the contractual framework at the centre of the analysis: the construction contract, the offtake or revenue agreement, and the operations and maintenance arrangement each allocate specific risks — completion, market and operating risk respectively — to the party best placed to bear them.

Senior debt is typically structured on a fully amortising basis matched to the tenor of the offtake or concession agreement, with a debt service reserve and strict cash-flow waterfall governing distributions to sponsors. Multilateral development banks, export credit agencies and commercial lenders frequently co-invest in larger projects, each bringing different risk appetite, tenor and pricing to the syndicate.

Lenders commission independent technical, legal, insurance and market advisers to review the construction contract, the strength and creditworthiness of the offtaker, and the robustness of the revenue or availability payment mechanism. Contracted, rather than merchant, cash flows are generally required to size senior debt, with any merchant exposure treated conservatively.

The experience of the construction contractor and operator, the enforceability of contracts in the relevant jurisdiction, and the availability of appropriate insurance and, where relevant, political risk cover are all central to whether a project is bankable on a limited-recourse basis, independent of the underlying economics being otherwise attractive.

Pricing for senior project debt is generally quoted as a margin over a reference rate that steps up modestly through the operating period, reflecting the declining risk profile as the project moves from construction into stabilised operation. Multilateral and ECA-supported tranches can offer more favourable indicative pricing and longer tenor than commercial bank debt alone, though they bring additional procedural requirements.

Given the fixed costs of technical, legal and financial diligence, bankable project finance transactions of this kind generally start from around ten million euros or its equivalent; smaller renewable, infrastructure or industrial assets are usually better served by corporate lending or asset-backed structures rather than a full project finance process.

GFG works with sponsors from an early stage to assess whether a project's contractual structure is likely to be bankable, and where gaps exist — an unsigned offtake agreement, for example — advises on what needs to be in place before approaching lenders. GFG then identifies commercial, multilateral and ECA counterparties with an active mandate for the relevant sector and jurisdiction.

Given the diligence involved, project finance transactions typically take three to nine months from mandate to financial close, driven principally by the pace of legal, technical and insurance due diligence rather than credit appetite. GFG's success-based fee is payable on financial close, consistent with its approach across all mandate types.