Currency risks due to depreciation or exchange restrictions.Potential for civil wars and domestic unrest.Risk of expropriation, confiscation and nationalization.This is not a comprehensive list, there are many other risks to be considered when evaluating a project financing. Basic Corporate Structure in Project FinanceĮach risk category consists of various risks, which are listed below. It is important to understand some of the key risks mentioned below.
At the same time, if problems arise during the project cycle, such as cost increases or completion delays, then the lenders will not have the contractual right to ask for more equity. In other words, if the capital project faces critical issues that prevent it from generating revenue, then the lenders cannot demand compensation from the Project Sponsors. The Project Sponsors are the companies/parties that own the “Project Company.” Project Finance is a type of structured financing solution used to finance capital intensive projects where lenders have recourse (the legal right to demand compensation or payment) primarily to the revenue stream of the project they are financing, rather than to the Balance Sheet of the Project Sponsors. But before doing that, here is a brief definition of project finance. Given that we are starting a new year, I want to take some time to share what I believe are some of the key risks for lenders (e.g., Banks) when entering into project finance arrangement with borrowers (Project Company). Risk management applied to project financing, project execution and day-to-day operations is a key ingredient to ensure the success of most industrial ventures.