Project finance

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Under project financing ( english project finance ), the structured financing of themselves economically and legally definable mostly refinancing business entity of limited life understood. The project financing thus forms the alternative to classic corporate financing ( English corporate-credit-rating-based-financing ).

General

The funds are therefore neither raised in the classic form of order financing aimed at the creditworthiness of the customer, nor in the form of project-related financing aimed directly at the creditworthiness of the sponsors involved , but made available sui generis depending on the expected project economy .

Project financing typically has the following characteristics:

  1. Cash-flow- related lending ( English cash-flow-related-lending ),
  2. Explicit risk sharing ( english risk sharing ) and
  3. Balance External financing ( English off-balance-sheet financing ).

Cash-flow-related-lending

The high specificity of project-financed projects generally results in a disproportionately low liquidation revenue potential compared to the amount of the acquisition costs. For example, it can be assumed that in the event of the premature termination of a structurally already completed infrastructure project, only very low residual income from the sale of the individual items of property, plant and equipment can be expected. In the case of project financing, the project assets and their potential breakdown values ​​are therefore not in the foreground of the lending decision as security for the repayment of the granted loans , but the lenders primarily orientate themselves on the debt servicing ability of the cash flows expected for the future . In contrast to traditional balance sheet related lending or asset based financing, the project company's assets only play a subordinate role. A major risk for the lender in project financing is the completion risk, because the project can only generate a positive cash flow if it is completed and thus fulfills its intended tasks.

Explicit risk sharing

Risk sharing describes the distribution of project risks between the various project participants. In accordance with the general efficiency principle of risk allocation, the individual project risks should, if possible, be assigned to those involved who can best handle them based on their individual risk-related know-how . Project financing tries to implement this by transferring risks directly associated with a project service to the respective provider of the service and assigning the remaining refinancing risks to equity and debt capital providers as well as third parties in a phase-related manner. Depending on the project-specific risk situation and the willingness of the financier to take risks, the prospectively oriented cash-flow-related lending can be equipped with additional recourse rights of the lender towards the equity providers . The three levels of non-recourse, limited recourse and full recourse financing can be distinguished. While non-recourse financing, which is largely unusual in practice, restricts the lender's recourse to the project sponsors' equity contribution, the limited recourse financing typical of project financing describes the parent company's liability beyond its shareholder contribution , which is limited in terms of time, amount or situation . The extreme form of full recourse financing breaks through the project financing principle of risk sharing due to the full recourse to equity providers and is therefore not assigned to project financing in the actual sense, but to traditional corporate credit rating-based financing, which is based on the creditworthiness of the parent company . In the course of the explicit risk allocation, equity ratios can be achieved that can be classified as unusually low, especially for Anglo-American conditions. The main concern of risk-sharing across individual interests is to establish a financing structure that enables those involved in the project not to be forced to terminate the entire project immediately if risks inherent in the project occur.

Off-balance sheet financing

The establishment of the project company can, with a suitable choice of the participation quotas and the right to have a say, result in the sponsors only having to account for the respective share of the company's equity in accordance with the accounting regulations relevant to them. Since all project loans in this type of capital consolidation, known as the equity method , are only shown in the individual balance sheet of the project company, there is no need for the sponsors in the course of full or proportionate consolidation due to the going concern companies in particular in comparison to the US disproportionately high indebtedness of project companies occurring deterioration of the liabilities side vertical balance sheet structure. Since the participation in a project company only has to be shown at equity in fixed assets , the horizontal and vertical balance sheet ratios are also spared. However, this so-called off-balance-sheet effect can be eliminated due to contingent liabilities from the sponsors' limited recourse that are subject to passivation. The contingent liabilities arising in the context of limited recourse financing must also be noted in the appendix. The term off-balance-sheet financing should therefore not be translated in its literal absoluteness, but should be interpreted as a phenomenon of particularly low effects of equity investments on the project sponsor's balance sheet.

As a result, it should be noted that only the specificity of the financing of an economically and usually legally delimitable, self-refinancing economic entity with a limited lifespan, cash-flow-related lending and risk-sharing are to be regarded as constituent features of project financing. Off-balance-sheet financing only has a differentiating character.

literature

  • Daniel Beckmann: Controlling operator model-based infrastructure projects. A concept from the project management perspective. Shaker, Aachen 2003, ISBN 3-8322-1203-5 ( reports from business administration ), (also: Braunschweig, Techn. Univ., Diss., 2003).
  • Christian Decker: International project finance. Conception and testing. Books on Demand, Norderstedt 2008, ISBN 978-3-8370-4068-5 (At the same time: Bremen, Univ., Diss., 2007: Principles of proper disclosure of the economic situation in international project financing, theoretical examination foundation and operationalization of Section 18 sentence 1 KWG for future-oriented lending decisions. ).
  • Alexander Reuter, Claus Wecker: Project Financing. Possible applications, risk management, contract drafting, accounting treatment. Schäffer-Poeschel, Stuttgart 1999, ISBN 3-7910-1477-3 ( The company series ).
  • Heinrich Uekermann: Risk Policy in Project Financing. Measures and their design. Deutscher Universitäts-Verlag, Wiesbaden 1992, ISBN 3-8244-0174-6 ( DUV. Economics ), (also: Diss. Uni. Münster 1992).