Editor’s Note: “From a Legal Perspective”
appears regularly in District Energy
magazine to address legal issues of current
importance to the district energy industry.
It is intended for educational purposes only
and does not constitute legal advice.
Enormous capital is typically required to construct renew- able energy facilities, which are usually funded through a
combination of debt and equity. In a traditional funding model, the owner would
supplement its own equity contributions
with loans to pay for the construction
and equipping of the facility. In those
situations, the owner would usually be
responsible for assuring full repayment
of the loan, and the lender would have
recourse against the owner and all its
assets for the amount due.
A useful alternative financing method is project finance, where the lenders
agree to look solely (or at least primarily)
to the cash flow from the project for the
repayment of the loan, rather than to the
sponsors and their assets. Project finance
has many advantages in addition to this
limited recourse, and it could be an appropriate source of capital for a broad
range of renewable energy projects, including solar, wind, geothermal, biomass
and other kinds of operations.
The Benefits of Project Finance
for Renewable Energy Facilities
Richard Lieberman, Chair, Corporate, Securities and Finance Department, Jennings, Strouss & Salmon PLC;
and Andrea Sarmentero Garzón, Attorney, Jennings, Strouss & Salmon PLC
In a typical project finance arrange-
ment, a pool of lenders will agree to fund
the majority of the construction costs on
a first-priority, secured basis. This senior
lending consortium will require that the
remainder of the project be funded
through equity and, if necessary, other ju-
nior debt facilities, such as mezzanine or
longer-term subordinated debt. The rights
of junior lenders and the equity owners
are generally restricted while the senior
lending facility remains outstanding.
Equity can be contributed by the
sponsors, outside investors or sometimes
purchasers of the anticipated tax credits or
other tax benefits to be produced by the
project. The equity owners may consist, for
example, of a single entity, a consortium of
utilities or a group of investors.
The equity and debt capital are
contributed to the project company,
whose sole purpose is the development,
construction and operation of the project.
The project company is structured as
an independent company so as to be
“bankruptcy-remote,” despite its potential affiliation with one or more of the
In addition to the capital required to
develop and construct the project, financing is usually needed to support the general working capital needs of the project
once it becomes operational, so the credit
BASIC CHARACTERISTICS OF PROJECT
The basic characteristics of project
financing can be summarized as follows:
•;The parties create a single-purpose
company to develop, construct and
own the project (i.e., the project company), from which generated cash flows
will be used to repay the debt.
•;The financing is linked to the operating
life of the project, so the debt must be
repaid by the end of the project’s life.
•;The lenders typically permit a high ratio
of debt to equity (project finance debt
may cover 70 percent to 90 percent of
the capital cost of a project).
•;The project company’s physical assets
are likely to be worth less than the debt
if they are sold off after a default on
•;This is “nonrecourse” or “
limited-recourse” finance, meaning investors in
the project company do not guarantee
repayment of any or all of the project
finance debt, respectively.
ELEMENTS OF A PROJECT FINANCE
There are two basic elements of a
project finance structure: ( 1) equity,
provided by investors in the project, and
( 2) debt, provided by one or more groups
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