--- title: "Project Finance | Altss Glossary" description: "Project finance is the financing of a single ring-fenced asset through a special-purpose company whose lenders are repaid only, or mainly, from that…" canonical: "https://altss.com/glossary/project-finance" --- Glossary · Strategy # Project Finance Also called: project financing · limited recourse project finance Project finance is the financing of a single ring-fenced asset through a special-purpose company whose lenders are repaid only, or mainly, from that asset's own cash flows and contracts, with limited or no recourse to the sponsors. Publisher: Altss LLCContent modified 2026-10-02 ALTSS-INFRA-007 Instead of a company borrowing against its whole balance sheet, the sponsors set up a new company that owns just one project, such as a wind farm, a toll road or a hospital, and that company borrows. The lenders look to the project's future income and its contracts for repayment. If the project fails, the lenders can take the project but usually cannot pursue the sponsors for the shortfall. ### Formal definition There is no single legal definition. For EU insurers' capital requirements, Solvency II's Delegated Regulation (EU) 2015/35, as amended in 2016 by Delegated Regulation (EU) 2016/467, defined an "infrastructure project entity" as an entity not permitted to perform any function other than owning, financing, developing or operating infrastructure assets, where the primary source of payments to debt providers and equity investors is the income generated by the assets being financed (Article 1(55b)). Delegated Regulation (EU) 2017/1542 replaced that definition with the broader "infrastructure entity": an entity or corporate group that derives the substantial majority of its revenues from owning, financing, developing or operating infrastructure assets. ## Formulas ### Cash flow available for debt service (CFADS) ``` CFADS = revenue − operating costs − taxes paid − maintenance capex ± change in working capital ``` `CFADS_t` cash the project company generates in period t that is available to pay senior debt service `Maintenance capex_t` lifecycle and major maintenance spending, or the funding of the reserve account that pays for it The exact definition, including treatment of reserve account movements and cash from interest income, is set in the financing documents. Compare ratios only on the same definition. ### Period DSCR and sculpted debt service ``` DSCR_t = CFADS_t / DS_t; sculpted debt service DS_t = CFADS_t / target DSCR ``` `DS_t` scheduled senior interest plus principal in period t `DSCR target` the coverage ratio the lenders size to; set per project and per revenue risk Sculpting sets each period's repayment so projected DSCR is constant. Lenders also test a minimum and an average DSCR, and some size on a gearing limit (debt over total project cost) as well; the tighter constraint sets the loan. ### Debt capacity and loan life coverage ratio (LLCR) ``` Debt capacity D_0 = PV of sculpted debt service; LLCR = PV of CFADS over the loan life / debt outstanding ``` `r` discount rate, normally the all-in interest rate on the debt `N` remaining loan life in periods `D_0` senior debt outstanding at the calculation date With repayment sculpted at a constant DSCR and the loan rate used as the discount rate, LLCR equals the DSCR target. The project life coverage ratio (PLCR) uses the same numerator over the whole project or contract life, so the gap between PLCR and LLCR measures the tail. The ratio here discounts CFADS at the end of each period at the loan's all-in rate and makes no adjustment for the DSRA; some agreements add the DSRA balance to the numerator or net it from debt. ## How the structure works The sponsors form a project company, a [special purpose vehicle](https://altss.com/glossary/spv-special-purpose-vehicle) that owns one asset and has no other business. It holds the project's contracts and raises equity from the sponsors and debt from lenders. Typical contracts: - **Revenue contract**: a concession or PPP contract with availability payments, a power purchase agreement, or a take-or-pay offtake. - **Construction contract**: usually fixed-price and date-certain, with liquidated damages for delay. - **Operations and maintenance contract.** - **Direct agreements** giving lenders step-in rights under the key contracts. Lenders take security over the shares, bank accounts and contracts. Cash moves through an account waterfall: revenue pays operating costs, then senior debt service, then reserve accounts such as the debt service reserve account (DSRA), and only then, if coverage tests are met, distributions to equity. ## Non-recourse and limited recourse Non-recourse means lenders can claim only against the project company and its assets. In practice most project finance is limited recourse during construction: sponsors provide completion support, contingent equity or cost-overrun guarantees until the asset is built and passes completion tests. After completion, recourse usually falls away and lenders rely on the project's cash flows and contracts. Non-recourse lending is also common in real estate; what sets project finance apart is debt sized on contracted cash flows, sculpted repayment and a security package built on the project's contracts. ## Sizing the debt Project debt is sized on forecast cash flow available for debt service (CFADS), not on asset value. Lenders set a target [DSCR](https://altss.com/glossary/dscr-debt-service-coverage-ratio) that rises with revenue risk: lower for availability payments from a creditworthy government, higher for user-pays or merchant revenue. Repayment is often sculpted to the cash-flow profile. For energy projects, lenders commonly size on a conservative production case (for example, a P90 output estimate) rather than the central P50 case. The loan normally matures before the revenue contract or concession ends, leaving a tail of contracted cash flow as a cushion. A loan that relies on refinancing before full amortisation (a mini-perm) adds refinancing risk. ## Phases and risks | Phase | Main risks | Usual mitigants | | --- | --- | --- | | Development | Permits, land, financing | Sponsor-funded; not usually lender risk | | Construction | Cost overrun, delay, technology | Fixed-price construction contract, contingencies, sponsor support, delay damages | | Ramp-up | Demand, performance | Reserves, availability-based revenue | | Operations | Opex, availability deductions, counterparty, change in law, refinancing | O&M contract, reserves, hedging, termination compensation clauses | Risk falls sharply at completion, so construction loans are often refinanced into longer, cheaper debt once the asset operates. Operating projects with contracted revenue are a core asset for infrastructure debt funds and insurers. ## Who provides the capital Sponsors are developers, contractors, utilities and [infrastructure](https://altss.com/glossary/infrastructure-investing) equity funds. Construction loans commonly come from banks; insurers, pension funds and infrastructure debt funds hold long-dated operating-phase debt and project bonds; development finance institutions and multilateral lenders are common in emerging markets. The infrastructure financing taxonomy that the Organisation for Economic Co-operation and Development (OECD) prepared for the G20 in 2015 separates project finance from corporate finance in this same sense. In the EU, an insurer's project-finance debt or equity can receive lower Solvency II capital charges than comparable non-qualifying investments if it meets the qualifying infrastructure criteria of Article 164a of Delegated Regulation (EU) 2015/35, which include cash flows that allow all financial obligations to be met under sustained stresses, predictable cash flows, and a regulatory or contractual framework that gives investors a high degree of protection. ## Worked examples ### Illustrative sculpted loan sizing ($ millions) An operating availability-based project forecasts CFADS of 12.0, 12.4, 12.8, 13.2, 13.6, 14.0, 14.4 and 14.8 over the eight years of its proposed loan, inside a longer contract. Lenders size to a 1.30x DSCR and the loan costs 6%. The present value of CFADS at 6% is **$82.45m**, so debt capacity is 82.45 / 1.30 = **$63.43m**, and the loan life coverage ratio (LLCR) at financial close is 82.45 / 63.43 = **1.30x**, equal to the sizing DSCR because the loan is sculpted at a constant ratio. ### Year-one coverage Sculpted debt service in year one is 12.0 / 1.30 = $9.23m ($3.81m interest and $5.42m principal). Coverage is **1.30x**. ### Downside: CFADS 15% below forecast If performance deductions cut year-one CFADS to $10.2m, debt service is still $9.23m and DSCR falls to **1.10x**. Under an illustrative lock-up covenant of 1.15x, cash stays in the project and no distributions are paid to equity that period. ### LLCR if the shortfall persists If CFADS stays 15% below forecast in every year of the loan (10.20, 10.54, 10.88, 11.22, 11.56, 11.90, 12.24 and 12.58), its present value at 6% falls to $70.09m and LLCR on the $63.43m loan falls to **1.10x**, the same as the period DSCR, because repayment was sculpted to the original forecast at a constant ratio. Examples are illustrative; figures are not market data. ## Not the same as - Infrastructure Debt: Infrastructure debt is the wider category. It includes project finance and corporate loans and bonds of companies that own many infrastructure assets. - [Public-Private Partnership (PPP)](https://altss.com/glossary/public-private-partnership): A PPP is a contract between government and a private party. Many PPPs are project-financed, but project finance is equally used for private power, pipelines and telecoms with no public counterparty. - Asset-Based Lending: Asset-based lending advances against a borrowing base of receivables or inventory of an operating company; project finance lends against the future cash flows of one asset. ## Common mistakes - Describing a project as non-recourse when sponsors still guarantee completion or cost overruns. - Comparing DSCRs from two financings without checking that CFADS is defined the same way. - Assuming LLCR always equals DSCR. They match only when repayment is sculpted at a constant ratio and discounted at the loan rate. - Sizing renewable debt on the central (P50) production estimate. - Ignoring the tail: a loan that runs to the end of the offtake contract leaves no contracted cash flow if the project underperforms late in life. ## Edge cases - Portfolio financings of many small assets (for example rooftop solar) are sized on pooled cash flows and look more like asset-backed finance than single-asset project finance. - A period DSCR below 1.0x need not mean default if the DSRA covers the shortfall; persistent shortfalls drain the reserve and trigger default. - Interest-rate swaps on long project loans can carry large break costs if the debt is refinanced or the project is terminated. ## Questions ### What is the difference between DSCR and LLCR? DSCR measures one period: CFADS over debt service due. LLCR measures the whole remaining loan: the present value of CFADS over the loan life divided by debt outstanding. ### Why use project finance instead of corporate debt? Lenders have no recourse to the sponsors' other assets, so once completion support falls away the sponsors' losses are limited to the equity they invested. It also lets sponsors share a large project with partners and lets lenders price the risk of one asset and its contracts. ## External standards | Standard | Relation | Note | | --- | --- | --- | | Solvency II Delegated Regulation (EU) 2015/35 (Art 1(55b) infrastructure entity (replacing the 2016 'infrastructure project entity' definition, Delegated Regulation (EU) 2017/1542); Art 164a qualifying infrastructure investments) | related | The 2016 project entity definition captured the ring-fenced, cash-flow-repaid structure; the current infrastructure entity definition is broader, and qualification adds further criteria. | ## Sources - [Commission Delegated Regulation (EU) 2016/467 amending Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings](http://publications.europa.eu/resource/cellar/4d554f44-f7d1-11e5-b1f9-01aa75ed71a1.0006.03/DOC_1). Official Journal of the EU, L 85, 1.4.2016, p. 6, Adopted 30 September 2015; published OJ L 85 of 1 April 2016; in force the day after publication (Art 3). Status: In force as part of Delegated Regulation (EU) 2015/35, which has been amended since (checked 2026-10-01). Art. 1(1) inserting Art. 1(55b); Art. 1(4)-(6) (Art. 164a; qualifying infrastructure equities); recitals 15 and 17 — supports: 2016 definition of infrastructure project entity; qualifying infrastructure category with reduced equity and spread risk charges - [Infrastructure Financing Instruments and Incentives (Mapping of Instruments and Incentives for Infrastructure Financing: A Taxonomy)](https://www.ppiaf.org/documents/4660). OECD (R. Della Croce et al.), OECD, September 2015, report to G20. Status: Published (checked 2026-10-01). Table 1, pp. 11-12 — supports: Project vs corporate finance; debt, mezzanine and equity instruments; direct vs fund investment - [Public-Private Partnerships Reference Guide, Version 3](https://ppp.worldbank.org/sites/default/files/2024-08/PPP%20Reference%20Guide%20Version%203.pdf). World Bank Group with multilateral partners, World Bank, Version 3, 2017. Status: Current edition; online version maintained on the PPP Knowledge Lab (checked 2026-10-01). Payment mechanisms — supports: Government-pays PPPs with availability payments as a project-finance revenue source - [Commission Delegated Regulation (EU) 2017/1542 amending Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates)](https://eur-lex.europa.eu/eli/reg_del/2017/1542/oj/eng). European Commission (Official Journal of the EU), Adopted 8 June 2017; CELEX 32017R1542. Status: in force (checked 2026-10-02). Art. 1(1) (replacing Art. 1(55b)); Art. 1(2) (replacing Art. 164a(1)) — supports: Infrastructure entity definition and current qualifying infrastructure criteria ## Related terms 3 terms - [Debt Service Coverage Ratio (DSCR)](https://altss.com/glossary/dscr-debt-service-coverage-ratio) - [Special Purpose Vehicle (SPV)](https://altss.com/glossary/spv-special-purpose-vehicle) - [Public-Private Partnership (PPP)](https://altss.com/glossary/public-private-partnership) ## Referenced by 2 terms - [Core Infrastructure](https://altss.com/glossary/core-infrastructure) - [Infrastructure Investing](https://altss.com/glossary/infrastructure-investing) ## Concept record Concept ID ALTSS-INFRA-007 Classification Strategy · Security / instrument Topics Infrastructure · Private credit Version 2.0.0 Last reviewed 2026-10-02 Structured data [JSON](https://altss.com/reference/concepts/project-finance.json) Source check Regulatory statements checked against the cited primary sources on 2026-10-02 ([how](https://altss.com/methodology)). General information, not advice. ## Canonical URL https://altss.com/glossary/project-finance