Successful project financiers understand the risks involved in project finance and know how to successfully allocate them to the best parties capable of dealing with them.
Full risk mitigation may not be impossible, but understanding what risks are acceptable, and what aren’t is certainly one of the art forms of project finance! Risk mitigation techniques in project finance are one of the reasons why project finance loans can be up to 20 years in tenor – the risks have been largely hedged over the long term. Indeed, at Financial Close a project company can have hundreds of millions of dollars of debt committed to it, with very little in the way of assets. Deal structuring and negotiation allow a brand new SPV to take on these large construction projects.
In the table below, I outline some project finance risks and potential mitigants.
I hope this gives an indication of some of the risks found in a project finance deal – and the art of project finance dealmaking.
Happy financial modelling!