Project Finance Glossary

Acceleration

Acceleration of a project finance loan or loans is a remedy available to project lenders in the event of a default on a project finance loan. Upon the occurrence of any event of default, and in addition to any and all other remedies under any security for or guarantee of the project loans, together with any and all remedies at law or in equity, at the option of the project lender the entire outstanding principal balance of the project loan and all accrued and unpaid interest thereon and all other amounts payable by the project company to the project lender of every nature and type shall be immediately due and payable. All accelerated amounts bear interest at the default rate set forth in the project Loan Agreement from the date of the default until fully paid.

Note For Project Sponsors and Stakeholders
Acceleration of a project finance loan, whether completed or just noticed, may actually trigger a default under any subordinate or mezzanine financing. For additional information about acceleration, see Project Finance Documents › Project Loan Agreement › Intercreditor Agreement.

Advance Payments

Advance payments are an amount paid by a project company to the construction contractor who has been engaged to build the project under an EPC Contract or other turnkey construction contract. Generally paid at or around the date of commencement of construction in order to offset preliminary costs that have been paid or are being paid by the contractor, Advance Payments can include costs incurred by the contractor for the purchase of equipment and organizational expenses. Advance Payments are also sometimes referred to as a construction deposit.

All-in Cost

All-in cost is a term used to describe the total costs involved in a project. The scope of costs involved within that all-in cost will vary, depending on the nature of the deal. Understanding this total cost makes it possible to determine if the project is likely to produce the desired result, either immediately or at some point in the future.

Many different types of projects involve the need to assess the all-in cost of the deal. Take the case of a real estate development project. The all-in cost includes the cost of purchasing the land, the cost to entitle the land, architects and engineering fees, site work and development costs, vertical construction costs, interest and other costs of financing, soft costs, and other professional fees.

Amortization

Amortization is the reduction of the capital balance or up-front (capitalized) expenses over time to reflect life-cycle depreciation and obsolescence, often an equal amount per annum. Sometimes describes repayments over time, in a series of installments. See also depreciation.

Angel Capital

Angel capital is capital invested in a start-up venture or small business expansion by an angel investor. Angel investors are typically individuals, partnerships or investment groups who consciously seek higher rates of return than is available in more traditional investments. An angel investor typically seeks returns on investment of 25 percent or more per year.

Angel capital is an equity investment where the angel investor provides funding in exchange for taking an equity position in the company. Equity financing is normally used by non-established businesses that do not have sufficient cash flow or collateral with which to secure business loans from financial institutions.

Annuity

Repayment of debt where the sum of principal and interest is equal for each period; also a term used in India for availability payments.

Appraisal

An estimate of the value of property made by a qualified professional called an “appraiser”. Based on an appraiser’s knowledge experience and analysis of the property.

Appraised Value

An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. For senior housing properties, there are three approaches to determining the appraised value: the cost approach, sales comparison approach, and income capitalization approach.

Arrangement Fee

The fee paid to an arranger of financing for its work in relation to a transaction.

Arranger

The senior tier of a syndication. Implies the entity that agreed and negotiated the project finance structure. Also refers to the bank/underwriter responsible for originating and entitled to syndicate the loan/bond issue. The arranger may not necessarily also be the agent and may not even participate in the transaction.

Availability Payment

Where the contracting agency pays the project company for the services rendered (different from a user fee).

Base Rate

The Base Rate is the rate of interest used by lenders as a baseline index which is adjusted either upward or downward pursuant to the terms of the loan. The two most widely used Base Rates in the world are the Wall Street Journal Prime Rate of Interest which is published every day in the Wall Street Journal and LIBOR which is the London Interbank Offer Rate. With either of these interest rates as an index, lenders add additional basis points as an adjustment to either increase their margin or simply to compensate for perceived risk.

LIBOR is more stable than WSJ Prime and is preferred by most sophisticated lenders. The US Discount Rate, which is the interest rate that US banks charge each other for overnight borrowing, is occasionally used as an index rate but is far less common than the other two. In the vernacular, common interest rate terms look like LIBOR + 275 BP, which is LIBOR plus 2.75%, or Prime +1 which is WSJ Prime Rate plus 1%.

Basis Point

Basis points are an expression of interest rates where 100 basis points is one percent. The term Basis Points is used almost exclusively by bankers to make themselves appear smarter than everyone else. Where bankers say one hundred basis points the rest of us say 1%. In project finance, the interest rate charged by the lender to the project is almost always expressed as a Base Rate plus Basis Points, ie LIBOR + 350 basis points. LIBOR is presently 2.40% so this example equates to an interest rate of 5.90%.

Bid Bond

A bond of a fixed amount, usually one percent to three percent of the tender contract price, deposited by bidders with the tendering authority at the time of submission of their bids as a guarantee that the bidder will enter into a contract and achieve financial close in conformity with the tender. The bid bond is generally returned to the successful bidder the contract becomes effective or on financial close. Also known as a tender bond.

Bilateral Agencies

An agency of one country, either public or private, which funds development in other countries. See also export credit agencies; multilateral lending agencies.

Bond

The paper evidence of a legal promise by the issuer to pay the investor (owner or holder of the bond) on the declared terms. Bonds are usually negotiable and customarily long-term, generally between 5 to 25 years. Short-term bonds are usually referred to as notes. See also: Bid bond; Maintenance or retention bond; Performance bond; Straight debt.

Break Clause

A clause giving a party the right to terminate the contract at a particular point, often called the “break point”.

Bridge Financing

A form of short-term or intermediate term interim financing designed to bridge a gap in financing, usually before long-term financing becomes effective and put in place.

Bullet

A one-time repayment, often after little to no amortization of the loan balance. Also referred to as a balloon payment.

Buy-back

A promise to repurchase unsold production. Alternatively, a promise to repay a financial obligation.

Buyer Credit

Financing provided to a buyer to pay for the supply of goods or services, usually by an exporting country or the supplier company.

C C C

Call Option

A contract sold for a price that gives the holder the right to buy from the writer of the option, over a specified period, a specified property or amount of securities at a specified price. Also known as a “call”. For example, in a bond or loan, the call option may give the borrower a refinancing option if interest rates fall below the call option interest rate. The borrower will pay a higher coupon for this right.

Capital Appreciation

The increase in the value of an asset over time.

Capital Costs

Costs of financing construction and equipment. Capital costs are usually fixed, one-off expenses.

Capital Expenditure

Long-term expenditure on fixed assets such as land, buildings, plant and equipment.

Capitalized Interest

Accrued interest (and margin) which is not paid but added (“rolled up”) to the principal amount lent at the end of an interest period. See grace period.

Clawback

The ability (e.g. on the part of the grantor) to recover prior project cash flow that may have been distributed or paid as dividends or other form of payout to the project sponsors.

Collar

A combination of a ceiling and a floor, for example to an interest or foreign exchange rate, structured through swaps, options, hedging or by agreement. Also known as a tunnel.

Collateral

Assets pledged as security under a loan or other financing instrument, to assure repayment.

Commercial Close

In a project financing, the commercial close is the point at which the commercial documentation has been executed but before conditions precedent have been satisfied or waived. The commercial close occurs before the financial close.

Commercial Risk

Risk due to uncertainty about investment outlays, operating cash flows, supply, demand and asset values. Also known as business risk.

Commissioning

The testing and inspection of the completed works to verify that the works are ready for commercial operation.

Commitment Fee

Any fee paid by a potential borrower to a lender for the lender’s promise to lend money at a specified rate and within a given time. A per annum fee applied to the portion of the unused financing (the amount not yet drawn down) until the end of the availability period.

Completion Risk

The risk that a project will not be able to pass its completion test within the time for completion.

Completion Tests

Tests of the project’s ability to satisfy the contract requirements, perform to a specified minimum standard and generate the expected cash flows.

Compound Interest

Interest resulting from the periodic addition of simple interest to principal, the new base thus established being the principal for the computation of interest for the following period.

Concession

The right granted by the host government for a private company to undertake an otherwise public sector project and operate that project over a period of time.

Concession Agreement

Concession Agreements, which are also known as Concession Deeds, are project finance documents that are created by and between the project company and the public entity that has contracting and approval authority over the project. Concession Agreements concede the use of a government asset, such as a plot of land, road or bridge to the project company for a specified period according to specified terms.

Concession Agreements are found in most projects that involve a government or sovereign authority, such as infrastructure projects, and are always executed by a national, regional or municipal government. Learn more about the Concession Agreements in project finance documents.

Concessional Finance

Debt provided on a subsidised basis, where the borrower (usually a sovereign entity) would not be able to access debt at such a low cost of money on the financial markets. The subsidised cost is generally provided to encourage specific activities or support certain borrowers. E.g. the World Bank through IDA provides concessional financing to the poorest countries.

Conditions Precedent

Conditions which must be satisfied before a right or obligation accrues. The matters which have to be dealt with before a borrower will be allowed to borrow under a facility agreement. These will be listed in the agreement.

Consortium

Two or more parties acting together as a partnership or joint venture.

Contingency

An additional amount/percentage set aside against a cash flow item, e.g. capital expenditure. For liabilities, those that do not appear on the balance sheet until they crystallise, e.g. guarantees, supports and dispute settlements.

Contingent Liability

A liability which is uncertain as to its crystallization, e.g. a guarantee or a contingent debt, either in amount and/or timing.

Convertible Currency

A currency which can be freely exchanged into foreign currency or gold without government central bank restrictions or authorisation.

Cost of Debt

Yield to maturity on debt; frequently after tax, in which event it is one minus the tax rate times the yield to maturity.

Counterparty

An adverse party usually in a swap or contract, and includes intermediaries.

Country Risk

Risk specific to a particular country, including political risk and economic risk. See also sovereign risk.

Credit Rating Agency

(or rating agency) A private agency that assesses credit risk of sovereign entities, companies or investments, such as Standard & Poors, Moody’s and Fitch. The agency applies a letter grade to indicate credit risk. Lenders and investors use the rating as an indication of the relative riskiness of a loan or investment.

Credit Risk

The risk that a counterparty to a financial transaction will fail to perform according to the terms and conditions of the contract (default), either because of bankruptcy or any other reason, thus causing the asset holder to suffer a financial loss. Sometimes known as default risk.

Creditworthy

An entity which is “creditworthy” is deemed to have a low risk of default on a debt obligation.

Cross-collateral

A pool of collateral of two or more project sponsors, from which the sponsors agree to allow recourse to each other’s collateral.

Cross-Default

An event of default triggered by a default in the payment of, or the actual or potential acceleration of the repayment of, other indebtedness of the same borrower or group.

Cure

Make good a default. See also defects liability.

Currency Basket

The situation in which a selection of currencies (the basket) is combined to create a common unit. In such cases, the value of each currency is usually weighted according to various economic criteria, such as the foreign component of a country’s total trade, its gross national product and its importance in world trade.

Currency Option

A currency option entitles the holder to buy or sell an agreed amount of foreign currency at an agreed price until or on an agreed date.

Currency Risk

The risk associated with changes in the exchange rate for a currency. See also transfer risk.

Currency Swap

A swap in which the parties sell currencies to each other subject to an agreement to repurchase the same currency in the same amount, at the same exchange rate, and at a fixed date in the future. The exchange ensures that neither party is subject to currency risk because exchange rates are predetermined.

D D D

Debt Rescheduling

Adjusting the tenor, interest rate or other terms and conditions of a debt agreement.

Default Interest

A higher interest rate payable after default.

Default Risk

The risk that a counterparty to a financial transaction will fail to perform according to the terms and conditions of the contract (default), either because of bankruptcy or any other reason, thus causing the asset holder to suffer a financial loss.

Defects Liability

The construction contractor’s obligation to cure defects which may arise after completion.

Defects Liability Period

The period during which the construction contractor is liable for defects after completion.

Deficiency Agreement

The situation in which cash flow, working capital or revenues are below agreed levels or are insufficient to meet debt service; a deficiency or make-up agreement provides the shortfall to be met by the sponsor or another party, sometimes to a cumulative limit.

Demand Line of Credit

A bank line of credit that enables a customer to borrow on a daily or an on-demand basis.

Despatch Instructions

The instructions given to the operator by the bulk offtake purchaser as to how much output is required. These instructions will often include specific requirements for offtake and how the operator is to fulfil these requirements.

Devaluation

A formal government action which has the effect of decreasing the value of its own national currency by reducing the equivalent value in gold, special drawing rights, US dollars or other currencies. However, devaluation is only possible where fixed exchange rates exist.

Direct Agreement

An agreement made in parallel with one of the main project documents, often with the lenders or the contracting agency. Step-in rights and other lender rights are often reinforced or established through direct agreements between the lenders and the project participants.

Drawdown

The obtaining by the borrower of some of the funds available under a credit facility.

E E E

Environmental Impact Assessment

An assessment of the potential impact of a project on the environment that results in an environmental impact statement.

Environmental Impact Statement

A statement of the potential impact of a project on the environment. The result of an environmental impact assessment, which may have been subject to public comment.

Environmental Risk

The economic or administrative consequences of slow or catastrophic environmental pollution.

EPC Contract

Engineering, Procurement and Construction Contract or EPC Contract is a type of construction contract that establishes a contractual relationship between a project company as owner and an EPC contractor as the contractor to provide turnkey construction services that encompass project design, engineering, procurement and construction of the project. EPC Contracts are very important Project Finance Documents that are used in more than 70% of projects that are funded via project finance. See also Project Delivery Methods

We offer extensive, in-depth content about EPC Contracts because construction is part of every project and Engineering, Procurement and Construction Contracts play a significant role in a great many project financings.

Equity Kicker

A share of ownership interest in a company, project or property, or a potential ownership interest in a company, project or property, in consideration for making a loan. The kicker may take the form of stock, stock warrants, purchase options, a percentage of profits or a percentage of ultimate ownership.

Escrow

A deed that has been signed and sealed but is delivered on the condition that it will not become operative until some stated event happens. It will become effective as soon as that event occurs and it cannot be revoked in the meantime. Banks often hold escrow accounts, in which funds accumulate to pay taxes, insurance on mortgaged property, etc.

Event of Default

One of a list of events which would entitle the lenders, under the terms of the relevant credit facility or debt instrument, to cancel the facility and/or declare all amounts owing by the debtor to be immediately due and payable. Events of default typically include non-payment of amounts owing to the lenders, breach of covenant, cross-default, insolvency and material adverse change. See also default.

Exchange Controls

Restrictions that are applied by a country’s monetary authority, or central bank, to limit the convertibility of the local currency into other specific foreign currencies.

Export Credit Agencies

An agency established by a country to finance its national goods, investment and services. They often offer political risk insurance. Also known as a trade finance agency. See also bilateral agencies; multilateral lending agencies.

Expropriation

The taking over by the state of a company or project, with compensation usually being paid. Creeping expropriation occurs when a government gradually takes over an asset by taxation, regulation, access or change in law.

F F F

Facility Fee

An annual percentage fee payable to a bank providing a credit facility on the full amount of the facility, whether or not utilised. See also front-end fee.

Feasibility Study

A detailed assessment of the parameters of a PPP project used to prepare a project for transaction development. See also full business case.

Financial Close

In a financing, the point at which the documentation has been executed and conditions precedent have been satisfied or waived. Drawdowns become permissible after this point.

Financial Internal Rate of Return

The discount rate that equates the present value of a future stream of payments to the initial investment.

Fiscal Risk

Risk borne by the Government (by the fiscal position of the country) due to liabilities associated with PPP transactions.

Fixed Rate

An interest rate that is fixed (calculated as a constant specified percentage) for a defined period.

Fixed Rate Loan

A loan for which the rate paid by the borrower is fixed for the life of the loan.

Floating Charge

A form of security taken by a creditor over the whole or substantially the whole of a company’s assets. The company can continue to use the assets in its business until an event of default occurs and the charge crystallises. The holder of the floating charge can then generally appoint an administrative receiver. See also featherweight floating charge; fixed charge.

Floating Currency

A currency whose rate of exchange (exchange rate) is allowed to fluctuate according to the forces of supply and demand. All currencies are subject to some degree of central bank intervention to soften the effects of market forces.

Floating Interest Rate

An interest rate that fluctuates during the term of a loan in accordance with some external index or a set formula, usually as a margin or spread over a specified rate. See also interest rate.

Force Majeure

Events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations.

Foreign Exchange Risk

The effect on project cash flow or debt service of a movement in the FX rate for revenue, costs or debt service.

Forex

(FX) Foreign exchange.

Forward Contract

An agreement to exchange currency or interest obligations in the future. For tradable commodities or securities, an agreement to buy or sell at a future date. See also futures contract.

Forward Market

A market in which participants agree to trade some commodity, security or foreign exchange at a fixed price at some future date. Unlike futures and options, trading in forward markets does not occur on organised exchanges but through the forex traders of financial institutions. Forward currency contracts are not transferable instruments and settlement is usually expected to be through actual delivery of currencies. See also futures market.

Forward Rate

The rate at which forward transactions of some specific maturity are being made; e.g. the US dollar price at which Euros can be bought for delivery three months hence.

Front-end Fee

A fee, calculated as a percentage of the principal value of an issue of securities, which is payable once at issue (frontend), as opposed to a percentage fee payable each year. See also facility fee.

Future Value

The value of an initial investment after a specified period at a certain rate of interest (interest rate).

G G G

Global Competitiveness Index

The Global Competitiveness Index (GCI) is a comprehensive tool that measures the microeconomic and macroeconomic foundations of national competitiveness across 12 pillars, including infrastructure. It is derived from the Executive Opinion Survey, the longest-running and most extensive survey of its kind, which captures the opinions of business leaders around the world on a broad range of topics for which data sources are scarce or, frequently, nonexistent on a global scale. Indicators are on a scale of 1 to 7 with 7 being the most favorable ranking and 1 being the least favorable.

Grace Period

The borrower does not have to pay interest or possibly any debt service, during the grace period, that amount being capitalised. This allows for periods when revenues are insufficient, e.g. during construction. See also capitalised interest.

Grantor

The party which grants a concession, a licence or some other right. See contracting agency.

Greenfield

Often used to refer to a planned facility which must be built from scratch, without existing infrastructure.

Guarantee

An undertaking to fulfil the obligations of a third party (whether or not related) in the event of a default. It may be limited
in time and amount, and may be callable immediately on default or only after the beneficiary has exhausted all other remedies. See
also subrogation.

Guarantor

A party which will guarantee repayment or performance of a covenant.

H H H

Hard Currency

A currency considered by the market to be likely to maintain its value against other currencies over a period and not likely to be eroded by inflation. Hard currencies are usually freely convertible. See also soft currency.

Hedge

A method whereby currency (the risk of possible loss due to currency fluctuations), interest rate, commodity, or other exposure is covered or offset for a fixed period of time. This is accomplished by taking a position in futures equal and opposite to an existing or anticipated position, or by shorting a security similar to one in which a long position has been established. For example, a manufacturer may contract to sell a large quantity of a product for delivery over the next six months. If the product depends on a raw material that fluctuates in price, and if the manufacturer does not have sufficient raw material in stock, an open position will result. This open position can be hedged by buying the raw material required on a futures contract; if it has to be paid for in a foreign currency the manufacturer’s currency needs can be hedged by buying that foreign currency forward or on an option. See also swap.

Hurdle Rate

Minimum acceptable rate of return on investment.

I I I

IBRD

(International Bank for Reconstruction and Development) A multilateral agency focused on middle income countries based in Washington D.C, part of the World Bank group. Also known as the World Bank.

ICC

The International Chamber of Commerce, an organisation based in Paris that represents the interests of the global business community. For example, it provides a variety of international dispute resolution services through its International Court of Arbitration.

In Situ Treatment

Treatment conducted where the resource is located, without moving it to another location for treatment.

Inconvertibility

A local currency that cannot be exchanged for another currency.

Input Supplier

The project participant that will bear the market risk of purchase and transportation of the input necessary for operation of the project.

Input Supply Agreement

The agreement entered into by the project company and the input supplier which defines the rights and obligations in relation to the supply of input for the project. It will be used to allocate the market risk of input cost and provision. This agreement will often be on either a take-or-pay or a take-and-pay basis. See also constituent documents; project documents.

Insolvency

Insolvency occurs when a company is unable to meet debt obligations.

Institutional Framework

The series of institutions that together deliver the different functions and inputs from the Government needed to implement a PPP program.

Institutional Investors

Investors such as banks, insurance companies, trusts, pension funds and foundations, and educational, charitable and religious institutions.

Intercreditor Agreement

An agreement between lenders as to the rights of different creditors in the event of default, covering such topics as collateral, waiver, security and set-offs.

Interest During Construction

This interest accumulated during construction, before the project has a revenue stream to pay debt service, is usually rolled up and treated as capitalised interest. See also grace period and capitalised interest.

Interest Rate

Interest Rate is a fee for borrowing money from a bank or institution. The fee is usually an annual percentage of the amount borrowed.

Internal Rate of Return or IRR

The discount rate that equates the present value of a future stream of payments to the initial investment. See also financial internal rate of return, but see economic internal rate of return.

International Bank for Reconstruction and Development

A multilateral agency focused on middle income countries based in Washington D.C, part of the World Bank group. Also known as the World Bank.

International Development Agency

A multilateral agency focused on developing countries based in Washington D.C, part of the World Bank group. Also known as the World Bank.

International Finance Corporation

The private sector arm of the World Bank group, based in Washington D.C.

International Financial Institution

An organisation jointly owned by a group of countries and designed to promote international and regional economic co-operation. See also bilateral agencies; export credit agencies; development finance institution.

International Lending

International Lending is known as offshore lending or cross-border financing. International lending occurs when a lender and borrower are in different countries.

Intra Vires

An act within the scope of one’s authority. See also ultra vires.

Invoice Discounting

Invoice Discounting is a type of loan that is drawn against a company’s outstanding invoices but does not require that the company give up
administrative control of those invoices.

IPP

Independent power producer, a power generation BOT project.

L  L  L

Latent Default

A potential default that may have always been present but unidentified.

Legal Risk

A risk that a defect in the documentation or legal structure will affect cash flow or debt service.

Licensing

Licensing is a business arrangement in which the manufacturer of a product (or a firm with proprietary rights over certain technology, trademarks or the like) grants permission to some other group or individual to manufacture the product (or make use of that proprietary material) in return for specified royalties or other payment.

Lien

A legal security interest in an asset.

Limited Partnership

A partnership consisting of one or more general partners, jointly and severally responsible as ordinary partners, by whom a business is conducted; and one or more limited partners, contributing in cash payments a specific sum as capital and which are not liable for the debts of the partnership beyond the funds so contributed.

Limited Recourse

Lenders have access to the sponsors’ credit or other legal security for repayment (besides the project’s cash flows) only under certain limited conditions (legal or financial). There is usually recourse in the event of fraud or misrepresentation/ nondisclosure – thus “non-recourse” is better described as “limited recourse”. See also recourse.

Liquidated Damages

(LDs) A fixed periodic amount payable as a sanction for delays or substandard performance under a contract. Also known as a penalty clause.

Liquidity

The ability to service debt and redeem or reschedule liabilities when they mature, and the ability to exchange other assets for cash.

M  M M

Maintenance Bond

A bond to provide funds for maintenance and repair of equipment or a facility. Maintenance bonds are used in connection with construction contracts to ensure that a construction contractor will repair mistakes and defects after completion of construction. The retention bond may be used in lieu, leaving a portion of the contract price on deposit with the project company to ensure performance.

Marginal Cost of Capital

The incremental cost of financing.

Market Risk

Changes to the amounts sold or the price received which would have an impact on gross revenue. Sometimes known as sales risk.

Material Adverse Change Clause

A general event of default designed to pick up any change in circumstances which might affect the likelihood of a borrower paying its debts or performing its covenants. The clause is couched in general language and is used to supplement more specific events of default.

Merchant Bank

A bank which, besides lending and deposit taking (usually not from the public), engages in trading and advisory services, and acts as an underwriter and fund manager of securities.

Mezzanine Financing

A mixture of financing instruments, with characteristics of both debt and equity, providing further debt contributions through higher-risk, higher-return instruments, subordinated debt, sometimes treated as equity.

Middle Market

Middle Market is a medium-sized company that has 10 to 100 employees and revenues of $10 million to $50 million.

Mortgage

A pledge or assignment of security of particular property for payment of debt or performance of some other obligation. Also an indenture of trust or a security agreement.

Multilateral Lending Agencies

Organisations jointly owned by a group of countries and designed to promote international and regional economic co-operation. In particular, these lending agencies may have such goals as aiding development and furthering social and economic growth in member countries. Also known as “multilateral agencies”. See also bilateral agencies; export credit agencies.