but is especially critical to assessing financial flexibility and the ability to absorb downside scenarios in
the operating period. Discussed below are key financial and legal considerations included by Origin
Invest in analysis of project finance transactions.
"lift" from the sponsor. However, an experienced sponsor can reduce development, construction and
operational risks of the project. A sponsor with a long and established track record in managing similar
project assets can reduce credit risk. Such a sponsor can provide comfort that a project with construction
risk will be delivered on time and on budget, and that once in operation the facility will be operated and
maintained to minimize outages and achieve its expected useful life.
ment for projects under construction or that are newly completed. A higher level of equity contribution
can motivate a sponsor to monitor and solve problems early, particularly during construction. A sponsor
with modest investment in a project may be more inclined toward higher-risk strategies or less motivated
to resolve issues for projects that underperform. However, the presence of equity may add little to the
financial flexibility of a project given its small size relative to the construction budget and the fact that
equity funds are typically earmarked to construct the asset; that is, unless equity is retained as a reserve, it
does not represent a potential source of contingent liquidity and by commissioning has usually been fully
deployed in the constructed asset.
ize the sponsor, as well as achieving minimum DSCRs consistent with the rating, equity for a greenfield
project of low to moderate complexity in the "A" range should generally account for between 10% and
an adverse effect on the rating. Equity may be in the form of a traditional cash equity contribution or
deeply subordinated debt and, if not contributed at financial close, is usually secured by an LC until fully
drawn. For a project under construction, if equity is to be contributed in stages during construction, cer-
tainty of equity contributions must be assessed. Subject to the project rating and credit quality of equity
participants, a bank letter of credit or other third-party support will generally be required.
obligations, real return bonds, inflation-indexed bonds and subordinated debt, as well as the maturity
profile of the debt structure. The less flexibility ProjectCo has to increase revenues in response to unex-
pected cost increases, the more stable the debt structure and servicing requirements are required to be,
especially for "A"-range ratings. As such, most projects are funded with fixed-rated debt that fully amor-
tizes over the life of the project, with payments often sculpted to match anticipated cash flows and
provide for a stable DSCR. Debt structures often contain covenants that include limitations on asset
dispositions, a negative pledge, compliance with material contracts, limitations on additional debt, and
limitations on distributions, reserve accounts and payment priority, in addition to timely and full payment
to bondholders.
typically less than the expected economic life of the project. A typical structure amortizes debt to remove