Understanding the terminology used in project finance is crucial for professionals involved in large-scale infrastructure and industrial projects. This glossary provides comprehensive definitions of key terms used in project finance, helping to navigate and manage transactions effectively.
| TERM: | DEFINITION: |
|---|---|
| Accrual | Accounting method where revenue and expenses are recorded when they are incurred, not when cash is exchanged. |
| Acquisition Finance | Financing used to acquire another company. |
| Affirmative Covenant | A clause in a loan agreement that requires the borrower to take certain actions. |
| Amortization | The process of gradually repaying a loan through periodic payments. |
| Annuity | A series of equal payments made at regular intervals over a specified period. |
| Arbitrage | The practice of taking advantage of price differences in different markets. |
| Asset-backed Security (ABS) | A financial security backed by a pool of assets. |
| Back-End Load | A fee or commission charged at the time of the sale of an investment. |
| Balloon Loan | A loan that does not fully amortize over its term, leaving a balance due at maturity. |
| Balloon Payment | A large payment due at the end of a loan term after a series of smaller payments. |
| Bankable | A project that is considered acceptable to lenders for financing. |
| Base Case | The initial set of assumptions used for project evaluation. |
| Base Rate | The interest rate set by the central bank that influences other interest rates. |
| Basis Point | One hundredth of a percentage point (0.01%). |
| Basel III | A set of international banking regulations developed by the Basel Committee on Banking Supervision. |
| Bear Market | A market condition characterized by falling prices. |
| Bond | A debt security issued by an entity to raise capital. |
| Book Value | The value of an asset as recorded on the balance sheet. |
| Bridge Loan | A short-term loan used until permanent financing is obtained. |
| Bull Market | A market condition characterized by rising prices. |
| Callable Bond | A bond that can be redeemed by the issuer before its maturity. |
| Cap Rate (Capitalization Rate) | The rate of return on a real estate investment property based on the income that the property is expected to generate. |
| Capital Expenditure (CapEx) | Funds used by a company to acquire or upgrade physical assets. |
| Capital Markets | Markets for buying and selling equity and debt instruments. |
| Capital Structure | The mix of debt and equity used to finance a project. |
| Cash Flow | The net amount of cash being transferred in and out of a business. |
| Clawback Provision | A clause that allows an investor to retrieve invested funds under certain conditions. |
| CLO (Collateralized Loan Obligation) | A security backed by a pool of loans. |
| Collateral | An asset pledged by a borrower to secure a loan. If the borrower defaults, the lender can seize the collateral to recover the owed amount.4 |
| Cash Collateral | A specific form of collateral where the borrower provides actual cash or cash equivalents (e.g., certificates of deposit or treasury bills) as security.7 |
| Commitment Fee | A fee charged by a lender to keep a credit facility available. |
| Commitment Letter | A formal offer by a lender to provide financing under specific terms and conditions. |
| Concession Agreement | A contract that grants a company the right to operate a project. |
| Contingent Liability | A potential obligation that may be incurred depending on the outcome of a future event. |
| Credit Enhancement | Techniques used to improve the creditworthiness of a project. |
| Cross-Default Clause | A provision that triggers a default if the borrower defaults on another obligation. |
| Deposit Account Control Agreements (DACA) | A DACA account is a three-party agreement involving a custodial bank, its customer (the borrower), and the customer’s secured creditor (the lender). |
| Debt Capacity | The maximum amount of debt that a project can support. |
| Debt Service | The cash required to cover the repayment of interest and principal on a debt. |
| Debt Service Coverage Ratio (DSCR) | A measure of a project’s ability to service its debt. |
| Debt to Equity Ratio | A measure of a company’s financial leverage. |
| Default | Failure to meet the legal obligations of a loan. |
| Deferred Tax Liability | A tax obligation that a company will pay in the future due to temporary differences between its book and tax bases. |
| Defeasance | The process of retiring debt by setting aside sufficient funds. |
| Dilution | The reduction in existing shareholders’ ownership percentage due to the issuance of new shares. |
| Discount Rate | The interest rate used to discount future cash flows. |
| Dividend | A portion of a company’s earnings distributed to shareholders. |
| Drawdown | The process of accessing funds from a loan facility. |
| Due Diligence | The investigation and analysis of a project before investment. |
| Earnings Before Interest and Taxes (EBIT) | A measure of a firm’s profitability.5 |
| Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) | A measure of a company’s overall financial performance.6 |
| Enterprise Value (EV) | The total value of a company, including its equity and debt, minus cash and cash equivalents. |
| Equity | The ownership interest in a project. |
| Equity Kicker | An additional equity interest granted to a lender as part of a loan agreement. |
| Escrow | Funds held in trust by a third party until certain conditions are met. |
| Feasibility Study | An analysis of the viability of a proposed project. |
| Fixed Rate | An interest rate that remains constant over the life of the loan. |
| Floating Rate | An interest rate that fluctuates with market conditions. |
| Force Majeure | A clause that frees parties from liability or obligation when an extraordinary event or circumstance beyond their control occurs. |
| Forward Contract | A customized contract between two parties to buy or sell an asset at a specified future date. |
| Foreclosure | The process by which a lender takes control of a property due to loan default. |
| Grace Period | A time period during which a borrower is allowed to delay payment. |
| Hedge | A financial strategy to reduce risk. |
| Indenture | A formal debt agreement. |
| Indenture Trustee | A third party that acts as an intermediary between the bond issuer and the bondholders. |
| Infrastructure | The basic physical systems of a project. |
| Intercreditor Agreement | An agreement between creditors that sets out the terms and conditions of their respective loans. |
| Interest Rate | The cost of borrowing money. |
| Internal Rate of Return (IRR) | The discount rate that makes the net present value of all cash flows equal to zero. |
| Investment Grade | A rating indicating a low risk of default. |
| Investment Tax Credit (ITC) | A federal tax credit for certain investments in renewable energy projects. |
| Lease | A contract granting the use of an asset for a specified time in exchange for payment. |
| Leaseback | Selling an asset and leasing it back for long-term use. |
| Leasehold Improvement | Improvements made to a leased property by the tenant. |
| Leverage | The use of borrowed funds to finance a project. |
| Leveraged Buyout (LBO) | The acquisition of a company using a significant amount of borrowed money. |
| LIBOR (London Interbank Offered Rate) | A benchmark interest rate at which major global banks lend to one another. |
| Limited Recourse Financing | A hybrid of recourse and non-recourse financing. The lender has limited rights to pursue repayment beyond the collateral, often subject to predefined conditions or guarantees. |
| Liquidity | The ease with which an asset can be converted into cash. |
| Loan Covenant | A condition in a loan agreement that requires the borrower to meet certain criteria. |
| Long-term Debt | Debt with a maturity of more than one year. |
| Margin | The difference between the cost of borrowing and the return on investment. |
| Market Risk | The risk of losses in financial markets due to movements in market prices. |
| Maturity | The date on which a debt must be repaid. |
| Mezzanine Financing | A hybrid of debt and equity financing. |
| Mini-Perm Loan | A short-term loan used to pay off the construction or lease-up phase of a project. |
| Monte Carlo Simulation | A mathematical technique that allows for the modeling of complex systems and the assessment of risk. |
| Mortgage | A loan secured by real property. |
| Negative Covenant | A clause in a loan agreement that restricts the borrower’s activities. |
| Net Lease | A lease in which the tenant pays a portion or all of the taxes, insurance fees, and maintenance costs. |
| Net Present Value (NPV) | The difference between the present value of cash inflows and outflows. |
| Non-Performing Loan (NPL) | A loan on which the borrower is not making interest payments or repaying any principal. |
| Non-recourse Financing | A loan secured only by the project assets. The lender can only claim the collateral pledged for the loan and has no right to pursue the borrower’s other assets if the collateral’s value doesn’t cover the debt. |
| Off-balance Sheet Financing | A form of financing that does not appear on the balance sheet. |
| Offtake Agreement | A contract between a producer and a buyer to purchase or sell portions of the producer’s future production. |
| Operating Lease | A lease that does not transfer ownership of the asset. |
| Option | A contract giving the right to buy or sell an asset at a future date. |
| Par Value | The nominal value of a security. |
| Pari Passu | A Latin term meaning “equal footing,” used to describe loans or securities that have equal rights of payment. |
| Pass-Through Security | A security that passes income from a pool of assets to investors. |
| Payback Period | The time required for an investment to generate cash flows to recover the initial investment. |
| Performance Bond | A bond that guarantees the completion of a project. |
| Political Risk | The risk of loss due to political instability or changes in government policy. |
| Preferred Equity | Equity that has preferential rights to dividends and assets. |
| Principal | The amount of money borrowed or invested. |
| Private Placement | The sale of securities to a small group of investors. |
| Project Finance | The financing of long-term infrastructure and industrial projects.1 |
| Project Finance Advisory | Services provided by experts to assist in the structuring and financing of a project. |
| Project Sponsor | The entity that owns and develops the project. |
| Proof of Funds (POF) | Documentation or evidence of sufficient financial resources for a particular transaction or investment. |
| Prospectus | A formal document that provides details about an investment offering for sale to the public. |
| Public-Private Partnership (PPP) | A cooperative arrangement between the public and private sectors. |
| Recapitalization | The restructuring of a company’s debt and equity mixture. |
| Recourse Financing | The lender has the right to seek repayment beyond the collateral provided for the loan. If the collateral doesn’t fully cover the loan amount, the lender can pursue the borrower’s personal or business assets. |
| Refinancing | The process of replacing an existing debt with a new one. |
| Regulatory Risk | The risk of changes in laws and regulations affecting a project. |
| Repurchase Agreement (Repo) | A short-term agreement to sell securities and buy them back at a slightly higher price. |
| Residual Value | The estimated value of an asset at the end of its useful life. |
| Retention Money | Funds withheld from payment to a contractor until certain conditions are met. |
| Revenue Bond | A bond supported by the revenue generated from a specific project. |
| Revolving Credit Facility | A credit line that allows the borrower to draw, repay, and redraw funds. |
| Risk Management | The process of identifying, assessing, and controlling risks. |
| Securitization | The process of pooling various types of debt and selling them as securities. |
| Securities and Exchange Commission (SEC) | The U.S. federal agency responsible for regulating the securities industry. |
| Senior Debt | Debt that has priority over other unsecured or junior debt. |
| Shadow Banking | Non-bank financial intermediaries that provide services similar to traditional commercial banks.3 |
| Share Buyback | The process by which a company buys back its own shares from the marketplace. |
| Shareholders’ Equity | The owners’ residual interest in the assets of a company. |
| Sinking Fund | A fund established to repay debt over time. |
| Sovereign Risk | The risk associated with lending to a foreign government. |
| Special Purpose Vehicle (SPV) | A subsidiary created for a specific project. |
| Spread | The difference between two interest rates. |
| Step-in Rights | Rights that allow a lender to take control of a project if the borrower defaults. |
| Strip Financing | A financing structure where different parts of a project’s cash flow are sold to different investors. |
| Structured Finance | Complex financial instruments offered to borrowers with unique and sophisticated needs. |
| Subordinated Debt | Debt that ranks below other debts in case of liquidation. |
| Swap | A derivative contract through which two parties exchange financial instruments. |
| Swaption | An option granting the right to enter into a swap agreement. |
| Syndicated Loan | A loan provided by a group of lenders. |
| Syndication | The process of involving multiple lenders in providing various portions of a loan. |
| Tax Equity | Equity investment made to take advantage of tax benefits. |
| Term Sheet | A non-binding agreement outlining the terms and conditions of a transaction. |
| Tolling Agreement | A contract where a company agrees to process raw materials or semi-finished goods for another company. |
| Underfunded Pension Plan | A pension plan that has more liabilities than assets. |
| Underwriting | The process by which a lender evaluates the risk of a loan. |
| Unlevered | A project or company without debt. |
| Upstream Guarantee | A guarantee by a subsidiary for the obligations of its parent company. |
| Valuation | The process of determining the present value of an asset or company. |
| Variable Rate | An interest rate that varies with market conditions. |
| Venture Capital | Financing provided to early-stage companies with high growth potential.2 |
| Venture Debt | A type of debt financing provided to early-stage, high-growth companies. |
| WACC (Weighted Average Cost of Capital) | The average rate of return a company is expected to pay its security holders. |
| Warrant | A security that gives the holder the right to purchase the underlying stock at a specific price. |
| Waterfall Payment | The order in which cash flows are distributed among different stakeholders. |
| Weighted Average Cost of Capital (WACC) | The average rate of return a company is expected to pay to its investors. |
| Working Capital | The difference between a company’s current assets and current liabilities. |
| Yield | The income return on an investment. |
| Yield Curve | A graph showing the relationship between interest rates and the maturities of debt securities. |
| Yield Maintenance | A prepayment penalty on a loan intended to make the lender whole in the event of early repayment. |
| Zero-Based Budgeting | A budgeting method where all expenses must be justified for each new period. |
| Zero-Coupon Bond | A bond that does not pay periodic interest. |
| Zoning | The process of dividing land into zones for different uses. |
| Z-Score | A statistical measure that indicates the number of standard deviations a data point is from the mean. |
REFERENCES:
- Investopedia, Adam Hayes, Project Finance: Definition, How It Works, and Types of Loans, retrieved from https://www.investopedia.com/terms/p/projectfinance.asp
- Investopedia, James Chen, Venture Capital Funds: Definition for Investors and How It Works, retrieved from https://www.investopedia.com/terms/v/vcfund.asp
- Investopedia,Michael Bromberg, Shadow Banking System: Definition, Examples, and How It Works, retrieved from https://www.investopedia.com/terms/s/shadow-banking-system.asp
- Investopedia, Julia Kagan, Collateral Definition, Types, & Examples, retrieved from https://www.investopedia.com/terms/c/collateral.asp
- Investopedia, Chris B Murphy, Earnings Before Interest and Taxes (EBIT): Formula and Example, retrieved from https://www.investopedia.com/terms/e/ebit.asp
- Investopedia, James Chen, EBITA (Earnings Before Interest, Taxes, and Amortization) Definition, retrieved from https://www.investopedia.com/terms/e/ebita.asp
- Investopedia, Will Kenton, Cash Collateral: Definition and Examples, retrieved from https://www.investopedia.com/terms/c/cash-collateral.asp.
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