Principles of Project Finance

Edward Yescombe worked in project finance for decades and wrote the standard practitioner reference on it. Project finance means lending against the cash flows of a specific project held in a separate company, with limited or no recourse to the sponsors, and the book explains every component of that structure.

The coverage is systematic. It sets out who the parties are and what each contributes, the project development process, the commercial contracts that create the revenue, including offtake agreements, power purchase agreements and concession agreements, and the construction contracts that allocate completion risk. It then covers the financial structuring: the debt sizing based on cover ratios, the security package, the intercreditor arrangements, the drawdown and repayment mechanics, hedging of interest rate and currency exposure, and the financial model that ties everything together. Separate chapters cover the roles of export credit agencies, development finance institutions and multilateral lenders, and the specific features of different sectors including power, transport, telecommunications and oil and gas.

The method throughout is to explain what each provision does and why lenders require it. Yescombe's argument, stated implicitly, is that project finance is a risk allocation exercise conducted through contracts, and that the financing is only viable when every material risk has been assigned to a party capable of bearing it. Later editions add material on public-private partnerships, on the financial crisis's effect on bank tenors, and on the growth of bond and institutional funding. It is a reference rather than a book to read through.