Project Finance - Assignment Example

Unlike project finance which is considered a non-recourse option, the conventional source of funding for long-term investments greatly depended on cash flows. Primarily, the classic lending principally depended on the credit rating of the borrower, since the company assets were used as security for the lending. However, due to the size of the project finance operation, the balance sheets of the participating company may be overshadowed, considering the possible lack of credit history by the special purpose vehicle that acts as the borrowing entity.

Additionally, project financing has increasingly been used to fund investments as a non-recourse alternative because, for an individual project, the debtor’s liabilities will not be remedied using the project sponsor’s assets. Instead of relying on the creditworthiness of the project sponsor, credit assessment is based on the expected cash flows of the project. The project sponsor is therefore relieved from any interest payments or liability associated with servicing of the project.

Similarly, a limited recourse in project financing implies that certain responsibilities and obligations of the project sponsor are incapacitated.Although the US corporations recorded a lower use of project finance compared to the foreign counterparts, the $34 billion investment in 2004 surpassed the $25 billion that was invested in new businesses by venture capitalists and was half the $73 billion raised by stock-listed companies via IPOs. From the study, project financed corporation investments were only 19% of the US corporations while 53% of international firms were project financed.

Therefore, project finance has a 50% chance, and growing, over traditional corporate finance. The major shortcomings of project finance First, the numerous participants involved in project financing have each a specific interest in mind.