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.4 |
| 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. |
| 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. |
| 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. |
| 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. |
| 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. |
| 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. |
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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
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