Limited Recourse Financing in Project Finance

Project finance has become a popular way to fund large-scale, capital-intensive projects including power plants, oil pipelines, highways, and tunnels, among other things. In a project finance arrangement where the project's lenders have limited access to the sponsoring company's assets, we examine debt capacity and risk selection. We draw a comparison between project finance loans with limited recourse and susceptible financial guarantee loans. We demonstrate the trade-offs between risk and debt capacity using contingent claims analysis in instances where the project's lenders have recourse to the sponsor's assets and in cases where they do not.