Project finance relies on non‑recourse lending to a special‑purpose vehicle (SPV) whose only assets and cash flows are generally derived from a single project.
Lenders often depend exclusively on project revenues for repayment, so any operational or regulatory disruption can quickly jeopardize covenant compliance and lead to the loss of equity. Sector-specific risks, such as reliance on long-term power purchase agreements (PPAs) in renewables or concession regimes in mining, significantly affect revenue stability and financing outcomes.
Disputes commonly arise from high leverage, stringent contracts, and the need for stable operating conditions and reliable counterparties. Challenges such as government actions, permitting delays, counterparty failures, and operational issues can erode revenues and trigger defaults.
The authors Seabron Adamson, Dr. Tiago Duarte-Silva, and Drake Hernandez outline the mechanics of project finance, examine how sector-specific structures like PPAs and concession arrangements shape risk, review typical dispute scenarios, and explain how these factors influence damage assessment, particularly in relation to lender rights and cash flow modeling.
The key takeaways from the analysis are:
- Non‑recourse lending makes lender protection central and places sponsors last in payment priority.
- Cashflow waterfalls and covenants shape financial outcomes and could wipe out equity when disruptions occur.
- Sector‑specific structures (PPAs, concessions, offtakes) heavily influence risk and bankability.
- Common disputes stem from financeability failures, government actions, counterparty issues, and operational disruptions.
- Lender enforcement tools (step‑in, waivers, restructuring) materially affect both project outcomes and damages.
- Damage quantification must incorporate waterfall constraints and realistic mitigation options.
Read more about project finance basics for International Arbitration practitioners here.
