APPENDIX B
Commonly Used Project Finance Definitions

63‐20 Issuance.
State and local governments can issue tax‐exempt debt through the creation of nonprofit corporations pursuant to IRS Revenue Ruling 63‐20. Bond proceeds can then be used by private developers to finance and build transportation facilities.
Accommodation project.
An availability‐based or private finance initiative (PFI) model contract relating social infrastructure projects such as schools, hospitals, prisons, government offices, etc.
Angola model.
Construction of infrastructure projects in return for the right to extract natural resources.
Assumptions book.
A register of source data and assumptions for the financial model.
Availability contract.
A project agreement with a contracting authority under which it pays the project company for the right to use the project.
B loan.
Participation by a private sector lender in a loan made by a multilateral development finance institution (MDFI).
Banking case or Base case.
The projection of cash flow shortly before financial close, agreed between the project company and an offtaker or the contracting authority.
Bilateral DFI.
A development finance institution (DFI) in a particular country providing loans and equity to projects in developing countries.
Buyer credit.
An export credit agency‐supported loan to an importer of equipment for a project.
Capital grant.
Payment by a contracting authority of part of the capital cost of an availability based or other PFI‐model project.
Capitalized interest.
Interest during construction that is added to the debt principal amount.
Collateralized loan obligations.
A way to syndicate bank loans to insurance companies or pension fund and the process is known as securitization.
Concession agreement.
A government contract giving a company the right to operate a business subject to negotiated terms and conditions.
Concession.
It is a PPP in which the general public pays user charges in the form of tolls, fares, or other charges for using the facility and it is used in the PFI model as well.
Contingency.
Unallocated reserve in the project construction budget, covered by contingency finance.
Contract mismatch.
Incompatible provisions between a project agreement and one or several project contracts.
Convertible securities.
They are bonds or convertible preferred shares that allow the holder to exchange them for a stated number of shares of the project company's common stock.
Corporate finance.
Usually refers to a loan against a company's balance sheet and existing business and it is an alternative to project finance.
Cost benefit ratio.
The ratio of net present value (NPV) of the benefits of a project to the NPV of its costs over a project's lifecycle.
Counter party risks.
Technical and financial capacity risks related to all parties with which the project company has project contracts.
Credit default swap.
It is a credit derivative that is a privately negotiated contract. Its value is derived from the credit risk of a bond, a bank loan, or some other instrument and the credit risk is taken by a party other than the lender.
Credit enhancement.
Provision of a guarantee, standby loan, or other additional financial security for a project financing.
Cross‐collateralization.
The sharing of security between different groups of lenders in a project.
Debt acceleration.
It is a drawdown procedure where debt can be drawn during a much longer availability period and its common use is in concessions.
Debt accretion.
Increasing the debt amount during the operation phase of a concession, based on traffic growth above initial projections.
Debt sculpting.
It is a way for principal repayment obligations of the project company to be calculated to ensure that principal and interest obligations are matched to the strength and pattern of the cash flows in each project period.
Defects liability period.
The period after project completion during which the construction contractor is obliged to remedy any defects on the project's construction.
Direct agreements.
Agreements between lenders and partners signing contracts with the project company, which protect the lenders' interests under these contracts signed by the offtaker or contracting authority.
Dividend trap.
Inability of the project company to pay dividends, despite having cash available to do so, because of accounting losses.
Dry closing.
Signing of a loan agreement and project contracts subject to subsequent conditions.
Economic infrastructure.
The infrastructure essential for the functioning of an economy, such as transportation, communications, energy, water and sewage and social infrastructure.
Enclave project.
A project whose products are exported for which payment is received outside the host country.
Equity bridge loan.
Finance provided by lenders during the construction period for the amount of equity investment.
Export credits.
Guarantees or insurance provided by ECAs to lenders and direct loans to the project company which are linked to export sales from the ECA's country.
Final information memorandum.
The information memorandum on the project company used for syndication.
Financial assessment.
A systematic approach to determine the commercial viability of a project to all project participants. It is performed by the project sponsor and it is considered viable if it is validated by lenders.
Financial close.
The date all project contracts and financing documents are signed and conditions precedent to initial drawing of the debt have been fulfilled.
Forward contracts.
They obligate the holder to buy a specified amount of a particular asset at a stated price on a particular date. Most forward contracts are for commodities or currencies and the specified future price is called the exercise price.
Franchise.
The right to operate existing public infrastructure project and receive user payments. It is different from a PPP because no substantial new investment is required by the private sector operator.
Fronting bank.
A bank acting as a channel for an interest rate swap.
Futures contracts.
They obligate the holder to buy a specified quantity of a particular asset at a specified exercise price at a specified date in the future. There are futures contracts for precious metals, industrial commodities, currencies, and other financial instruments.
Government support agreement.
A project contract that creates the legal basis for the project and under which the host government agrees to provide various kinds of support and guarantees.
GPA.
An agreement on government procurement, the framework for public procurement under the WTO.
Gross up.
An increase of a payment to compensate for tax deductions.
Implementation agreement.
A contract between a project company and a developing country host government that allocates political and financial uncertaintyrisksin a project financing. Implementation agreements are not normally needed in industrialized countries.
Incomplete contract.
A contract in which the parties cannot provide for all possible outcomes.
Information memorandum.
A marketing document presented by the project company to prospective investors after a confidentiality agreement is signed and a brief investment summary has been reviewed.
Institutional PPP.
An operating project company in which the contracting authority sells part of the equity to an investor who is actively involved in management of the company.
Intercreditor.
Refers to the relationship between different groups of lenders.
Interest buy down.
Reduction in the interest rate in exchange for providing more equity in the project.
Interest rate equalization.
The interest subsidy provided by ECAs to banks to cover the difference between the banks' cost of finance and commercial interest reference rate (CIRR).
Investment insurance.
Political risk insurance provided to investors by ECAs, DFIs, or private insurers.
Islamic finance.
It refers to financial activity in which Muslims engage in and it involves traditional financial and investment techniques and structures that are tailored to comply with Sharia principles.
Leverage.
The debt‐to‐equity ratio.
Life cycle.
The renewal or replacement of major project company equipment at the end of its operating life.
Limited recourse debt.
This is debt that carries a repayment guarantee for a defined period of time for part of the total principal or until a milestone is achieved; e.g. until construction is complete or the project reaches a minimum level of output is a subset of non‐recourse debt. The difference is that at least some portion of the debt becomes non‐recourse at some point.
Linear project.
A project involving construction of a facility over a long stretch of land, such as a road.
Liquidated damages.
The pre‐agreed level of loss when a contracting party does not perform under a contract.
Loan agreement.
The agreement between a project company and its lenders such as a credit agreement or a facilities agreement.
Mandate.
The appointment of a bank as lead arranger.
Mandatory costs.
The additional costs of funding a loan which commercial banks charge to a borrowing project company.
Mark to market.
Calculating the current value of a swap or its breakage cost.
Mechanical completion.
Under an EPC contract, confirmation that the project can meet the required performance and operating criteria.
Mini perm.
A loan for the construction period and first few years of project operation to be refinanced in due course by long‐term debt, which is known as a Hard Mini Perm.
Modified IRR.
An IRR calculation with a reduced reinvestment rate for cash taken out of the project.
Notice to proceed.
It is given from the project company to the construction contractor to begin the project works.
OECD Consensus provisions.
Starting as a Gentlemen's Agreement among OECD countries, it has evolved and has specific provisions to bring order to official export financing.
Options.
An option gives its holder the right to do something, without the obligation to do it. A call option is the right to buy an asset and a put option is the right to sell an option.
PFI Model contract.
A project agreement with a contracting authority under which it pays a project company for the right to use the project. It is also referred to as an availability contract.
Pooled equity vehicles.
These are companies formed by an existing operating company to own and manage certain specified types of projects. They give investors geographic diversity and opportunities to invest in projects alongside an experienced operator.
Private activity bonds.
A method of raising finance for PPP projects in the US municipal bond market.
Private finance initiative.
A way to transfer responsibility of financing government projects and the risk of failure away from the government and into private sector hands.
Private participation in infrastructure.
Refers to participation in privatized and private sector infrastructure and PPPs.
Process plant project.
A project where there is an input at the end of the project that goes through a process within the project and emerges as an output, such as power generation and water treatment.
Project agreement.
The contract between the project company and an offtaker or contracting authority to design, construction, finance, and operation of a project and which is the main security for a project financing.
Project development.
Refers to the prebid stage process of preparing for and structuring a new project that has three distinct phases: origination of a project, negotiating and formalizing the project contracts, and mobilizing financing.
Project finance.
It involves creation of a legally independent project company financed with nonrecourse debt and equity from sponsors to build single purpose capital assets usually with a limited life cycle.
Project preparation facility.
Funding for a contracting authority to engage advisors to develop a PPP project.
Public sector comparator.
A calculation of the life time cost of a project if build and operated by the public sector to compare with the expected cost of a PPP project.
Public–private infrastructure advisory facility.
It is a multi‐donor trust fund that provides technical assistance to governments in developing countries for PPI projects.
Public–private partnerships.
These are arrangements that vary from full private ownership subject to government approval and oversight, to public projects in which the private partner serves as a financial contributor to the government‐sponsored project. They are governed by negotiated contracts that specify public and private responsibilities, impose public regulation of safety, require quality of service, and often restrict user fees.
Qualified institutional buyer.
An institutional investor to which Rule 144A bonds can be sold.
RAB Finance.
Regulated asset based finance is a method to raise funding for a project using a regulated ROI.
Regulatory capture.
It refers to the tendency of a host country independent industry regulator to be overly influenced by activities it is regulating.
Retainage.
The portion of each payment under the construction contract retained by the construction company as security until commercial operation date.
Rule 144A.
A U.S. Securities & Exchange Commission rule modifying a two‐year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves.
Secondary investors.
These are investors purchasing some or all of the sponsors' shareholding in a project after the construction is complete.
Secondary loss.
A loan guarantee by a public sector entity on which a payment or loss only occurs if the loss on the project is greater than the senior loan outstanding.
Section 129 loans.
Section 129 of Title 23 allows federal participation in a state loan to support projects with dedicated revenue stream including tolls, excise taxes, sales taxes, real property taxes, motor vehicle taxes, incremental property taxes, or other beneficiary fees.
Securitization.
The process where interests in loans or a group of assets are packaged, underwritten, and sold as asset‐backed securities. Structuring enables lenders to transfer some of risk of project company loan ownership to parties willing to manage them for a profit.
Senior lenders.
These are lenders whose debt service takes priority over the debt service of mezzanine or subordinated debt and distribution to investors.
Shadow tolls.
They are tolls based on usage of the project but are payable by the contracting authority rather than the general public.
Site legacy risk.
The risk of pre‐existing contamination on the project site.
Social impact bond.
It is a bond in which repayment depends on achieving specific social outcomes.
Standby finance.
Funding made available if the project company's cash flow comes below projections.
State infrastructure banks (SIBs).
US banks that provide mezzanine support for transportation projects using federal funding.
Structural risk.
A contract mismatch in project finance projects.
Subrogation.
It is the right of an insurer or guarantor to take over an asset on which an insurance claim or guarantee has been paid.
Sukuk bond.
A bond based on Islamic principles.
Sunset date.
The last possible date for completion of construction of a project before failure becomes an event of default.
Swap credit premium.
The credit risk margin charged on an interest rate swap.
Swaps.
These are contracts obligating two parties to exchange specified cash flows at specified intervals. In an interest rate swap, cash flows are determined by two different interest rates in the same currency. In a currency swap, cash flows are based on the interest rates in two different currencies.
Syndication.
The process by which the lead arranger reduces its underwriting by placing part of the loan with other lenders.
Take and pay contract.
A contract under which the purchaser pays an agreed price for the project company's output produced, but is not obligated to purchase.
Take or pay contract.
A contract under which the purchaser must buy the product or make payment in lieu.
Target repayments.
A flexible repayment structure to allow for temporary project company cash flow deficiencies.
Tax increment finance.
A method of raising finance for urban development by imposing higher taxes on properties whose values appreciated by a project.
Term loan B.
A long‐term loan with low amortization in its earlier years, and/or a balloon repayment, provided by an institutional lender.
Termination sum.
The compensation payable by the offtaker of the contracting authority for the early termination of a project agreement.
Third‐party liability insurance.
Insurance against damage or injury caused by the project to third parties.
Third‐party risks.
Risks that parties not involved with the project contracts may affect the completion of the project.
TIFIA finance.
Finance for transport infrastructure projects provided under the US Transportation Infrastructure Finance and Innovation Act of 1998 and subsequent legislation.
Tolling contract.
An input supply contract in which the fuel or raw material is supplied free and the project company is paid for processing it.
Tranche.
Separate portions of a loan or investment that may be provided by different parties on different terms, or for a specific purpose rather than financing the project as a whole.
Tripartite deeds.
Direct agreements between lenders and the parties signing project contracts with the project company protecting the lenders' interests under these contracts.
Undertakings.
These are representations and warrantees. Confirmation by the project company of the facts on which financing is based and acceptance of liability for any error.
Unitary charge.
A service fee or payments by the contracting authority under the PFI model contract; e.g. contact payment, tariff, user charge, payment mechanism.
Unwind cost.
It is also known as breakage cost, it is the cost for early termination of an interest rate swap, fixed rate loan or bond, an inflation indexed loan, or an inflation swap.
Value for money (VFM)
The basis on which an offtaker or contracting authority decides whether to transfer project risks to a project company.
Variation bonds.
These are bonds with the right to increase the amount of a bond issue after it has been placed in order to cover additional capital expenditures.
Viability gap funding (VGF).
A construction subsidy for a concession project.
Warrantees.
These are guarantees against poor construction or failure of equipment after project completion, provided by the construction contractor.
Warrants.
A warrant is a long‐term call option issued by a company and it entitles the holder to buy shares of the firm's stock at a stated price for cash.
Waterfall or cascade.
This is the order of funds' disbursement priorities under the financing documentation for the application of the project company's cash flow.
Windfall gains.
Politically sensitive profits made by investors in PPPs resulting from debt refinancing or sale of their investment.
Working capital.
The amount of funding required for inventories and other costs incurred before receipt of sales revenues.
Wrapped bonds.
Bonds guaranteed by a monoline insurance company; that is, an insurer who repays the principal and interest on a bond should the issuer default.
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