Expanded Debt Capacity.
Project financing enables a project sponsor to finance the project on someone else's credit. Often, that someone else is the purchaser(s) of the project's output. A project can raise funds on the basis of contractual commitments when (1) the purchasers enter into long-term contracts to buy the project output and (2) the contract provisions are tight enough to ensure adequate cash flow to the project, enabling it to service its debt fully under all reasonably foreseeable circumstances. If there are contingencies in which cash flow might be inadequate, supplemental credit support arrangements will be required to cover these contingencies. Nevertheless, the contractual purchase commitments form the foundation that supports the project financing.
The project company may be able to finance with significantly greater leverage than would be normal in the sponsor's capitalization. A broad range of projects have been financed with capitalizations consisting of 70 percent or more debt. However, the degree of leverage that a project can achieve depends on the strength of the security arrangements, the risks borne by creditworthy participants, the type of project, and its profitability.
Expanded Debt Capacity.Project financing enables a project sponsor to finance the project on someone else's credit. Often, that someone else is the purchaser(s) of the project's output. A project can raise funds on the basis of contractual commitments when (1) the purchasers enter into long-term contracts to buy the project output and (2) the contract provisions are tight enough to ensure adequate cash flow to the project, enabling it to service its debt fully under all reasonably foreseeable circumstances. If there are contingencies in which cash flow might be inadequate, supplemental credit support arrangements will be required to cover these contingencies. Nevertheless, the contractual purchase commitments form the foundation that supports the project financing.The project company may be able to finance with significantly greater leverage than would be normal in the sponsor's capitalization. A broad range of projects have been financed with capitalizations consisting of 70 percent or more debt. However, the degree of leverage that a project can achieve depends on the strength of the security arrangements, the risks borne by creditworthy participants, the type of project, and its profitability.
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