Security Structure and Debt Service in Project Finance

How project finance differs from corporate lending

In a corporate loan the lender looks at the company's historical cash flow and overall balance sheet. In project finance the project is built through a separate vehicle (an SPV) that will generate its own cash flow, and that future is the lender's only security.

This changes the security package too: in corporate lending, security is the company's existing assets; in project finance, security is a revenue stream not yet fully produced. That is why the structure carries much tighter controls.

What the debt service coverage ratio measures

DSCR shows how many times the cash the project generates in a period covers that period's principal and interest payment. A DSCR of 1.3 means the project covers its debt with a 30% cushion.

The lender does not look at a single DSCR but at the lowest and average DSCR across the project's life together. Which year produces the lowest point, and what risk drives it, is where loan terms are debated most.

The security package is not one asset

The security package in project finance typically has five elements: a pledge over the SPV's shares, a mortgage over project assets, assignment of receivables under the revenue contract, assignment of insurance policies, and a pledge over the project accounts.

None of these is sufficient alone; together they let the lender step in and keep the project running if something goes wrong.

Reserve accounts and the cash flow waterfall

The project company cannot distribute the cash it generates directly to shareholders. Operating costs are paid first, then debt service, then the debt service reserve account, then the maintenance reserve; distribution to shareholders comes last.

This order — the cash flow waterfall — is set out clause by clause in the agreement, and distributions stop automatically once DSCR falls below a defined threshold.

Why the structure is rebuilt for every project

Even two projects in the same sector cannot share an identical security structure; the nature of the revenue contract, who carries construction risk, and the currency match between revenue and costs differ from project to project.

This is why project finance advisory is not about applying a template but about mapping the project's own risk profile and building the security and DSCR structure around it.

Frequently asked questions