9 - Insurance as a risk management tool

Summary

Setting the background

The implications of non-recourse or limited recourse financing usually prompt potential project finance (PF) lenders to assess carefully all possible risks that might arise in a project to ensure that those risks are mitigated and controlled. The failure to do so might upset the schedule of cash flowing into the project, while the project revenues are the only source for repayment of the loan, with interest accruing on a daily basis. In an extreme case, this might put the viability of the whole project at risk, thus triggering non-payment of debt owed to banks.

So lenders will typically look for the project to be sound at various levels: technically, environmentally and legally. Lenders will also look for the proof of demand for the project’s output in different markets, as well as for the project’s potential to penetrate those markets with the assumed percentage of sales and thus secure the assumed margins in each market. This will ensure that the project is feasible and complies with the lender’s standards.