| Investopedia: "Non Recourse Finance is a loan where the lending bank is only entitled to repayment from the profits of the project the loan is funding, not from other assets of the borrower. These types of projects are characterized by high capital expenditures." (credit: investopedia.com) |
If you use the phrase, "non recourse finance", your listener will probably think of nothing or will picture Enron and other financial shenanigans. However, it's simple: projects get financed off-balance-sheet or on-balance-sheet. It's one way or the other. That is non recourse financing: off balance sheet. If financed On balance sheet then the loans and credit involved in the project have to be shown on the purchasing company's balance sheet, and that the financing company can claim the assets of the purchasing company if there is a payment default. New capacity is often financed through Non-Recourse Finance, which is commonly known as off-balance-sheet finance or limited recourse.
Another advantage non recourse finance is that because of the extensive documentation, you can usually anticipate a longer loan maturity period than when financing on balance sheet. The risk-sharing characteristic of this type of financing, enables the project sponsors to avoid recording the project on their balance sheets. Lenders expect repayment from the cash flows generated by the project. Although assets are technically pledged as security for the loan, the assets are not easily available as a source for repayment.
This form of financing is "non-recourse" because the lender cannot claim assets outside the project as support for the loan unless these specific assets are specifically enumerated as project security. The main advantage of nonrecourse finance is that it allows the developers to finance projects which couldn't possibly be financed with their own limited resources. Security is provided by the supply and the contracts as well as the contractual risk allocation. The simple rule of thumb in all non-recouse finance arrangements is that the risks are always transferred to stronger entities who are better able to handle the risks.
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