Identifying and analysing project risks and risk allocation

Risk is a common (and defining) feature of many project finance transactions.

To decide whether or not to lend to a project, project finance lenders must identify and analyse every risk associated with the project. They will want to see that risks are:

• • shared across the project participants (and not left with the borrower); and
• • mitigated as far as possible, for example, with additional credit support or insurance.

If the risks involved in a project cannot be sufficiently minimised to the satisfaction of the lenders, this will often be reflected in the margin for the loan. In some cases, the risks associated with a project will mean that the lenders decide that they cannot lend at all. It is very important that the sponsor gets its risk strategy right.

This two-part guidance note identifies the major areas of risk that are common to many projects, and explains some of the ways in which they are usually tackled. The major areas of risk include:

• • sponsor risk;
• • construction risk;
• • permitting risk;
• • operating risk;
• • supply or resource risk;
• • off-take risk;
• • legal and political risk;
• • environmental and social risk
• • currency risk; and
• • interest rate risk.

See Identifying and analysing project risks and risk allocation part 1.

See Identifying and analysing project risks and risk allocation part 2.