Every day CCC Training provides a definition of a different project finance term, so please bookmark this page to build up your own personal glossary.

Participants in CCC Training courses each receive the most up-to-date version of our comprehensive glossary – which covers the complete range of financing, documentation, ESG, sector and technical terminology.

TODAY’S DEFINITION

Clean Development Mechanism

By Glossary

One of the Flexible Mechanisms defined in the Kyoto Protocol (IPCC, 2007) that provides for emissions reduction projects which generate Certified Emission Reduction units (CERs) which may be traded in emissions trading schemes.

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A-Z of Project Finance

Advance Payment Guarantee

By Glossary

Where a construction contractor receives an advance payment (often in the range of 10-20% of contract price) he will frequently be required to post a Bond for the same amount by way of security until the amount of work represented by the payment has been carried out. The bond will…

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Amortisation

By Glossary

With regard to loans, amortisation is the process of reducing the size of the loan by making scheduled repayments of principal (as opposed to the interest due on the loan outstandings). The amortisation schedule is thus the agreed series of repayments built into the loan agreement. In accounting, amortisation is…

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Annual Debt Service Cover Ratio (ADSCR)

By Glossary

The ratio of Cashflow Available for Debt Service to interest payments and loan repayments in a given period. The most commonly used ratio for the sculpting and stress-testing of debt service payments and the setting / testing of cashflow-based covenants.

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Arrangement Fee

By Glossary

In project finance, usually the fee paid by the sponsor(s) of a project to the lender(s) acting as Mandated Lead Arranger(s) in return for structuring, documenting and syndicating the necessary loan facilities. From this fee the Mandated Lead Arranger(s) will typically pay Participation Fees to the lenders joining the transaction…

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Bid Bond

By Glossary

A bid bond is issued to the owner of a project (typically the SPV), as part of a supply bidding process, to provide assurance  that the winning bidder will undertake the contract under the terms at which they bid. The bond is subject to full or partial forfeiture if the…

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Boilerplate

By Glossary

In contract law, the term “boilerplate language” or “boilerplate clause” describes the parts of a contract that are considered standard. In negotiations, the phrase “that’s boilerplate” can be used to mean that a clause is simply required and therefore not negotiable, does not need to be negotiated or is not…

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Bond

By Glossary

May have a range of meanings in the finance sector. In project finance the most common meanings are: A loan instrument used as an alternative or in addition to bank financing – a “Project Bond”. The project SPV raises debt by selling bonds to investors – usually through the intermediary…

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Borrowing Base Facility

By Glossary

A type of loan facility used in Reserve-Based Lending (RBL). The term may refer to either the US type of facility (US Borrowing Base) or the European / International variant (European Borrowing Base).

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Business Interruption Insurance

By Glossary

Business interruption insurance is a type of insurance that covers the loss of revenue relating to delay, suspension or closure of a project facility , provided that such interruption is caused by (or tied to) a claim for physical damage to the underlying project.  It is limited in duration, typically…

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Capacity Payment

By Glossary

Part of an offtake arrangement – such as a Power Purchase Agreement – which is structured so as to cover the fixed costs of a project SPV, including its Debt Service. Sometimes referred to as an Availability Payment. The payment is made to the SPV regardless of actual offtake, so…

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Cash Sweep

By Glossary

A mechanism used in project finance debt structures where projected revenue / cashflow is inherently unpredictable. Following scheduled Debt Service and any required transfers to reserve accounts, some or all of the remaining Cashflow Available for Debt Service – which would usually be distributed to the sponsors of the project…

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Cash Trap

By Glossary

Any feature of a loan facility which permits lenders to hold cash within the SPV rather than releasing it to the project Sponsors as a Distribution. An example would be a Distribution Lock-Up Ratio. Cash traps are viewed negatively by sponsors – who therefore tend to negotiate them heavily –…

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Cashflow Available for Debt Service (CFADS)

By Glossary

The cashflow remaining in a given period (either historical or projected) after cash operating costs and taxes have been deducted from operating revenues. It is emphasised that this is a cashflow – rather than revenue statement (P&L) – concept, so items such as provisions and depreciation are not taken into…

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Cashflow Waterfall

By Glossary

The pre-agreed order in which payments will be made from available cashflow by the SPV – typically operating costs (including taxes), then debt service payments and transfers to reserve accounts and then distributions to Equity. Also known as the Cashflow Cascade.

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Clean Development Mechanism

By Glossary

One of the Flexible Mechanisms defined in the Kyoto Protocol (IPCC, 2007) that provides for emissions reduction projects which generate Certified Emission Reduction units (CERs) which may be traded in emissions trading schemes.

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Club Deal

By Glossary

A club deal is a loan provided by a group of banks on a non-syndicated basis, i.e. they are all fronting banks who each have a seat at the negotiating table and are each party to the financing documents.  There is no lead arranger as such, rather each lender gets…

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Commitment Commission

By Glossary

Otherwise known as Non-Utilisation Fee. A fee charged by lenders on the unutilised portion of a committed loan facility – such as a project financing – to compensate them for the capital which they need to set aside on the unused portion of a committed transaction. In project financing transactions…

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Compensation Account

By Glossary

A Control Account, which will receive sums such as insurance proceeds, contract termination payments and performance liquidated damages. Sums from this account may be used to repair / reinstate the project. If this does not happen the sums on the Compensation Account are likely to be used to repay the…

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Conditions Precedent

By Glossary

A condition precedent is an event or state of affairs that is required before something else will occur. In contract law, a condition precedent is an event which must occur, unless its non-occurrence is excused, before performance under a contract becomes due, i.e., before any contractual duty exists. In project…

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Control Accounts

By Glossary

Accounts maintained at the lender / agent bank in the name of the Borrower but with the lenders having security rights. The accounts typically include the Disbursement Account, Proceeds Account, Debt Service Reserve Account, Maintenance Reserve Account and Compensation Account.

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Covenant

By Glossary

Sometimes called an Undertaking. A covenant is a solemn promise to engage in or refrain from a specified action. A covenant is a type of agreement analogous to a contractual condition. The covenantor makes a promise to a covenantee to do (affirmative covenant (US) / positive covenant (English Law)) or…

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Cover Ratio

By Glossary

A form of calculation used in the structuring and stress-testing of project financing debt facilities – the most common being the Annual Debt Service Cover Ratio and the Loan Life Cover Ratio. Cover ratio values are frequently also incorporated into loan agreement Covenants and Events of Default.

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Debt Service Undertaking

By Glossary

A commitment by a project Sponsor to meet scheduled interest payments or interest and principal repayments on a project which has not been completed by a defined date, until the date that completion is actually achieved.

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Delay Liquidated Damages

By Glossary

Damages paid by a construction contractor in compensation for late completion of a project being constructed under the terms of a Fixed Price Turnkey or Engineering Procurement & Construction contract. The damages will typically be calculated as an amount per day, per week or per month of delay beyond the…

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Disbursement Account

By Glossary

A Control Account, which receives loan drawdowns and equity injections and which is mainly used to make payments to the construction contractor(s) against appropriate evidence that construction milestones have been met.

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Distribution Lock-Up Ratio

By Glossary

A Covenant which requires a project SPV not to pay Distributions unless a pre-agreed Cover Ratio is met. Typically distributions will not be allowed unless three conditions are met: No Event of Default outstanding; Debt Service Reserve Account fully funded as required; Distribution lock-up ratio test met.

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Distributions

By Glossary

Payments by a project SPV to its Sponsors by way of dividends on equity ordinary shares and / or by way of interest and principal repayments in respect of equity subscribed as subordinated inter-company loans. Such payments typically occur on a Repayment Date, at the bottom of the Cashflow Waterfall.

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Equator Principles

By Glossary

The Equator Principles provide a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance. It is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making. The Equator Principles, formally launched in Washington DC on…

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Equity

By Glossary

The Sponsors’ share of the cost of construction, which is typically injected into the SPV partly by the purchase of ordinary share capital in the SPV and partly by way of so-called “Inter-Company Loans” from the Sponsor(s) to the SPV. It is common for the amount of inter-company loan funding…

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ESG Considerations/ Engagement and Investments

By Glossary

A method of running businesses and select investments which takes into account the Environmental, Social and Governance impacts of business and investment decisions. “E”: concerns issues related to resource use, pollution, climate change, energy use, waste management and other physical environmental challenges and opportunities. “S”: impact on Social, inclusion, economic…

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European Borrowing Base

By Glossary

A form of Reserve Based Lending which is used in most upstream oil & gas sectors outside the Americas, where the US Borrowing Base structure is employed. The European (sometimes “International”) facility type is characterised by a more mechanistic approach than its US equivalent. The European model also accords far…

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Event of Default

By Glossary

An occurrence which gives lenders under a project financing arrangement the right to declare the Borrower in default of its obligations under the financing agreements and to require immediate repayment of the debt in full. While project lenders rarely exercise this right, they will use their ability to do so…

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Export Credit Agency (ECA)

By Glossary

An export credit agency (or ECA) or investment insurance agency is a government-owned or government-supported institution which provides export financing and / or credit insurance or guarantees to lenders. The objective of ECAs’ activities is to encourage exports and thereby to stimulate activity within their own economies. Examples are Euler-Hermes…

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Feed-In Tariff

By Glossary

A policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each technology. Rather than pay an equal amount for energy, however generated, technologies such as wind power and solar PV, for instance, are awarded…

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Fixed Price Turnkey (FPTK) Contract

By Glossary

For most practical purposes in project financing, a FPTK contract is the same as an Engineering Procurement & Construction (EPC) Contract. The contract requires the contractor to deliver a project by a date certain and for a price which may not increase without the approval of the project owner. The…

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Force Majeure (FM)

By Glossary

Force majeure is generally intended to cover occurrences beyond the reasonable control of a party to a contract. It is a common clause in contracts that essentially frees parties from liability or obligation when an extraordinary event or circumstance beyond the reasonable control of the parties, such as a war,…

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Front-End Engineering & Design (FEED)

By Glossary

An engineering design approach much used in process and power plant projects to control project expenses and thoroughly plan a project. It may also be referred to as Pre-project planning (PPP), front-end loading (FEL), feasibility analysis, or early project planning. The FEE is basic engineering which comes after the conceptual…

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Gearing

By Glossary

The ratio between Equity and project finance debt within the financing structure. Usually given as Debt : Equity – thus “80:20 gearing” means 80% debt and 20% Equity. This ratio is also referred to as the project’s “Leverage”.

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Green Bond

By Glossary

A bond issued by a bank or company, the proceeds of which will go entirely into renewable energy and other environmentally-friendly projects. The issuer will normally label it as a green bond. There is no internationally-recognised standard for what constitutes a green bond.

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Green Certificate

By Glossary

A green certificate is a tradable commodity proving that certain electricity is generated using renewable energy sources. Typically one certificate represents the generation of one Megawatt hour of electricity. What is defined as “renewable” varies from certificate trading scheme to trading scheme. Green certificates represent the environmental value of renewable…

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Greenhouse Gas

By Glossary

A gas which absorbs infra-red radiation (i.e. the sun’s heat and energy) in the atmosphere. Greenhouse gases include water vapour, carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), halogenated fluorocarbons (HCFCs), ozone (O3), perfluorinated carbons (PFCs), and hydrofluorocarbons (HFCs). These gases contribute to the ‘greenhouse effect’.

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Independent Technical Consultant

By Glossary

A due diligence adviser working generally on behalf of the lenders in a project finance transaction. Also known as an Independent Engineer. The ITC’s costs are met by the Borrower. The scope of work of the ITC may cover only the period up to Financial Close, although lenders will wish…

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Intercompany Loans

By Glossary

Usually the largest part of the equity funding injected by the Sponsors into the SPV. For the Inter-Company Loans to be treated as Equity by the lenders, they will need to be subordinated to the debt provided by the external lenders.

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Intercreditor Agreement

By Glossary

An agreement between / among the main creditors of a project Borrower governing the relationships among those lenders in respect of the borrower’s obligations. Typically such an agreement will contain provisions regarding matters such as: Common terms Order of drawdown Cashflow waterfall Limitation on ability of creditors to vary their…

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Interest During Construction (IDC)

By Glossary

The interest which is due on project financing loan facilities during the construction period, but which cannot be paid since the Borrower is not generating cash. This interest is generally added to the loan or “capitalised”. IDC is in effect therefore a cost of construction.

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Know Your Customer (KYC)

By Glossary

Know your customer, alternatively known as know your client or simply KYC, is the process of a business verifying the identity of its clients and assessing their suitability, along with the potential risks of illegal intentions towards the business relationship. The term is also used to refer to the bank…

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Limited-Recourse Loan

By Glossary

In a project financed structure, the Sponsors will not normally be under any obligation to provide further financing support to the SPV once they have injected their base Equity. The Lenders are therefore said to have limited recourse to the balance sheets of the Sponsors. In practice it is common…

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Liquidated Damages (LDs)

By Glossary

A fixed level of damages payable to the project company/SPV– typically by a construction or operation & maintenance contractor – as a result of the contractor failing to meet contractual obligations. In the case of a construction contractor these will typically be Delay LDs and / or Performance LDs. An…

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Loan Life Cover Ratio (LLCR)

By Glossary

The ratio of the net present value of CFADS during the remaining loan life to the amount of the loan which is still outstanding at the time the calculation is made. A common ratio for the sculpting of debt and the setting / testing of covenants in minerals-based project transactions, such as…

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Loan Market Association (LMA)

By Glossary

The Loan Market Association (LMA) was formed in December 1996 and is based in London, UK. Its initial aim was to assist in the development of the secondary loan market in Europe, which was in its infancy at that time. Its intention was to develop industry best practice and standard…

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Loss Payee Clause

By Glossary

A loss payee clause (or loss payable clause) is a clause in a contract of insurance that provides, in the event of payment being made under the policy in relation to the insured risk, that payment will be made to a third party rather than to the insured beneficiary of…

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Multilateral Agency

By Glossary

An international organisation owned by three or more countries which exists to encourage the development of productive private enterprise through the provision of financing, guarantees and other support mechanisms. Examples are the International Finance Corporation (IFC) – a member of the World Bank Group –  the African Development Bank and…

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Negative Pledge

By Glossary

A provision in a contract which prohibits a party to the contract from creating any security interests over certain property specified in the provision. Negative pledges often appear in project finance security documents, where they operate to prohibit the person who is granting the security interest from creating any other…

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Non-Recourse Loan

By Glossary

The difference between a Limited-Recourse Loan and a Non-Recourse Loan is really one of emphasis. The term Non-Recourse Loan tends to be used by Sponsors, who are thereby emphasising that once they have injected their base Equity there is no further obligation on them. Lenders tend to use the term “Limited-Recourse Loan” rather than “Non-Recourse…

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Offtake

By Glossary

The arrangements for the disposal / use of the goods or services to be produced by a project. Many projects have a formal offtake contract (e.g. a power purchase agreement) with a contractual Offtaker. Others have no formal offtake agreements – e.g. where a commodity (such as oil) is sold in…

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Open Book Contract

By Glossary

In an open-book contract, the buyer and seller of work/services agree on: a) which costs are remunerable; and b) the margin that the supplier can add to these costs. The project is then invoiced to the customer based on the actual costs incurred plus the agreed margin. It is essentially…

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Participation Fee

By Glossary

A fee paid by the Mandated Lead Arranger(s) of a financing to other banks taking part in the transaction. This is a one-off payment, typically a flat percentage of the participant’s contribution to the loan (the participant’s “ticket”).

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Performance Bond

By Glossary

When a contractor’s tender for a construction project is successful, he will be released from his obligations under his Bid Bond once he has submitted a performance bond as security for completion of the work. If the contractor fails to construct the project according to the specifications laid out by…

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Political Risk Insurance (PRI)

By Glossary

A type of insurance which covers the risk that losses will be caused by country or political issues, such as: Political violence – revolution, insurrection, civil unrest, terrorism or war; Governmental expropriation or confiscation of assets; Governmental frustration or repudiation of contracts; Wrongful calling of letters of credit or similar…

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Power Purchase Agreement (PPA)

By Glossary

A structured – typically long-term – offtake arrangement between a power-generator SPV and a power Offtaker. The offtaker may be a public or private sector entity. A wide range of such instruments exists, but the PPA incorporating a Capacity Payment tends to be the offtake structure of choice in project-financed…

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Prepayment Penalty / Fee

By Glossary

A fee which requires a payment by the Borrower to the parties financing a project (typically banks) in the event that all or a part of a financing is repaid by the borrower in advance of its scheduled final maturity date. The payment is typically a percentage of the amount repaid. If…

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Price Deck

By Glossary

The price assumption being used at a particular point in time by a bank financing oil & gas projects for projected production which is not subject to a hedge such as a swap, option or collar. The price deck assumption will be revised by a lender on a regular basis…

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Principles for Responsible Investments (PRI)

By Glossary

The world’s leading organisation for responsible investment. The PRI is truly independent and acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI is supported by the United Nations.

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Project Documents

By Glossary

The commercial contracts and other agreements relating to a project to which the lenders are NOT party and which have been identified as “Project Documents” in the loan and security agreements. Once a document has been classified as such, it will be impacted by provisions in the loan documents, including…

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Project Life Cover Ratio (PLCR)

By Glossary

The ratio of the net present value of CFADS during the remaining project life to the amount of the loan which is still outstanding at the time the calculation is made. Much used in the sculpting of debt capacity in upstream oil &gas lending, but also used as an additional…

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Regulator

By Glossary

A state-appointed individual or body with oversight powers in industries such as gas, water and electricity generation / distribution – where the services are provided by one supplier (e.g. a power grid operator) or a very limited number of suppliers. The role of the regulator usually includes ensuring that monopoly…

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Representations & Warranties

By Glossary

Clauses in project financing agreements where the Borrower – and potentially also the Sponsor(s) – confirm the accuracy and sufficiency of information or assurances provided to the lenders. Certain representations and warranties are deemed to be repeated at each drawdown or roll-over of a loan. If it can be shown…

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Reserve-Based Lending (RBL)

By Glossary

A form of lending against petroleum reserves which uses some aspects of project finance structuring (notably discounted cashflow of Cashflow Available For Debt Service) but which: a) is not structured as a Term Loan; and b) is not specifically dedicated to the development of particular petroleum assets. RBL facilities are…

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Retention Bond

By Glossary

A form of surety provided by a contractor so as to avoid deductions (retentions) being made from the milestone payments under a construction contract. Thus rather than receiving 90% of a stage payment due to him when a milestone is passed (with the other 10% being payable at completion of…

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Revenue Account

By Glossary

A Control Account. The account which is opened in the name of the Borrower in the books of the agent bank for a transaction into which are paid the proceeds of sale of the project’s output. Also known as a Proceeds Account.

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Revolving Credit

By Glossary

A form of financing facility where a Borrower who repays an amount borrowed under the facility will have the right to draw that amount again. Revolving credits contrast with Term Loans, which have a drawdown period and repayment period. Amounts repaid under a term loan structure are not available for…

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Sale & Purchase Agreement (SPA)

By Glossary

A contractual agreement for the sale to a buyer of physical goods or other assets – most often encountered in the project financing field in the context of LNG. SPAs are the usual method for the long-term sale of LNG and frequently incorporate take-or-pay provisions.

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Single-Purpose Vehicle (SPV)

By Glossary

The company which is established to construct, own and operate the project in question. The SPV will in almost all cases be the borrower of project loan facilities. NB – occasionally the SPV may be a limited partnership, but a limited company is the norm.

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Standby Letter of Credit

By Glossary

A financial instrument (typically issued by a bank) which is issued for the benefit of a party to a contract, who can claim  payment under that instrument if, for whatever reason the beneficiary is not paid under that contract . The issuing bank must pay upon receipt of a completed…

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Subordinated

By Glossary

An instrument (usually a debt or obligation) which ranks lower than / behind some other instrument in terms of interest payment, debt repayment, access to cashflow or access to security. If debt instruments are of equal rank they are “pari passu”.

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Subrogation

By Glossary

Subrogation is the right to “step into the shoes” of a third party (such as a creditor or an insurance company) and assume their right to collect a debt or damages. Subrogation is an equitable remedy, having first developed in the English Court of Chancery. It is a familiar feature…

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Super Majority

By Glossary

An increased majority percentage requirement which is incorporated into a loan agreement for the approval of particular issues – usually those which are complex or contentious.

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Take or Pay

By Glossary

Take or pay is a contractual provision, whereby one party has the obligation of either (i) taking delivery of the product, goods or service or (ii) paying a specified amount.  Take or pay contracts ensure a predictable level of revenues, since they are not dependent on demand and therefore will…

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Term Loan

By Glossary

A financing facility, typically with a maturity greater than 3 years, with an agreed availability period (when the funds may be drawn) and a predetermined repayment schedule / arrangement. Amounts drawn under term loans may not be redrawn following repayment. Term loans are not typically repayable on demand. An Event…

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Term Sheet

By Glossary

May be seen as a memorandum of understanding, setting out the terms and conditions of a financing which will in due course be incorporated into a full loan agreement. Term sheets may be “uncommitted” or “committed”. The former will normally be subject to: lender credit committee approval; formal loan documentation…

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Tolling

By Glossary

Refers generally to a contractual arrangement whereby an Offtaker (the “toller”) agrees to make payments to an SPV in return for the provision of services – e.g. refining of crude, power generation, regasification of LNG. The payments tend to be availability / capacity based and therefore such structures frequently transfer…

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Transition Risks

By Glossary

The financial risks which could result from significant policy, legal, technology and market changes as we transition to a lower-carbon global economy and climate resilient future.

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UN Sustainable Development Goals (SDGs)

By Glossary

A collection of 17 goals reflecting the biggest challenges facing global societies, environments and economies today. Many investment decisions are now driven by the willingness to meet those SDGs.The 17 SDGs are: no poverty, zero hunger, good health and wellbeing, quality education, gender equality, clean water and sanitation, affordable and…

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Underwriting

By Glossary

In syndicated loan transactions the Mandated Lead Arrangers may agree, for an underwriting fee, to provide the full amount of the loan facility if it proves impossible for them to syndicate the transaction to other lenders. The name derives from the Lloyd’s of London insurance market. Financial bankers, who would…

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US Borrowing Base

By Glossary

A form of Reserve Based Lending which is used in North America. US Borrowing Base structures typically require 100% approval by all lenders for any increases in debt capacity (as opposed to 2/3 in European Borrowing Base Structures). US-style facilities generally also give only very limited debt value to probable…

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Variation Order

By Glossary

A variation (sometimes referred to as a variation instruction, variation order (VO) or change order), is an alteration to the scope of works in a construction contract in the form of an addition, substitution or omission from the original scope of works. Lenders (and sponsors) are acutely aware that any…

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Warranty Bond

By Glossary

A  Bond issued to an SPV at the instruction of a construction contractor (usually by a banker to that contractor) which guarantees the obligations of the contractor up to the amount of the bond during the warranty period.

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