Situating Project Finance and Securitization in Context

Article excerpt

Carl Bjerre has written an interesting analysis of some overlapping legal issues in project finance and securitization transactions. However, some of his reasoning and conclusions do not reflect the broader environment in which these transactions are carried out.

Project finance generally results in the creation of a new cash-flow producing asset. Because this asset is created not in the originator but in the special purpose vehicle (SPV), no true sale is required. Consequently, project financings are safer from interference in the case of an originator bankruptcy and are less sensitive to originator recourse. Indeed, project financings are typically non-recourse to the originator. Further, in a project finance transaction there is no risk of the financing being recategorized as a secured loan on the balance sheet of the originator, which would result in increased leverage on its balance sheet. Although project finance has structural aspects that provide definite advantages over traditional structured finance, these differences pose problems of their own. Specifically, the opportunities for a project finance SPV bankruptcy are substantially greater than the typically passive SPV designed for structured finance transactions. When an SPV is operating an asset, and the asset is a dangerous or controversial one, there is an increased chance of adverse financial consequences. Project finance receivables generally (but not always) flow from a small number of obligors. These factors introduce greater credit risk than is normally found in structured finance securitizations, which typically consist of receivables from a statistically predictable large pool.

Professor Bjerre's comparison and contrast of project financing and securitization is somewhat effective, but he abruptly moves into a wholly unrelated discussion of consensuality with respect to the adverse impact that project financed transactions may have on third parties. (1) Since project finance mechanisms typically result in the creation of a new asset such as a large infrastructure project, there are frequently broad social and political ramifications that are absent from most structured financings. Third parties are affected by the project operations. This leads Professor Bjerre to his main argument: that consensuality is only present in varying degrees in project finance transactions. (2) In other words, many third parties do not consent to the project, but are greatly impacted by it nonetheless. Structured finance also struggles with this issue, but on the level of unsecured creditors of the originator wanting fair compensation for the transfer of receivables.

Professor Bjerre's article would be more effective by comparing and contrasting basic structuring issues in securitization and project finance. It is debatable whether a law review article in a symposium issue on securitization should ruminate about erecting "a philosophical framework within which to judge the acceptability" of the tradeoffs between economic benefits and social costs involved in large projects. (3) Professor Bjerre wants to connect the "discourses" of human rights law, sociology, and developmental economics with project finance. This is a fine thought in the abstract, but he misses the mark. The developmental concerns Professor Bjerre raises are important ones. However, I fail to see the relevance to other parts of the article. Professor Bjerre seems to conflate issues of project financing techniques with the societal effects of project finance. Professor Bjerre should critique not the social and political aspects of project finance, but rather the regulatory structure governing large-scale investments in general. There is nothing unique to project finance in this regard. The same power plant can be financed through project financing techniques, through direct foreign equity investments, or by local governments from tax revenues. Project finance is only one of several financial means to accomplish the same result. …