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Glossary of Project Finance Terms and Acronyms 

(see reference note)


This glossary contains a list of more than 650 definitions and more than 275 acronyms for terms related to and institutions involved with the field of project finance

A hardcopy of this Project Finance Glossary (case #203-040) is available from Harvard Business School Publishing.


A    B    C    D    E    F    G    H    I    J    K    L    M 

N    O    P    Q    R    S    T    U    V    W    X    Y    Z




Note:  This Glossary is copyright protected by Benjamin C. Esty

Copyright ©2004 Benjamin C. Esty


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Acceleration: A remedy available to lenders following an event of default that causes a borrower’s indebtedness to become immediately due and payable in full.

Acceptance: The positive response to an offer seeking participation in a credit facility.

Accrual Accounting:  Recognizing revenues and expenses when earned or incurred.

Accrued Interest: The interest earned on a loan or note between two interest payment dates.

Administrative Agent: The arranger of a syndicated loan.

Advance: A partial upfront drawdown of a loan.

Ad Valorem Tax: A tax or duty based on the value of a good or service (Latin: “according to value”).

Affiliate: A foreign operation—either a branch or foreign–incorporated subsidiary. A corporation that directly (or indirectly) controls or is controlled by another corporation.

A.G. Aktiengesellschaft: German word for incorporated or stock company.

Agency Agreement: A legal agreement between a borrower, a group of lenders, and one or more agent banks governing the rights and responsibilities of the agent(s) in the transaction. The agency agreement is an integral part of a syndicated loan.

Agent: The bank responsible for administering a project financing.

All-In Rate: The interest rate including the loan spread, commitment fees, and other up-front fees.

All Risks Insurance: Insurance against physical damage to the project during operations.

Alternative Interest Rate Clause: A clause usually incorporated in financing documents making provisions for interest to be calculated on a different basis (typically the lenders cost of funds) where the chosen basis rate (e.g., Libor) cannot be determined.  This clause is also known as the market disruption clause.

A-Loan: A loan from a multilateral agency such as the International Finance Corporation (IFC) where it is the lender of record and where it books the loan for its own account.

American Depository Receipt (ADR): A certificate of ownership issued by a U.S. bank representing a claim on underlying foreign securities. ADRs may be traded in lieu of trading in the actual underlying shares.

Amortization: Reduction of capital or up–front expenses (capitalized) over time, often with an equal amount per annum. 

Annual Debt Service Coverage Ratio (ADSCR): The ratio between operating cash flow and debt service during any one-year period. This ratio is used to determine a project’s debt capacity.

Annuity:  When the sum of principal and interest is equal for each period.

A/P: An abbreviation in international trade documentation for either “authority to purchase” or “authority to pay.”

Arbitrage: To take advantage of discrepancies in price or yields in different markets.

Arbitrage Pricing Theory (APT): An asset pricing model based purely on arbitrage arguments. The APT implies that multiple risk factors determine an asset’s required rate of return. In contrast, the Capital Asset Pricing Model (CAPM) uses a single risk factor (beta) to determine required rates of return.

Arms–Length Price:  The price at which a willing buyer and a willing unrelated seller freely agree to carry out a transaction.

Arrangement Fee: A fee paid to a mandated bank or group of banks (lead arrangers) for arranging a transaction. It includes fees to be paid to participating banks.

Arranger: A bank or other financial institution responsible for originating and syndicating a loan transaction. The arranger always has a senior role, is often the agent, and usually participates in the transaction at the most senior level (it holds the largest share of the loan).

Ask Price: The price at which a dealer is willing to sell foreign exchange, securities, or commodities.  Also called the offer price.

Asset:    The physical project and its associated contracts, rights, and interests of every kind, in the present or future, which can be valued or used to repay debt.

Assignment: A transfer of legal title to an asset for security purposes.

Audit: An independent examination of the financial statements, project studies, or projections.

Availability Factor: A measure of how much a power plant is available to produce power, usually expressed as the ratio (a percentage) of a power plant's available hours to the total number of hours in such a period.

Availability Period: The period during which a loan is available for drawdown.

Available Cash Flow: Total cash sources less total cash uses before payment of debt service.

Average Debt Service Coverage Ratio (Average DSCR): The average annual debt service coverage ratio (ADSCR) calculated over the life of a loan.

Average Loan Life: The average maturity for all repayments weighted by the principal outstanding.

Avoided Costs: Incremental costs that a utility would incur to purchase or generate electricity if it did not purchase electricity from an independent power project (IPP).


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Backcast: The use of historical rather than predicted information (a forecast) in a financial model. Often done to test the robustness of a project’s capital structure to changes in underlying conditions.

Back Stop Facility: Facility to advance funds only when a borrower can not obtain funds under short-term instruments, such as commercial paper.

Backto–Back LC:  A letter of credit issued on the strength of another letter of credit.  The terms must be identical.

Backwardation: A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This condition may occur when the costs of storing the product until delivery are effectively subtracted from the price today. The opposite of contango.

Balance of Payments: A system of recording all of a country’s economic transactions with the rest of the world for a certain period. The balance is typically broken into three accounts: capital, current, and gold.

Balance Sheet: The accounts which show assets, liabilities, net worth/shareholders’ equity.

Balloon Payment: A final debt repayment that is substantially larger than the preceding repayments.

Bankable: Capable of being financed.

Barter: The physical form of countertrade.

Base Case: A cash flow projection with variables measured at their expected values.

Base Load Plant: A power plant that runs all the time, as opposed to a plant that is used only in times of peak electricity requirements (a peaking plant).

Base Rate: On a variable rate loan, it is the key underlying rate to which lenders add a spread to come up with a total lending rate for the borrower.

Basel Accord: The Basel Committee on Banking Supervison’s regulatory framework of capital standards for banks, established in 1988 to protect bank owners, depositors, creditors, and deposit insurers (e.g., governments) against financial distress.

Basis Point (bp): One-hundredth of one percent (1/100 * 1%, or 0.0001).

Basis Risk: The type of risk in which the exposure and the hedging instrument are not perfectly matched or correlated.

Bearer Bond: The bond certificate is not recorded as owned by a particular investor and is itself, therefore, negotiable.

 “Behind–the–Fence: A project or transaction that derives all of its revenues from a local customer such as a mine mouth power plant (i.e., a project that is fully integrated in some kind of manufacturing process).  For power projects, the "fence" refers to the boundary between the power grid and the industrial facility.  See also “Inside the Fence.”

Berne Union: The Berne Union was established in 1934 to determine sound principles for export credit and foreign investment insurance. As of 2002, the Berne Union has 51 members from 42 countries.

Best and Final Offer (BAFO): A second-stage bid in a public procurement.

Best Efforts: A very high standard of undertaking, nevertheless excusable in the event of force majeure or failure to execute the matter in question after trying to do so on a sustained, dedicated basis.  Also called best endeavors.

Best Efforts Arranger: A bank or other lender that agrees to syndicate a loan but that is unwilling to guarantee successful completion of the deal.

Bid Bond: A small percentage (1% to 3%) of the tender contract price is established as a bid performance bond.

Bid Price: The price that a dealer is willing to pay to purchase a foreign exchange, security, or commodity.

Bidding Group: The banks that bid on a facility.

Bilateral Agency (BLA): An institution established by one country to promote trade with other countries, such as an export-import agency or an export credit agency (ECA).

Bill of Exchange (B/E): A written order requesting one party (e.g., an importer) to pay a specified amount of money at a specified time to the order of the writer of the bill of exchange.  Also called a draft.

Bill of Lading (B/L): A contract between a common carrier and a shipper to transport goods to a specific destination.  B/L also represents receipt of the goods.

Black–Scholes Option Pricing Model: A model for pricing call options based on arbitrage arguments developed by Fischer Black and Myron Scholes (with insights from Robert Merton) in 1973. The model uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the expected standard deviation of the stock return.

Blocked Currency: A currency, which due to inconvertibility or transfer risk, cannot be moved out of the country.

B–Loan: A loan syndicated by a multilateral lender, such as the IFC, that acts as the lender of record on behalf of the funding participants (commercial banks and other institutional investors).

Boilerplate:  Standardized terms and conditions in legal contracts or other documents.

Bond: The paper evidence of a legal promise by the issuer to pay the investor on the declared terms.

Bond Rating: An appraisal by a bond rating service of the soundness of a bond as an investment.

Book Runner: The bank that extends invitations for a syndication and is responsible for determining the composition of the lending group and the final hold positions.

Book Value: The value of an asset as reported in a company’s annual financial statements.  This will be at the asset’s historic value less depreciation, which may differ from the asset’s market or replacement value.

Bracket: A level of commitment (underwriting or final take) and related title offered to banks invited into a syndicated transaction, such as arranger or manager.

Brady Bonds: Bonds issued by developing countries under a debt-reduction plan.

Branch: A foreign operation not incorporated in the host country unlike a subsidiary.

Break Even: The reduction of a project finance net cash flow to zero by changing an input variable such as the output price or input costs.

Break Even Analysis:  The level of sales needed to cover operating expenses.

Bridge Financing: Interim or temporary financing from a bank while a borrower obtains medium and long–term financing from the capital markets. 

British Thermal Unit (Btu): The quantity of heat needed to raise the temperature of 1 pound of water by 1ºF at or near 39.2ºF.

Broker: A party which brings together sponsors, financiers, or insurers but is not acting as a principal.

Builders–All Risk (BAR): The standard insurance package used during construction.

Build–Lease–Transfer (BLT): The situation when a private owner builds an infrastructure facility, leases it for use, and then transfers it to another entity after a specified period.

Build–Own–Operate-–Transfer (BOOT): The situation when a private owner builds, owns, and operates an infrastructure facility and then transfers it to another entity after a specified period.

Build–Own–Transfer (BOT): The situation when a private owner builds, owns, and then transfers an infrastructure facility to another party, often at no cost, after a specified period.

Build–Transfer–Operate (BTO): The situation when a private owner builds an infrastructure facility, transfers it to another entity, and then operates it on a contractual basis for a specified period.

Bullet Loan: A term loan with periodic installments of interest only with the entire principal due at the end of the term as a final payment. The final payment on a balloon loan is sometimes referred to as a bullet.

Bullet Repayment: A one–time repayment, often after no or little amortization of the loan.

Bundling: A grouping of projects or services within a structure which enables them to be financed as a single transaction.

Business Day:  A day on which banks are open for business in financial centers.

Business Interruption Insurance: Insurance against stoppage that is available once the project is operational.

Buy–Back:  A promise to repurchase unsold production or other financial obligations.

Buydown: A single payment by a project contractor to reflect future cash flow losses from anticipated and sustained underperformance; the amount is typically paid out of liquidated damages.

Buyer Credit: An arrangement under which a bank in the supplier’s country lends to a buyer, or a bank, in the buyer’s country that enables the buyer to purchase certain goods or services.

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Call Option: The right to buy a given asset at a fixed price during a particular period.

Cap:  A ceiling on an interest or FX rate through a swap, options, or by agreement.

Capacity:  The amount of energy, measured in kilowatts, that a plant or system is capable of producing.

Capital: The amount of money invested in a venture.

Capital Account: That portion of the balance of payments that measures international lending and investment.

Capital Asset Pricing Model (CAPM):  A theoretical model that relates the return on an asset to its risk, where risk is the contribution of the asset to the volatility of a well diversified portfolio (an asset’s “beta”).

Capital Budget: The cost of planned investment projects.

Capital Expenditures (CapEx): Long-term expenditures for property, plant, and equipment.

Capital Gains/Loss:  The difference between the cost of an asset held for investment and its resale price.

Capital Markets: A broad term to include tradable debt, securities, and equity as distinct from private markets or banks.

Capital Recovery:  The recovery of investments in equipment.  This includes the recovery of the original investment and its carrying costs.

Capital Structure: The financing mix of a company.

Capitalized Interest: During the pre-completion period, a project company can borrow to repay current interest obligations. By capitalizing interest, the principal balance outstanding increases by an amount equal to the interest due.

Cash Available for Debt Service (CADS): The amount of cash available to service debt after all essential operating expenses have been met.

Cash Deficiency Guarantee: A guarantee that requires the project sponsor(s) to contribute additional capital to the project company in the event cash deficiencies materialize due to pre-agreed causes.

Cash Flow: The cash generated by a project.

Cash Flow Cascade: The order of priorities under the financing documentation for the application of the project’s cash flow. See also cash waterfall.

Cash Flow Return on Investment (CFROI):  The profit from continuing operations less cash taxes and depreciation divided by “cash investment” which is the replacement cost of capital employed.

Cash Waterfall: The order of priority for project cash flows as established under the loan and financing documents.

Certain Funds: The provision by lenders to the borrower of a facility with minimal conditions precedent to drawdown (excluding for example material adverse change provisions) during a period to enable the borrower to meet the requirements of the UK Takeover Code in relation to the financing of a takeover bid for a UK quoted company.

Charge: A fixed charge refers to a defined set of assets and is usually recorded in an official registry. A floating charge refers to other assets, which change from time to time (e.g., cash accounts, inventory, or receivables) but which become fixed charges after a default.

Civil Law: Law inspired by old Roman law and associated with the Napoleonic code (French civil law). The primary feature of civil law systems is that laws are codified rather than determined by judges based on precedent, as in common law.

Civil Society Organization (CSO): An association or organization formed voluntarily by the public to represent the interests of specific groups or the society at large. CSOs can be small or large, officially registered or informal.

Claw Back Clause: The ability to recover prior project cash flows that may have been distributed to the sponsors. A claw back is used if there is a shortage of funds to meet defined operating expenses such as maintenance or debt service.

Clearinghouse: Facility through which transactions executed on the floor of an exchange are settled.

C–Loan: A full range of quasi-equity products with both debt and equity characteristics (e.g., convertible debt and subordinated loans) offered by the IFC or other multilateral agencies.

Club: A group of underwriters who do not need to proceed to syndication as part of a fund-raising.

Co–Financing: The situation where different lenders agree to fund under the same documentation and security packages yet may have different interest rates, repayment profiles, and terms. The lenders typically hold different debt tranches.

Cogeneration: The production of energy from the waste heat of industrial processes.

Co–Insurance: The phenomenon whereby a surplus of cash flows from one or more assets or divisions is used to cover the financial obligations of another asset or division.

Co–Manager: A second–tier participant, ranked by size of participation in a financing.

Collar: A ceiling and floor to an interest or FX rate structure through swaps, options, hedging, or by agreement.

Collateral: Assets pledged as security under a loan to assure repayment of debt obligations.

Collateralized Bond Obligation (CBO): Securities issued against a portfolio of bonds with different degrees of credit quality.

Collateralized Debt Obligation (CDO): Securities issued against a portfolio of debt instruments with different degrees of credit quality.

Collateralized Loan Obligation (CLO): Securities issued against a portfolio of loans with different degrees of credit quality.

Combined Cycle: The waste heat from an electric generation unit is recovered as steam, which is used to generate more electricity through a steam turbine.

Commercial Interest Reference Rates (CIRR): The interest rates charged by export credit agencies on their subsidized export credits.

Commercial Operations Date (COD): The date on which the independent engineer (IE) certifies that a facility has completed all required performance tests and/or is built to the specifications outlined in the engineering procurement and construction (EPC) contract.

Commercial Risks: The various risks that can affect a project during operations, such as changes in input and output prices, fluctuations in demand, or failures in mechanical processes.

Commitment Letter: A formal letter offering an underwriting on a given set of terms and conditions, including interest basis/margin and fees.

Commitment Fee: A per annum fee applied to undisbursed balances that lenders are committed to lend; the fee is charged until the end of the availability period.

Common Law: The legal system of England and former English colonies. A body of law based on custom and general principles that serves as a precedent or is applied to situations not covered by statute.

Compensation Trade: The form of countertrade whereby an incoming investment is repaid from the units/revenues generated by that investment.

Competitive Tender: An open bidding situation where many banks may be encouraged to submit offers.

Complementary Financing: Where different lenders agree to fund a project under similar yet parallel documentation and a pro-rata security package.

Completion: The date on which the project's cash flows become the primary method of repayment. It occurs after a completion test typically involving both financial and physical performance criteria. Prior to completion, the primary source of repayment is usually from the sponsors or from the contractor.

Completion Guarantee: A guarantee that ensures a project will achieve physical and/or financial completion. A turnkey contractor guarantees physical completion (achievement of certain operating performance). The guarantees are normally secured by performance bonds and/or penalties in the form of liquidated damages. Alternatively, project sponsors sometimes provide lenders with completion guarantees by agreeing to pay the scheduled debt service in the event the project company does not or cannot pay.

Completion Risks:  Construction, development, or cost overrun risk.

Completion Test: A test of the project's ability to perform as planned and generate the expected cash flows. In a limited-recourse deal, it is the time when the project moves from a full recourse to a nonrecourse financing.

Compound Interest: Interest resulting from the periodic addition of simple interest to principal; the sum then serves as the principal for the computation of interest owed during the following period.

Concession: The duration for which the private sector will operate the service/asset for.  At end of the concession the asset is handed back to the government authority in a pre-agreed condition.

Concession Agreement: An agreement made between a host government and a project company or sponsor to permit the construction, development, and operation of a particular project.

Conditions Precedent (CPs): A set of preconditions that must be satisfied before the borrower can request drawdown or other credit facilities be made available under a lending agreement.

Consortium: All of the participants or developers associated with a specific project.  In the early stage of a project, it may be a loose association not a legal or contractual entity or joint venture.

Constant Dollar: Dollars from a base year that are used to adjust the dollars of other years in order to ascertain purchasing power. The goal is to remove the effects of inflation and other forms of price escalation.

Consumer Price Index (CPI): An index measure of inflation equal to the sum of prices of a number of assets purchased by consumers weighted by the proportion each represents in a typical consumer’s budget.

Contango: A market condition in which futures prices are higher in the distant delivery months than in the near-term months. The opposite of backwardation.

Contingency: An additional amount or percentage to any cash flow item (such as capital expenditures) that is needed to provide a cushion.

Contingent: For liabilities that do not yet appear on the balance sheet such as guarantees, supports, and lawsuits.  For support or recourse, the trigger may occur anytime.

Contingent Equity: A standby commitment involving a specific amount of money callable by lenders for the purpose of covering cost overruns until completion.

Controlled Foreign Corporation (CFC):  A foreign corporation in which U.S. shareholders own more than 50% of the combined voting power or total value.  Under U.S. tax law, U.S. shareholders may be liable for taxes on undistributed earnings of the CFC.

Convertible Currency: A currency that can be exchanged freely for any other currency without government restrictions.

Cost, Insurance, and Freight (CIF): A quoted price including the cost of packaging, freight, insurance, and other charges paid from the time of loading to the arrival at a specified destination.

Cost of Capital: The rate a company must pay investors to induce them to invest in the company’s equity or debt.

Cost of Risk: The cost associated with the risk of a particular event happening.

Counter–Party: The other participant to a project agreement or a swap contract.

Countervailing Duty: An import duty charged to offset an export subsidy by another country.

Country Risk: Narrowly defined, it refers to cross-currency and foreign exchange availability risks. More broadly defined, it can also include the political risks of doing business in a given country.

Counter–Trade: One party supplies a unit or funding in return for other material or funding.

Coupon: The interest amount or rate payable on a bond.

Covenant: An agreement by a borrower to undertake (a positive covenant) or not to undertake (a negative covenant) a specific action. Breaching a covenant is considered an event of default.

Cover: The amount above 1.0x of a debt service coverage ratio.

Covered: When a loan or a tranche of a loan is protected by political risk insurance (PRI).

Covered Interest Rate Parity: The principle that the yields from interest-bearing foreign and domestic investments should be equal when the forward currency market is used to predetermine the domestic currency payoff from a foreign investment.

Crack Spread: A refinery hedging the oil intake and product mix of output results in a crack spread roughly equivalent to the gross refinery margin.

Crawling Peg: A foreign exchange rate system in which the exchange rate is adjusted frequently to reflect the rate of inflation.

Credit Enhancement: A guarantee issued by a third party assuring the payment or performance obligations of a major project participant. Credit enhancement can include other assets pledged as security for an obligation, guarantees from a project sponsor or host government, letters of credit payable to the project company as security for a project participant’s contractual undertakings, a debt service reserve fund, and/or contingent equity commitments.

Creditworthy: The risk of default on a debt obligation by that entity is considered low.

Creeping Expropriation: A series of acts that have an expropriating effect on a project’s value.

Cross–Collateral: Project participants agree to pool collateral (i.e., allow recourse to each other’s collateral in the event of default).

Cross–Default Provision: A provision under which default on one debt obligation triggers default on all other debt obligations

Crosslisting: Shares of common stock listed on two or more stock exchanges.

Crown Law: Law derived from English Law.

Cure Period: A period during which a borrower is allowed to remedy a default under a contract.

Current Account: The portion of the balance of payments that tracks the import and export of goods and services.

Current Asset: The assets that can be converted to cash within one year.

Current Dollar: Actual or real prices and costs at each point in time. Includes the effects of inflation and other forms of price escalation.

Currency of Denomination: Currency in which the borrower pledges to pay interest and repay principal.

Current Liabilities: Liabilities that are payable within one year.

Current Ratio: Current assets divided by current liabilities (a liquidity ratio).

Currency Swap: A transaction in which two counterparties exchange specific amounts of two different currencies at the outset and then repay over time according to an agreed upon contract. In a currency swap, the cash flows are similar to those in a spot and forward foreign exchange transaction.

Cushion: The extra amount of net cash flow remaining after expected debt service.

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Debenture: A debt obligation secured by the borrower’s general credit rather than being backed by a specific lien on property. In other words, the debt obligation is not collateralized.

Debt: The obligation to repay an agreed amount of money.

Debt Capacity: The total amount of debt a company can prudently support given its earnings expectations, equity base, and asset liquidation value.

Debt to Equity Ratio (D:E Ratio): A ratio of a company’s debt to its total capitalization.  The higher this ratio the greater the financial leverage of the company.

Debt Service: Principal repayments plus interest payable; usually expressed as the annual amount due per calendar or financial year.

Debt Service Coverage Ratio (DSCR): A quantitative measure used by lenders to determine whether a project’s prospective net cash flow from operations can support (make timely service payment on) a given amount of debt at the indicated potentially available terms. For any given debt service period, the debt service coverage ratio is defined as the cash available for debt service (CADS) divided by the total amount of debt service.

Debt Service Reserve Account (DSRA): A reserve account set up to ensure the timely payment of principal and interest.

Deemed–Tax Paid: That portion of taxes paid to a foreign government that is allowed as a credit or reduction in taxes due to a home government.

Deductible: An amount or period which must be deducted before an insurance payout or settlement is calculated.

Default: When a covenant has been broken or an adverse event has occurred. A monetary default occurs when a repayment is not made on time. A technical default occurs when a project parameter is outside defined or agreed-upon limits, or a legal matter is not yet resolved.

Default Interest: A higher interest rate payable on principal amounts after an event of default.

Deferred Tax Liability: An estimated amount of future income taxes that may become payable from income already earned but not yet recognized for tax reporting purposes.

Defeasance: The prepayment of financial obligations, often through a third party, in circumstances where the third party assumes the responsibility to discharge the financial obligations. When it occurs, the lender has no recourse to the original obligor.

Deficiency: The amount by which the project cash flow is not adequate to service the debt.

Deficiency Agreement: Where cash flow, working capital, or revenues are below agreed levels or are insufficient to meet debt service, then a deficiency or make-up agreement provides the shortfall to be provided by the sponsor or another party, sometimes to a cumulative limit.

Defined Event: The definition applicable to the trigger of a loss in an insurance policy, particularly political risk insurance.

Delayed–In–Startup (DIS):  Insurance which can cover all non–site force majeures, change in laws and contingent contractor liability..  Also called Advanced Loss–of–Profits insurance.   

Delta:     The change in an option’s price divided by the change in the price of the underlying instrument.  Hedging strategies are based on delta ratios.

Demand Side Management: The practice of cutting electrical energy usage and/or costs by shifting usage patterns through incentives (e.g., time-of-day rates) or negotiating more favorable energy supply agreements. 

Depreciation: Amortization for accounting (book), tax calculations, or income calculations.  A regular reduction in asset value over time.

Derivative: A financial instrument based on an underlying contract or funding such as a swap, option, or hedging instrument.

Devaluation: Either a formal reduction in the spot price of a currency or a gradual reduction due to market forces.

Developing Countries: Developing countries are defined by the World Bank in terms of 2000 gross national income per capita as follows: (a) low-income, US$755 or less; (b) lower-middle income, from US$756 to US$2,995; and (c) upper-middle income, from US$2,996 to US$9,265.

Development Bank: A lending agency that provides funds to encourage the creation or expansion of productive facilities in developing countries.

Development Finance Institution (DFI): A financial institution that provides debt and equity investments for projects in developing countries.

Dirty Float: A system of floating (i.e., market–determined) exchange rates in which the government intervenes on occasion to influence the foreign exchange value of its currency.

Disbursement: An accounting and financial term used to describe the actual payout or drawdowns of cash under a loan agreement.

Discount Bond: A bond selling below par.

Discount Rate: The annual percentage rate used to determine the present value of future cash flows.

Discount Securities: Non–interest–bearing money market instruments that are issued at a discount and redeemed at maturity for full face value.

Discounted Cash Flow: The future net cash flow brought to its present value using a discount rate.

Dispatch: The schedule of production for all the generating units on a power system, generally varying from moment to moment to match the production with power requirements. As a verb, to dispatch means to direct the plant to produce power.

Dividend:  The amount paid out per share, usually once, twice, or four times a year, by a company from its profits as decided by the board of directors.

Dividend Trap: A restriction on a project company’s ability to pay dividends, despite having cash available to do so, because of current or accumulated losses.

Dividend Yield: The annual dividend payment divided by the market price of a share.

Domestic International Sales Corporation (DISC):  Under the U.S. tax code, a type of subsidiary formed to export U.S. produced goods.  A portion of the earnings and profits of a DISC is not taxed to the DISC, but taxed directly to its shareholders.

Double Dip: Tax depreciation which is accessed concurrently in two countries.

Double Tax Treaty: An agreement between two countries to avoid or limit the double taxation of income and gains, whereby an investor resident in one country may apply for reduction of or exemptions from taxes imposed on his business by the other and/or be entitled to relief in respect of such income or gains in the investor’s own country.

Drawdown: An actual takedown (borrowing) of money by the borrower under the terms of a loan facility.

Drop Dead Fee: An agreed upon fee to be paid a bank as compensation for its work on a transaction which is aborted.

Drop–Lock Loans: A floating rate loan, the terms of which provide that if for any interest period the rate of interest should fall below a pre-set level, the loan rate will become fixed.

Dual Currency Loans: A loan denominated in one currency which gives the banks the right but not the obligation to redenominate the loan at a future date in another currency at a predetermined exchange rate.

Due Diligence: Bank lenders to a project will undertake a thorough assessment of the transaction which covers financial, legal, technical, and insurance aspects of the project in order to ensure that there are no undisclosed or potential problems.

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Earnings: Net income or profit.

Economic Value Added (EVA): The corporate goal of increasing the value of the capital that investors and shareholders have vested in the operations of the business.

Efficient Market: A market in which asset prices instantaneously reflect new information.

Enclave Guarantee: IBRD partial risk guarantee structured for export oriented foreign exchange generating commercial projects in IDA countries.

Enclave Project: A project whose products are exported, for which payment is received outside the host country.

Engineering Risk:  The negative impact on project cash flows resulting from deficiencies in design or engineering.

Environmental Risk:  Economic or administrative consequences of slow or catastrophic environmental pollution.

EOM: An international trade term for “end of month.”

Equator Principles:  A voluntary framework to guide project finance lenders / guarantors to act in a socially and environmentally responsible manner.

Equity:  In a project financing, the cash or assets contributed by the sponsors.  In accounting, the difference between total assets and total liabilities.

Equity Cash Flow (ECF): Cash flow available to equity holders. It is equal to net income plus depreciation less capital expenditures less increases in net working capital (NWC) less principal repayment plus new debt proceeds.

Equity Kicker: A share of ownership interest in a venture in consideration for making a loan.

Equity Risk Premium: The average annual return of the market over and above the return on riskless debt.

Escrow Account: A deposit held in trust by a third party to be turned over to the grantee on specified conditions. In project finance, an escrow account is often used to channel funds needed to pay debt service.

Eurobonds:  Bonds issued in any currency and are commonly listed in Luxembourg.

Eurodollar: U.S. dollar denominated deposits in banks outside of the U.S.

European Economic Community (EEC): Renamed the European Union (EU) in 1994, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the U.K. comprise the EU.

European Option: An option that can be exercised only on the day on which it expires (the maturity date).

Event of Default: Any event that entitles the lender to cancel a debt facility, declare all amounts owed by the debtor to become immediately due and payable, and/or enforce security.

Evergreen Facility: A renewable contract that rolls over after each agreed period until cancelled by one party.

Ex Dividend: Without dividend.

Ex Dock (Name of Port): International trade term in which seller agrees to pay for the costs (i.e., shipping, insurance, custom duties, etc.) of placing the goods on the dock at the named port.

Execute: Formally sign documentation or implement a required action.

Export Credit Agency (ECA): Organizations that assist in supporting exports from their country through the use of direct loan and guarantee mechanisms provided to importers.

Export Credits: Credit facilities or guarantee programs made available by a country for the benefit of exporters of goods or services in an effort to promote exports.

Expropriation: A forced transfer of ownership or value from a private owner to a government entity.

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Face Value: The maturity value of a debt instrument. Also known as par value or nominal value.

Fee:  A fixed amount or a percentage of an underwriting or principal charged as part of a financing.

Feedstock: The raw materials supplied to a processing or refining plant.

Fiduciary: A body to whom certain property is given to hold in trust per the trust agreement.

Finance Lease: The lessor receives lease payments to cover its ownership costs.  The lessee is responsible for maintenance, insurance, and taxes.

Final Take: The fractional amount of a syndicated loan allocated to a particular bank. Because of over-subscription, the amount may be less than the commitment the bank offered to take.

Financial Close: The date on which all project contracts and financing documentation are signed and conditions precedent to initial drawing of the debt have been satisfied or waived.

Financial Viability: The ability of a project to provide acceptable returns to equity holders and to service its debt on time and in full.

Financing Agreements: The documents which provide the project financing and sponsor support for the project as defined by the project contracts.

First In, First Out (FIFO): An inventory valuation approach in which the cost of the earliest inventory purchases is changed against current sales.

Fiscal Year (FY): Accounting period covering 12 consecutive months over which a company determines earnings and profits. The fiscal year serves as a period of reference for the company and does not necessarily correspond to the calendar year.

Fisher Effect: A theory that nominal interest rates in two or more countries should be equal to the required real rate of return to investors plus compensation for the expected amount of inflation in each country.

Fixed Cost: Operating cost which does not vary per unit of output.

Fixed Exchange Rate: Foreign exchange rate set and maintained by government support.

Fixed Rate: An interest rate that is fixed for a defined period.

Flexible Exchange Rates: The opposite of Fixed Exchange Rate.  The foreign exchange rate is adjusted periodically by the country’s monetary authorities based on their judgment and external economic indicators.

Floating Charge: A security interest created over variable or unascertainable assets such as receivables, inventories, spare parts, bank accounts, and so on.

Floating Exchange Rate: A country's decision to allow its currency value to change freely. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.

Floating Rate: An interest rate that is reset periodically.

Floating Rate Notes (FRNs): Notes where the interest is reset periodically to a floating rate.

Floor: A level which an interest rate or currency is structured not to go below.

Force Majeure: An excuse for contractual nonperformance due to events beyond the control of either party. These events are either “acts of God” (floods, fires, or other natural disasters) or political risks (war, strikes, riots, expropriation, breach of contract, etc.). Contractual performance is forgiven or extended by the period of force majeure (French: “superior force”).

Foreign Direct Investment (FDI): The purchase of physical assets in a foreign country to be managed by the parent corporation.

Foreign Exchange (ForEx or FX): The conversion of one currency into another.

Foreign Exchange Risk:  The effect on project cash flow or debt service coverage from the movement in the foreign exchange rate for revenue, costs, or debt service.

Foreign Sales Corporation (FSC): Under U.S. tax code, a type of foreign corporation that provides tax–exempt or tax–deferred income for U.S. persons or corporations having export–oriented activities.  

Foreign Tax Credit: The amount by which a domestic firm may reduce domestic income taxes for income tax payments made to a foreign government.

Forfaiting: A technique for arranging non–recourse medium term export financing usually by a third party financial institution.  Used most frequently to finance imports to Eastern Europe.

Forward Contract: A contract between two parties to exchange a commodity at a set price on a future date. Differs from a futures contract in that most forward commitments are not actively traded or standardized and carry the risk from the creditworthiness of the other side of the transaction.

Forward Rate Agreement (FRA): An interbank–traded contract to buy of sell interest rate payments on a notional principal.

Free Alongside (FAS): An international trade term in which the seller’s quoted price for goods includes all costs of delivery of the goods alongside a vessel at the port of embarkation.

Free Cash Flow (FCF): Cash available for capital providers. It is defined as earnings before interest payments adjusted for taxes (EBIAT); plus depreciation, amortization, and other non-cash charges; less capital expenditures; less increases in net working capital.

Free On Board (FOB): A transportation term in which the seller’s quoted price includes the cost of delivering the goods to a specified location. The buyer assumes responsibility for all transportation costs from that point onward.

Free Trade Zone: An area within a country into which foreign goods may be brought duty free often for additional manufacture, storage, or packaging.

Full Cover: Guarantees or insurance for both political and commercial risks provided to a lender by an export credit agency or international finance institution.

Full Recourse: No matter what risk event occurs, the borrower agrees to repay the debt. By definition, this is not a project financing unless the borrower's sole asset is the project.

Functional Currency: The currency of the primary economic environment in which a foreign subsidiary operates and generates cash flow.

Funding Risk: The impact on project cash flow from higher funding costs or lack of availability of funds.

Futures Contract: A legal agreement between a buyer (seller) and an established exchange or its clearing house in which the buyer (seller) agrees to take (make) delivery of something at a specified price at the end of a designated period. The price at which the parties agree to transact in the future is called the futures price. The designated date at which the parties must transact is called the settlement or delivery date. These contracts are usually tradable on exchanges.

Futures Market: A market where forward contracts can be traded before their maturity.

FX Rate: One currency unit expressed in terms of another.  Foreign exchange rate.

FX Risk: The effect on project cashflow or debt service from a movement in the FX rate for revenue, costs, or debt service.

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Gas Turbine: Electricity generation by way of a turbine from burning natural gas or liquid fuels.

Gearing:  A measure of leverage such as the ratio of debt to equity or debt to total capitalization.

General Partner: The partner with unlimited liability.

Generally Accepted Accounting Principles (GAAP): The set of standardized rules established for the reporting of a project or company’s financial results for accounting purposes. These rules are established by independent accounting organizations in each country worldwide.

Golden Share: A shareholding interest entitling the holder to exercise a degree of control over certain activities of the company.

Goodwill: The amount paid in excess of an asset’s book value, usually for intangible assets such as trademarks or licenses.

Governing Law:.The legal system to which the terms and conditions of a transaction or contract are subject.  The law set forth by the contract or applied by a court.

Grace Period: The period within which a default is resolved without incurring penalty interest or other charges.  A period during which interest or principal is not yet payable; it usually occurs after startup, commissioning, and completion in a project financing.

Greenfield: Refers to a project being conceived and executed where no project company, assets, or operations exist. A greenfield site or project location is one where no infrastructure exists to support the project.

Guarantee: An agreement to repay a loan or ensure performance. It may be limited in time and amount.

Guarantor: A party who agrees to guarantee repayment or performance.

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Haircut: A discount.

Hard Currency: A currency that is likely to maintain its value against other currencies over time and not likely to be eroded by inflation. In contrast, a “soft” currency is likely to lose purchasing power over time. Hard currencies are usually freely convertible.

Heat Rate: The amount of fuel required to generate a kilowatt hour (kwh) of electricity. The lower the heat rate, the more efficient the generating facility.

Hedging: A strategy that eliminates a risk through the spot sale of the risk or through a transaction in an instrument that represents an obligation to sell the risk in the future. The goal is to ensure that any profit or loss on the current sale or purchase will be offset by the loss or profit on the future purchase or sale.

Hell–or–High–Water Clause: An absolute commitment to perform an action with no contractual defense.

Hermes: The German export credit agency.

Hire Purchase: The user of the asset is entitled to purchase the asset according to a pre–agreed method.  The user may be the owner for tax purposes.  

Host Country: The country in which a project is located.

Hurdle Rate: A minimum acceptable internal rate of return (IRR). Projects generating returns in excess of the corporate hurdle rate are viable candidates for implementation.

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Illiquid: Not easily traded or not readily converted to cash.

Incipient Default: A potential default.

Income: Operating cash flows less overheads and depreciation, either before tax or after tax earnings.

Inconvertibility: An investor’s inability to exchange a local currency (i.e., profits, royalties, fees, and capital invested) into a foreign currency.  Indemnity: A legal obligation to cover a liability.

Indemnity:  A legal obligation to cover a liability.

Independent Engineer (IE): A consulting firm that helps lenders by evaluating the technical aspects of a project (e.g., completion schedule, technical feasibility, etc.). See Lenders’ Engineer.

Indenture of a bond: A legal statement spelling out the obligations of the bond issuer and the rights of the bondholder.

Indexed Loan: A loan with debt service repayment tied to some standard which is calculated to protect the lender against inflation or currency risk.

Indexed Rate: An interest rate linked to an index, usually the CPI.

Indicative Terms:  The likely commercial terms upon which a bank will lend, subject to its internal credit approval or other conditions. It is not a firm offer to lend or arrange a loan.

Industrialized Countries: The World Bank defines an industrialized country as one having 2000 gross national income per capita of US$9,266 or more.

Inflation Premium: The increased return on an investment which is required to compensate investors for expected inflation.

Information Memorandum: A document that describes the project and the financing details; it is issued in connection with a loan syndication.

Infrastructure Project: A project in one of the following industrial sectors:  power (electricity and gas), telecom, transportation, or water/sewage.

Infrastructure Risk: The impact on project cash flows from infrastructure (i.e., transport, telecommunications, etc.) problems.  Sometimes called transportation risk.

Inside the Fence:  A project or transaction that derives all of its revenues from a local customer such as a mine mouth power plant (i.e., a project that is fully integrated in some kind of manufacturing process).  For power projects, the “fence” refers to the boundary between the power grid and the industrial facility.  See also “Behind the Fence.”

Insider Trading: Buying or selling of a company’s securities by persons having access to non–public information regarding the company.

Institutions: Insurance companies, pension funds, trusts, foundations, mutual funds, funds managers, and bank investment departments. 

Instrument: A financial tool. Sometimes a discrete type of funding or a security.

Intangible Assets:  Goodwill, patents and trademarks, deferred charges, and share/bond premiums.

Inter–Creditor Agreement: An agreement between lenders, or classes of lenders, describing the rights and obligations in the event of default.

Interest During Construction (IDC): An amount that is usually equal to capitalized interest.

Interest Rate: The percentage payable to the lender calculated at an annual rate on the principal amount outstanding on a loan.

Interest Rate Parity Theorem: An expression that assumes the interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

Interest Rate Risk: The impact on project cash flow from higher than expected interest costs..

Intermediary: An entity standing between parties to a funding, financing, or swap agreement.  An intermediary may be a risk.

Internal Rate of Return (IRR): The discount rate that makes the net present value equal to zero. Multiple IRRs occur mathematically if the periodic cash flows change signs more than once.

International Center for Settlement of Investment Disputes (ICSID): A member of the World Bank Group that helps to encourage foreign investment by providing international facilities for conciliation and arbitration of investment disputes.

International Fisher Effect: A theory that the spot exchange rate should change by an amount equal to the difference in interest rates between two countries.

International Monetary Fund (IMF): An international organization created in 1944 to promote exchange rate stability and provide temporary financing for countries with balance of payment difficulties.

International Parity Conditions: Economic theories that link exchange rates, price levels, and interest rates together.

International Swap and Derivatives Association (ISDA): An organization that produces standard documentation for interest rate swaps.

Inverse Order: Applied to the periodic repayment schedule and means from the end, or the expected maturity date.  Current order means the next periodic principal repayment.

Investment Bank: The U.S. term for merchant bank.

Investment Grade: An investment rating level of BBB- or better from Standard & Poor’s Corporation or Baa3 or better from Moody’s Corporation.

Irrevocable Letter of Credit: A letter of credit that cannot be changed or cancelled without the consent of all parties involved.

Islamic Loan: Interest cannot be charged.  Rather the loan is structured using discounts, a sale/lease, profit participation, or repurchase agreement.

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Joint and Several Liability: Each party is liable for the full amount of the liability, but performance by one discharges the obligations for all the parties.

Joint Venture: A business venture owned by two or more other business ventures.

Junk Bond: A bond with a sub-investment grade credit rating of BB+ or lower from Standard & Poor’s Corporation or Ba1 or lower from Moody's. Also known as speculative or high-yield debt.

Jurisdiction Clause: A clause whereby one or more parties expressly submit to the jurisdiction of specified courts and, commonly, waive any sovereign or other immunities it or they may have.

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Keepwell Letter: A form of guarantee in which the guarantor agrees to keep the recipient of the guarantee covered by injecting capital as needed.

kJ:  Kilojoule, a measure of energy.

KwH: Kilowatt hour, a common unit of electricity.  One thousand watts delivered for one hour.

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Last In, First Out (LIFO): An inventory valuation approach in which the cost of the latest inventory purchased is charged against current sales.

Latent Default: A potential default that may have always been present but unidentified.

Law of One Price: States that if the identical product or service can be sold on two different markets, and no restrictions exist on the sale or transportation costs of moving the product between markets, the product’s price should be the same in both markets.

Lead Arranger: The senior tier of arrangers in a syndicated loan facility.

Lead Bank: A senior bank involved in the negotiations for a project financing.  Subordinate to a lead arranger or manager.

Lead Manager: Senior tier of lenders in a loan syndication.

League Tables: A ranking of lenders and advisors according to the underwriting, final take, or number of project finance loans or advisory mandates completed during a given period.

Lease: The owner of an asset (the “lessor”) agrees to receive lease payments from the user (the “lessee”). The lessor receives the benefit of depreciation as a tax deduction and has the asset as security.

Lease Rate: The equivalent interest rate calculated from a stream of lease payments.

Lease Term: The life of a lease including any renewal options.

Legal Opinion: Written opinions provided by the legal advisors on the validity and enforceability of all project and finance documents including security documents.

Legal Risk: The risk that a party to a contract will not be able to enforce security arrangements, enforce foreign judgments, have a choice of law, or refer disputes to arbitration.

Lenders’ Engineer: An engineering firm that advises lenders on technical matters (see independent engineer).

Lessee: The user of a leased asset.

Lessor: The owner of a leased asset.

Letter of Credit (L/C): A financial instrument issued by a financial institution for the benefit of a customer under which the financial institution agrees to pay money to the beneficiary thereof upon demand or upon the occurrence of specified events.

Letter of Intent (LOI): A letter from one company to another acknowledging a willingness and ability to do business.

Leverage:  The level of debt expressed as a percentage of equity or as a ratio to equity.  The U.S./Canadian word for gearing.

Leveraged Lease: A lessor borrows to finance a leased asset.  Recourse may be limited to the lease rental or the asset.

Liability: The obligation to repay a defined amount or to perform a service.

Lien: A legal security interest on property to secure the repayment of debt and the performance of related obligations.

Limited Partnership: A partnership consisting of one or more general partners who are not liable for the debts of the partnership beyond the funds so contributed.

Limited Recourse: Under certain conditions (related to legal, financial, or operating conditions), lenders have access to the sponsors' credit or other legal security to fulfill a project’s debt obligations. There is usually recourse in the event of fraud, misrepresentation, or nondisclosure. For this reason, and because lenders often have some kind of recourse prior to completion, nonrecourse is often described as “limited-recourse” financing.

Line of Credit: A bank’s commitment to a borrower to extend a series of credits under certain conditions up to an agreed amount for a specified period of time.

Liquid: Easily traded or converted to cash.

Liquidated Damages (LDs): Specific and limited amounts that a contracting party is required to pay to another contracting party in the event an agreed-upon area of performance is not achieved.

Liquidation: The process of disposal or sale of the project or project assets with the proceeds used to repay the project financing.

Liquidity Ratio: Any ratio used to estimate a company’s liquidity.

Load Factor: A utilities average demand as a percentage of peak demand.

Loan Amortization: The scheduled repayment of loan principal. A loan amortization schedule specifies the amounts of principal to be repaid and the dates on which repayments are to be made.

Loan Life Cover Ratio (LLCR): The net present value of cash available for debt service (CADS) from the calculation date to the final maturity of the debt facilities divided by the principal outstanding on the calculation date.

London Club: The London Club has evolved as an ad hoc forum for restructuring sovereign debt. Each London Club is formed, usually by a group of commercial banks, at the initiative of the debtor country and is dissolved when a restructuring agreement has been signed.

London Inter–Bank Bid Rate (Libid):  The rate at which banks buy deposits in the market.

London Inter–Bank Offered Rate (Libor): The rate at which banks sell deposits in the market.

Long–Term:  3 years or more.  In accounting, anything more than 1 year.

Loss Payee: A party to whom an insurance loss payment or settlement may be paid directly.

Limean: The arithmetic mean of LIBID and LIBOR.

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Maastricht Treaty: The plan and timetable agreed to by members of the European Union (EU) to introduce a single European currency (Euro).

Macro Factors: Factors that pertain to developments in the general economy and government fiscal policy.

Maintenance Bond: A bond to provide funds for maintenance and repair of equipment or a facility.

Maintenance Reserve Account: A reserve account that builds up cash balances sufficient to cover a project’s maintenance expenses.

Majority Banks: A group of banks within a syndicate holding a specified percentage of the commitments (typically 66.67%) with the power to bind the syndicate as a whole in calling events of default and agreeing to certain amendments or waivers.

Make–Up: Where a cash flow or capital item is deficient, the amount of such deficiency (e.g., an interest make-up) relates to the interest amount above a ceiling percentage.

Make–Up Agreement: Where a product contracted to be supplied cannot be provided from a certain project; a make–up agreement provides that the product will be supplied from some other source. 

Manager: A medium–level participant established according to final take.

Mandate: The formal appointment to advise on or arrange a project financing.

Mandated Bank: The bank given the authority to proceed into the marketplace on behalf of the borrower, on the basis of the terms and condition set out in the mandate letter. The mandated bank is often referred to as the arranger in the Euromarkets and the administrative agent in the United States.

Margin: The amount expressed as a percent per annum above the interest rate basis or cost of funds. For hedging and futures contracts, the cash collateral deposited with a trader or exchange as insurance against default.

Margin Ratchet: A margin linked directly to the performance of the borrower.

Marginal Cost of Capital: The incremental cost of financing above a previous level.

Market Flex: The unilateral right reserved for underwriters to vary the structure and conditions of a mandate if the syndication process does not raise sufficient funds. Borrowers may negotiate restrictions on this unilateral right limiting variations to price only (called “price flex”).

Market Risk: Changes to the amounts sold or the price received which affects total revenue.  Sometimes called sales risk.

Material Adverse Change (MAC): Prior to closing, an event or occurrence that allows the lender to adjust the terms (e.g., rate) of a loan agreement. After closing, an event that gives lenders the right to refuse further drawings or to require immediate debt repayment.

Material Adverse Event (MAE): Any event or circumstance that affects a party’s ability to perform or comply with any of its material obligations under the transaction documents. Such an event may allow the party to change some aspect of the contractual agreement.

Maturity: The final date a project finance loan is repayable.

Medium Term:  Two to six years.

Merchant Bank: A bank that specializes in helping corporations and governments finance by any of a variety of market and/or traditional techniques; a combination of a commercial bank and investment bank found in the U.S.

Merchant Power Plant (MPP): A power plant that sells electricity without a long-term power purchase agreement

Mezzanine Debt: Refers to a type of debt which is between senior debt and equity.  The cost of mezzanine debt is greater than senior debt as there is more risk involved.

Minemouth: Usually refers to a power-generating plant located next to a coal mine.

Mini–Perm: A loan for the construction period and first few years of operations taken with the intent of refinancing with more permanent (long-term) debt at a future date.

Modeling Bank: The institution responsible for creating the lenders’ base case financial model.

Monetization:  Securitization of the gross revenues of a contract.

Monoline Insurance: Insurance of an individual financial risk (rather than general casualty insurance).

Monoline Insurance Company: An insurance company which specializes entirely in providing guarantees for corporate bonds.

Monte Carlo Simulation: The use of a random number generator to quantify the effects of uncertainty in a financial model.

Mortgage: A pledge or assignment of security of particular property for payment of debt; the same as an indenture of trust or security agreement.

Most–Favored–Nation (MFN) Status: A term meaning the same as “normal trade status.”  Normal trade status is the application, by a country, of import duties on the same (i.e., “most favored”) basis to all countries accorded such treatment.

Multilateral Agency (MLA): An institution organized by a group of countries to promote development (e.g., the World Bank, the IFC, and the Inter-American Development Bank).

Municipal Notes: Short–term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues.

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Natural Hedge: An off–setting operating cash flow, a payable arising from the conduct of business.

Negative Arbitrage: The loss of interest caused by having to draw the full amount of a bond financing and then redeposit the funds until they are required at a later date. Because borrowing rates are typically higher than deposit rates, the deposited funds earn a negative spread.

Negative Covenants: Promises by the borrower in a loan agreement to abstain from undertaking certain actions.

Negative Pledge: A covenant whereby a borrower and/or guarantor will undertake not to create or allow creation of encumbrances on its assets. Negative pledges typically are subject to numerous negotiated exceptions.

Negotiable:  A financial instrument can be bought or sold by another investor, privately, through a stock exchange, or via computer trading.

Net Operating Profit after Tax (NOPAT): Earnings before interest and taxes minus taxes.

Nominal Rate: A stated rate which is usually subdivided for compounding purposes, resulting in a higher effective rate.

Nonperforming Loan: A loan on which interest or some payment due under the loan agreement is not paid as it accures.

Nonrecourse: The lenders rely on the project's cash flows and security over the project vehicle's assets as the only means to repay debt service.

Non-tariff Barrier: Trade–restrictive practices other than custom tariffs (e.g., import quotas).

North American Free Trade Agreement (NAFTA): A treaty allowing for free trade and investment between Canada, U.S., and Mexico.

Note: An instrument recognized as a legal evidence of debt.

Notional Principal: In an interest rate swap agreement, notional principal mirrors the principal outstanding under a loan agreement at any point during the loan life.

Novation: The transfer of rights and obligations from one contracting party (which is released of those obligations) to a third party, with the agreement of each of the other contracting parties.

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OECD Consensus: Guidelines created by the Organization for Economic Cooperation and Development (OECD) that are intended to prevent distortions in price competition among manufacturers of different countries. The OECD Consensus is derived from an OECD agreement, “Arrangement on Guidelines for Officially Supported Credits” (1978), which limits export credit to 85% of the contract value and holds interest rates to a minimum of the OECD interest rate matrix, which is revised semiannually.

Off–Balance–Sheet Liability: A corporate obligation that does not appear as a liability on the company’s balance sheet or is not required to appear by the applicable accounting standards.

Offering Circular:  A document that describes the terms and conditions of securities being offered for sale and provides financial information relating to the borrower and any guarantor. Also called a prospectus.

Offshore Entity: A term for any entity located outside the boundaries of a given country.

Offtake Agreement: An agreement to purchase all or a substantial part of the product produced by a project, which typically provides the revenue stream for a project financing.

Offtaker (Offtake Purchaser): The purchaser of a project’s output.

One–Sided Risks: Those variables that are likely to result in decreased cash flows only from expected cash flows (including expropriation, cross-border payment restrictions or prohibitions, political unrest, etc.).

Onlending: The process by which a multi-lateral agency or other government agency lends funds to a financial institution (or possibly another government agency) with the expectation that those funds will be used to fund loans to ultimate borrowers.  Also called re-lending.

Open–Cycle:  The waste energy or exhaust from a power plant is not captured.

Operating Cash Flow:  Project revenues less  cash operating expenses.

Operating Lease: A lease that is not a finance lease whereby the lessee uses the assets for only a portion of its useful life.

Operating Risk: Cost, technology, and management components which affect operating expenses, output, or throughput.

Operations and Maintenance (O&M) Agreement: A contract obligating a party to operate and maintain a project.

Opportunity Cost:  The cost of pursuing one course of action measured in terms of forgone return offered by the most attractive alternative investment.

Organization of Petroleum Exporting Countries (OPEC): An alliance of most major crude oil producing countries to control oil production to influence the price of crude oil in world markets.

Overrun:  The amount of capital expenditure or funding above the original estimate to complete the project.

Oversubscription: The situation when the underwriting commitments from a syndication exceed the amount sought by the borrower.

Over–the–Counter (OTC) Market:  A market created by dealer trading as opposed to the auction market prevailing on organized exchanges.

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Par: Face value.

Parastatal Corporation:  A Corporation that performs a function typically associated with the government under its indirect control.

Pari Passu: Literally, “with equal treatment among themselves.” A legal term that refers to financial instruments that rank equally in right of payment with each other and with other instruments of the same issuer. Applies to both the right to be paid from available operating cash flow and the rights in the event of liquidation.

Paris Club: Since 1956, countries facing default have negotiated debt-restructuring arrangements with bilateral official creditors in the Paris Club, an informal body created for the purpose of maintaining strict standards for rescheduling or reducing debt.

Partial Credit Guarantee (PCG): An instrument designed to cover private lenders against all risks during a specified period of the financing term of debt for a public investment. These guarantees are designed to extend maturities and improve commercial terms (e.g., lower spreads).

Partial Risk Guarantee (PRG): An instrument designed to cover private lenders against the risk that a government or a government–owned agency fails to perform its contractual obligations vis-à-vis a private project.

Parity Conditions: In the context of international finance, a set of basic economic relationships which provide for equilibrium between spot and forward exchange rates, interest rates, and inflation rates.

Participant: A party to a funding agreement. It usually refers to the banks at the lower levels of a syndicate.

Participant Risk: The credit of the participants and the risk of non–performance under the project contract or financing agreements.

Participation:  The amount of loan/bond issue taken directly or from another direct lender/underwriter.

Partnership: The partners agree to a proportional share of profits and losses and thus have the same tax treatment.

Payback:  The period of years to recover the investment or loan.

Payment Cascade: See “cash flow waterfall.”

Peaking Capacity: A portion of a utilities capacity what is used during periods of peak demand.

Peaking Unit: A plant designed to operate only during periods of peak demand.

Performance Bonds: Guarantees purchased by the project developer issued by commercial banks or insurance companies to guarantee full and successful implementation of a contract according to prespecified performance guidelines.

Perpetuity: An annuity with periodic equal payments or receipts on a continuous basis.

Physical Completion:  The project is physically functioning, but not yet fully generating cash flow.

Placement: Securities are placed with a small group of investors.

Plain Vanilla:  A straightforward credit facility with no bells or whistles.

Point: One percentage point on a note or bond.

Policy Based Guarantees (PBG):  An instrument designed to cover a portion of debt service on a borrowing by an eligible World Bank member country from private foreign creditors in support of agreed structural, institutional, and social policies and reforms.

Political Risk: Eight risks associated with cross-border investment and financing: currency inconvertibility, expropriation, war and insurrection, terrorism, environmental activities, landowner actions, nongovernmental activists, and legal and bureaucratic approvals. The first three are insurable. It overlaps with the political component of force majeure risk.

Portfolio Financing (hybrid): A financing transaction involving multiple projects or assets. Because the financing incorporates elements of both corporate and project finance, it is known as a hybrid financing.

Positive Covenants: Promises made under a loan agreement by the borrower to undertake certain actions.

Potential Default: A condition where a default would occur in time or where a notice or default event has not yet been formalized.

Power Purchase Agreement (PPA): A contract for a large customer to buy electricity from a power plant. This is usually the most important contract underlying the construction and operation of a power plant.

Praecipium: The amount of the front-end fee paid to the arranger for the human resources and technical skills it provided to make the transaction successful.

Preferred Creditor Status: A designation given to the International Monetary Fund (IMF), all World Bank Group member institutions, and many of the regional multilateral banks. These institutions are only able to lend to member countries if there is recognition that in the event of a foreign exchange crisis, the preferred lenders have first call on available foreign exchange.

Preferred Stock: Preferred equity owners have privileges over common shareholders, but have no voting rights and typically are paid with fixed dividends.

Premium:  The cost of an insurance policy or the price of an option.  An extra margin payable with prepayment of principal.

Premium Bond: A bond selling above par.

Prepayment: Repayment of greater than the scheduled principal amount. If a project company is forced to prepay principal with excess cash flow, then it is referred to as a mandatory prepayment.

Pre–Qualification Questionnaire.  This questionnaire assesses the suitability and quality of bidders who have been selected following the Expression of Interest (EOI) stage.  It is used to produce a shortlist of bidders during the second stage of the OJEC process.

Present Value Factor: A factor used to calculate the present value of an amount to be received at a future point in time. If the opportunity cost of funds is 10% over next year, then the present value factor is equal to 0.909 [= 1 / (1 + 0.10)].

Price Elasticity of Demand: The percentage change in the quantity of goods demanded as a result of the percentage change in price of the goods.

Pricing Grid: When a borrower agrees to pay a margin the level of which varies by reference to specific financial ratios (e.g., leverage) or external credit ratings, the transaction is said to contain a pricing grid or matrix.

Primary Market: The market for new issues during the syndication period.

Prime Rate: The rate at which U.S. banks lend U.S. dollars to their most creditworthy customers.

Principal:  The quantity of the outstanding project financing due to be paid.

Private Finance Initiative (PFI): A program launched in 1992 by the UK Government to encourage private sector investment in the public sector.

Private Placement: A private placement occurs when a security is not registered with the U.S. Securities and Exchange Commission (SEC). Disclosure requirements for private placements are less stringent though no less complete than for a public placement.

Proceeds Account: The account into which all advances under the loan facilities, proceeds of base equity and contingent equity, and all project revenues are paid. The borrower is permitted to make withdrawals from the proceeds account only to make payments in connection with project costs and transfers to other accounts in accordance with prescribed cash waterfall.

Production Payment: A defined portion of the proceeds of production up to a capped amount. The amount that is required to repay a loan with interest and fees.

Production Loan: A project financing where the repayment is linked to some kind of production.

Pro Forma: A financial projection based on a set of assumptions.

Project: The asset constructed or acquired with a project financing, which is expected to produce cashflow at a debt service ratio sufficient to repay the project financing.

Project Appraisal Report: A formal assessment of the viability of the proposed undertaking and the robustness and predictability of revenue generation.

Project Company: A special-purpose entity created to develop, own, and operate a project.

Project Completion: Occurs when a defined set of technical and financial tests have been met as stipulated in the financing documents.

Project Contracts:  The suite of agreements underlying a project.

Project Finance: Involves a corporate sponsor investing in and owning a single-purpose industrial asset (usually with a limited life) through a legally independent entity financed with nonrecourse debt.

Project Finance Initiative (PFI):  Created in 1992 to encourage the private sector to invest in the public sector.

Project Funds Agreement: Agreement, usually by sponsors, to provide additional funds as needed until project completion or other agreed date.

Project Life Cover Ratio (PLCR): The net present value of a project's cash available for debt service (CADS) over the project’s defined life divided by the amount of principal outstanding at the time of calculation.

Project Holding Company: A company that owns and finances several stand-alone projects. Because some of the corporate liabilities are secured by multiple assets, it represents a hybrid form of financing with elements of both project and corporate finance.

Promissary Note: An unconditional promise in writing undertaking to pay a specific sum on demand or at a future date.

Pro Rata: Shared or divided according to a ratio or in proportion to their participations.

Pro Rata Sharing Clause: A clause in a loan or intercreditor agreement whereby banks agree to share among themselves amounts received or recovered from the borrower and/or guarantors pro rata to their participation in the financing.

Prospectus: A document that describes the terms and conditions of securities being offered for sale and provides financial information relating to the borrower and any guarantor. Also called an offering memorandum.

Purchasing Power Parity (PPP): A theory that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.

Public Private Partnerships (PPP): Projects, typically infrastructure developments, which involve both the public and private sectors.

Put Option: An option to sell an asset at a given price.

Put–or–Pay Agreement: An agreement whereby a supplier undertakes to supply an agreed quantity of materials to the project company and to make payments sufficient to enable the company to obtain alternative supplies in the event of supplier failure.

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Qualified Institutional Buyer (QIB): An institutional investor that is qualified to buy unregistered or private-placement (e.g., Rule 144A) securities.

Qualifying Facility (QF): A non-utility power producer or cogenerator that meets specific operating, efficiency, size, and fuel source standards, established by FERC.

Quasi–Equity: A type of deeply subordinated debt security or senior equity security (e.g., preferred shares) whose holders are paid before ordinary shareholders but after senior debt holders. Other forms of quasi-equity can include various kinds of convertible debt.

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Rate Base: The value of that part of a utility’s plant and equipment that is in use or deemed by regulators to be useful for future public service.  The utility is only allowed recovery of and a return on investments that are allowed into rate base by the regulators.

Rating: An evaluation of creditworthiness provided by a rating agency such as Standard & Poor’s Corporation or Moody’s.

Rating Agency: A company providing an independent view on the creditworthiness of the project company or some other security.

Real Exchange Rate: An index of foreign exchange adjusted for relative price level changes since a base period. Used to measure purchasing power–adjusted changes in exchange rates.

Real Option Analysis: The application of option theory to capital budgeting decisions.

Receiver:  A person or entity appointed under the legal security documents to administer the security on behalf of the project financiers.

Recourse:  In the event a project cannot service the financing or achieve completion, the financiers have recourse to either cash from the sponsor or other non–project security.

Refinancing: Prepayment of the existing debt and substitution of new debt on more attractive terms (e.g., at a lower cost, with a longer maturity, or with fewer or less restrictive covenants).

Remittance: A transfer of funds from one place to another, not necessarily a payment of an obligation.

Representations: A series of statements of fact or law made by one party to an agreement on the basis of which the other party undertakes to enter into the agreement. The representations will typically cover such matters as the legality and enforceability of documentation, the financial condition of the borrower, and the absence of any material litigation or other proceedings against the borrower. Material inaccuracies in the representations will normally constitute default under the loan agreements.

Request for Proposals (RFP): An invitation to bid on a public procurement.

Reserve Account: A separate cash account used to meet future payment obligations such as debt service, maintenance, or capital expenditure.

Reserve Margin: The percent difference between peak demand and capacity, where capacity includes the utility’s own power generation capacity and power available from other producers via contracts.  Generally, a 15% to 20% reserve is adequate in the U.S.

Reserve Tail: Proven reserves available after the final maturity of the debt; applies to projects involving natural resources.

Residual:  The assumed value of an asset at the end of a loan, lease, or pro forma cash flow.

Residual Asset Value: The value of an asset at the conclusion of a lease term.

Residual Cover: The cash flow remaining after a project financing has been repaid expressed as a percentage of the original loan.

Residual Cushion:  The amount of net cash flow from the project after the project financing has been repaid.

Retail Wheeling: A scheme when retail customers can contract to purchase power directly from any provider without regard to currently existing service areas.

Retained Earnings: Earned surplus retained and reinvested in a business and not distributed as dividends.

Retention: An amount held back from construction contract payments to ensure the contractor completes the construction before the retention (typically 5-15% of the contract price) is returned to the contractor.

Revenues: Sales or royalty proceeds. Quantity times price realized.

Revenue Bond:  A municipal bond secured by revenue from tolls, user charges, or rents derived from the facility that was financed.

Revocable Letter of Credit: A letter of credit that can be changed or cancelled by the issuing bank or by any party involved until payment is made.

Revolving Credit Agreement: A legal commitment on the part of a bank to extend credit up to a maximum amount for a definite term. The notes evidencing debt are short term, such as 90 days. As notes become due, the borrower can renew the notes, borrow a smaller amount, or borrow amounts up to the specified maximum throughout the term of commitment.

Risk:  The event which can change the expected cash flow forecast for the project financing.

Risk Adjusted Return on Capital (RAROC): The return on capital of an asset portfolio taking into account the risk weighting (as established in the Basel Accord) of each asset.

Risk Contamination: The phenomenon whereby a failing division (or asset) drags an otherwise financially healthy division into default.

Risk Free Interest Rate: The interest rate prevailing on a default–free bond in the absence of inflation.

Royalty: A share of revenue or cash flow to the government or grantor of the concession or license.  Compensation (i.e., royalty fees) for the use of intellectual property belonging to another party, usually calculated as a percentage of sales.

Rule 144A: An SEC rule that provides an exemption from the registration requirements of the Securities Act of 1933 for certain securities sold to qualified institutional buyers.

Running the Books:  In the central task to execute a syndication, a bank appointed to run the books is responsible for issuing invitations, disseminating information to interested banks, and informing the borrower and management group of daily progress.  The role is very visable vis-à-vis the borrower and the general market.  As such, it is generally considered the most desirable syndicate task.

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Sale and Leaseback: A transaction in which an investor purchases assets from the owner and then leases them back to the same individual.

Sales Completion:  The project has reached physical completion and has delivered product or generated revenues in satisfaction of a sales completion test.

Salvage Value: The estimated selling price of an asset once it has been fully depreciated.

Secondary Market: After the initial distribution of bonds or securities (in the primary market), additional trades occur between investors in what is known as the secondary market.

Securitization:  Packaging up a stream of receivables or assets to fund via a capital markets, tradable funding.

Security: A legal right of access to value through mortgages, contracts, cash accounts, guarantees, insurances, pledges, or cashflow, including licenses, concessions, and other assets.  A negotiable certificate evidencing a debt or equity obligation/shareholding.

Selling Short:  A speculation technique in which an individual sells an asset (e.g., foreign currency, securities, or commodities) to another party for delivery at a future date.

Senior: The highest ranking for repayment, security, or action.

Sensitivity Analysis: Analysis of how changing an input variable in a financial model affects the value, performance, or solvency of a given project.

Service Level Agreements: Contractual agreement defining the level of services between service providers and service customers.

Set–Off Clause: A claim made by someone who allegedly owes money that the amount should be reduced because the other person owes him or her money.

Several Liability: A legal term that conveys the meaning that nonperformance by one entity of its obligations will not affect or alter the obligations of the other parties.

Shadow Tolls: Tolls based on project use but payable by the government or other contracting authority rather than the general public.

Shareholders Agreement: The generic term for any contract between two or more shareholders governing their conduct in relation to the corporation, or partnership, in which they own shares.

Shareholders Equity:  Net  worth.  Book value of total assets less total liabilities.

Share Retention Agreement: An agreement, usually by sponsors, not to sell their shareholding(s) in the project company (or to maintain an agreed-percentage shareholding).

Short: A market participant assumes a short position by selling a commodity or security he does not own.

Short–Term: Up to 12 months.

Simple Interest: Only the principal earns interest for the life of the transaction.

Sinking Fund: A regular debt payment is set aside in anticipation of a future payment.

Solvency: The state of being able to pay debts as they become due.

Sources and Uses Statement: A document showing where a company intends to get its cash and where it intends to spend the cash over a specific period.

Sovereign Guarantee: A government guarantee of its obligations under project documents.

Sovereign Immunity: A doctrine under which it may be impossible to sue or seize the assets of a state or state equity.

Sovereign Risk: The risk that the host country government will default in its contractual undertaking with the project or another project participant, such as under guarantees, indemnity agreements, or input and offtake contracts.

Special Drawing Right (SDR): An international reserve asset, defined by the International Monetary Fund as the value of weighted basket of five currencies.

Special Purpose Entity (SPE): An entity established for a particular purpose, such as obtaining off-balance sheet financing, gaining tax advantages, or isolating the sponsors’ other assets from the project’s creditors.

Special Purpose Vehicle (SPV):  See Special Purpose Entity.

Sponsor: A party wishing to develop and finance (with equity) a project. Shareholders of project companies are known as sponsors.

Spot Market: The market for buying and selling a specific commodity, foreign currency, or asset at the prevailing price for immediate delivery.

Spot Price: The current market price of the actual physical commodity. Also called the cash price.

Standby Letter of Credit: A letter of credit that provides for payment to a beneficiary when that beneficiary provides certification that certain obligations have not been fulfilled.

State Revolving Funds (SRFs): State run programs in conjunction with the U.S. Environmental Protection Agency (EPA) to provide low interest rate loans with flexible terms, funding, and assistance for projects which protect water quality.

Steam Turbine:  Electricity generated from steam pressure.

Step–In Rights: The right of lenders to assume sole or principal responsibility for carrying out all or part of the project’s contractual responsibilities or to make arrangements for carrying them out.  Step-in rights are designed to ensure continuity of the project and its ability to operate following a default by the sponsor.

Step–Up Margin: A margin which increases during the term of the loan.

Stranded Costs: Costs that will be unrecoverable through rates in an open market.

Stripped Bonds:  Bonds issued by investment bankers against coupons or the maturity portion of original bearer bonds, where the original bonds are held in trust by the investment banker.  A stripped bond is essentially a zero coupon bond manufactured by an investment banker.

Structural Subordination: Occurs when a bank or other institution lends to a holding company that uses the loan proceeds to infuse capital, in the form of equity or deeply subordinated shareholder loans, into one or more newly purchased operating companies. The holding company lender is structurally subordinated in right of payment relative to third-party lenders that may be extending credit directly to the operating subsidiaries.

Structure:  How a project financing is drawn down, repaid, and collateralized.

Subordinated: The subordinated party accepts a lower priority of repayment and/or security than the senior party.

Subsidiary: A foreign operation incorporated in the host country and owned 50% or more by a parent company.

Sub–Sovereign Risks: Risks relating to a public-sector entity other than the central government (e.g., local and state governments).

Sunk Costs:  Capital that is already spent.

Supplier Credit: A financing arrangement under which the supplier agrees to accept deferred payment terms from the buyer, and funds itself by discounting or selling the buyer’s bill or promissory notes with a bank in its own country.

Supply–or–Pay Contract: A contract in which the supplier agrees to provide goods or services to a project over time for a negotiated fee. If it is unable to do so, it must either provide the goods or services from an alternative source at its own expense or pay damages to the project for expenses incurred by the project in securing the goods or services itself.

Supply Risk:  The raw materials or input to a project change from those assumed or projected.  For a resources production project, this is called reserves risk.

Surety Bond: A form of guarantee to ensure contractual performance. For example, an insurance company can guarantee that a contractor will complete a project by issuing a surety bond payable in the event the contractor fails to complete the project.

Swap: An arrangement in which two entities lend to each other on different terms, for example, in different currencies or at different interest rates, fixed or floating.

Sweep: Typically a covenant that requires all or a specified fraction of available cash flow to be used for debt service, including prepayments of principal.

Swingline: A credit facility that appear in major loan transactions where a lead lender provides a small operating credit facility that is carved out from the lead lender’s participation in one of the other credit facilities, and that is available to the borrower to deal with the need to obtain small advances or where the borrower needs an overdraft.  It is usually made available to a borrower in connection with its commercial paper program.

Swingline Agent: The bank which administers the swingline facility.

Syndicated Loan: A commercial banking transaction in which two or more banks participate in making a loan to a borrower, typically a large multinational firm or government.

Syndication:  The selling of a project finance to a group of prospective participants (a.k.a., the syndicate).

Synthetic Lease: A kind of lease that combines the tax treatment of a capital lease with the accounting treatment of an operating lease. Thus, the lessee can deduct depreciation and interest expenses for tax purposes but does not record those expenses on its GAAP accounting statements.

Synthetic Loan:  Typically, a floating rate instrument created by combining an interest rate swap with a bond.  For instance, by using an interest rate swap, floating rate interest payments can be created and linked to coupon payments under a fixed interest rate bond.  The resulting floating rate instrument is synthetic—that is, it has been created after issuance of the underlying bond, and its terms, therefore, might not otherwise be available in the market.

Systematic Risk:  Risk associated with the market, which cannot be diversified away.  Also known as non-diversifiable risk (as measured by an asset’s beta).

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Tail: The remaining reserves after the project financing has been repaid.  Sometimes called the residual.

Take–and–Pay Contract: A contract that requires the buyer to take and pay for the good or service only if it is delivered.

Take–or–Pay Contract: A contract that creates an unconditional obligation on the part of the buyer (off-taker) to pay for the good or service even if it is not produced or available from the seller.

Takeout: A new financing to refinance an existing loan.

Tariff: A duty or tax on imports that can be levied based on a percentage of cost or specific amount per unit.

Tax Haven: A country with either no or very low tax rates that uses its tax structure to attract foreign investment or international financial dealings.

Tax Holiday: A benefit granted to a project that provides project owners an exemption from taxation for a negotiated or statutory period.

Tenor: The number of years a loan is outstanding (i.e., the final maturity or term).

Tequila Effect: A contagion whereby the Mexican peso crisis of 1994 quickly spread to other Latin American currency and equity markets.  A contagion is a form of financial panic in which the devaluation of exchange rates by one country leads to similar devaluations at about the same time by other nearby countries.

Term: The loan life or tenor; the period to a loan's final maturity.

Term Loan: A loan with an original or final maturity of more than one year, repayable according to a specified schedule.

Term B Loan:  Medium–term (typically 5 to 7 years) heavily collateralized loans from non–bank lenders (e.g., mutual funds, hedge funds, and other institutions) with very high interest rates. This loan, which resembles a bond with back–end amortization but with bank–type covenants, has been used in corporate finance since the mid–1990s and more recently in project finance. 

Term Sheet: A document that outlines in general terms the key agreements to be contained in a legal document; other terms loosely associated and often used interchangeably are a letter of understanding (LOU) and a memorandum of understanding (MOU).

Third–Party Liability Insurance: Insurance against damage or injury caused by the project to third parties.

Throughput Agreement: A throughput agreement is a hell-or-high-water contract to put and pay for material through a facility.

Tolling Agreement: An agreement under which a project company imposes tolling charges on each project user as compensation for processing raw material.

Tombstone: An advertisement describing some kind of capital raising that lists the sponsor, amount raised, participants, and key roles played by the participants.

Total Shareholder Return (TSR): A measure of corporate performance based on the sum of share price appreciation and current dividends.

Tranche: A separate portion of a project financing, perhaps with different lenders, margins, and terms.

Transaction Advisor: Individuals, firms, and companies with expertise in financial, economic, legal,  and environmental analysis, contracts, the tender process, and engineering and cost estimating who assists in bringing a project from conception, through public bidding and award, to actual execution.

Transfer Risk:  Currency cannot be sent out of the country, usually due to Central bank restrictions or a national debt rescheduling.

Trustee: An independent or nominated third party who administers corporate or financial arrangements.

Turnkey Contract: A construction contract that provides for the complete engineering, procurement, construction, and start-up of a facility by a certain date, for a fixed price and at guaranteed performance levels.

TwoSided Risks: Risk components that can cause the cash flow returns of an investment to be higher or lower than generally expected.  Also known as symmetric risks.

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Undersubscription: The situation when the underwriting commitments from a syndication are less than the amount sought by the borrower.

Unsystematic Risk: The amount of risk in a portfolio that can be eliminated by diversification.

Underwrite: An arrangement under which a financial house agrees to buy a certain agreed amount of securities of a new issue on a given date and at a given price, thereby assuring the issuer the full proceeds of the financing.

Underwriting: The commitment to fund is not contingent upon successful syndication.

Unsecured: The financier has no security other than a legal commitment by the borrower to repay the loan.

Unwind: To reverse a swap or hedge position.

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Value–Added Tax (VAT): A type of national sales tax collected at each stage of production or sale of consumption goods, and levied in proportion to the value added during the stage.

Value for Money (VFM):

Vendor Finance: Debt provided by a supplier of equipment or services to the project company.

Venture Capital: Risk capital extended to start–up or small going concerns.

Volumetric Production Payment (VPP):  A financing structure whereby a buyer, typically a financial institution, advances funds to a seller, usually an oil & gas producer, in exchange for non-operating interest in oil and gas properties.  VPPs provide the seller with a piece of their cash flows today.

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Warranty: A guarantee that a given fact will exist at some future date, as promised.

Withholding Tax: A tax on interest, royalty, or dividend payments, usually those paid overseas.

Working Capital:  Cash required to fund inventories and accounts receivables.  Accounting definition is current assets less current liabilities.  It is recovered in full when the project ceases.

Workout:  The project financiers are responding to work out a potential problem or have arranged to take over the operation after a default to rehabilitate the project’s cash flow generating capacity.

Worldwide Approach Tax Structure: An approach which levies taxes on the income earned by firms that are incorporated in the host country, regardless of where the income was earned.

Wrapped Bonds:  Bonds that carry a significantly lower corporate spread because they are guaranteed by a monoline insurance company

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Yankee Bonds: Foreign bonds denominated in U.S. dollars and issued in the United States by foreign banks and corporations. These bonds are usually registered with the SEC.

Yield:  The financial return usually expressed as a percentage per annum.                    

Yield to Maturity: The rate of interest (discount) that equates future cash flows of a bond (both principal and interest) with the present market price. Yield to Maturity is the time-adjusted rate of return earned by a bond investor.

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Zero Coupon Bond: A bond that pays no periodic interest, but returns a given amount of principal at a stated maturity date. Zero coupon bonds are sold at a discount to the maturity amount to provide the holder with a compound rate of return for the holding period.

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Project Finance Acronyms


AAA                      Agency and Administration Agreement

ACH                      Automated Clearinghouse

ACP                       Average Collection Period

ACRS                    Accelerated Cost Recovery System

ADB                      Asian Development Bank

ADR                      American Depository Receipt

ADS                      American Depository Shares

ADSCR                 Annual Debt Service Coverage Ratio

AfD                       Agence Française de Développement

AfDB                     African Development Bank

AfDF                     African Development Fund

AG                         Attorney General

AIBD                     Association of International Bond Dealers

AIU                       American International Underwriters

APT                       Arbitrage Pricing Theory

APV                      Adjusted Present Value

AWA                    Amendment and Waiver Agreement


BAFO                   Best and Final Offer

BAR                      Builders' All Risk (insurance)

BATRI                   Borrower, Amount, Term, Repayment Method, Interest Basis plus Margins

BBSY                     Refers to a screen (i.e., a page name) on the Reuters Monitor System that shows benchmark interest rates used to price variable rate loans

BCA                      Basic Credit Approval

B/E                        Bill of Exchange

B/L                        Bill of Lading

BIPS                      Basis Points

BIS                        Bank for International Settlements

bl                            Barrel (equal to 42 U.S. gallons)

BLA                       Bilateral Agency (e.g., U.S. Export-Import Bank)

BLT                       Build-Lease-Transfer

bp                          Basis point (1/100 of 1%, or 0.0001)

BDOT                    Build-Design-Operate-Transer

BLT                       Build-Lease-Transfer

BOO                      Build-Own-Operate

BOOS                    Build, Own, Operate, and Sell

BOOT                    Build-Own-Operate-Transfer

BOT                       Build-Own-Transfer

BTO                       Build-Transfer-Operate

Btu                         British thermal unit


CAC                      Collective Action Clause

CADS                   Cash Available for Debt Service

CAGR                   Compound Annual Growth Rate

CAMENA             Central Asia/Middle East/North Africa

CAO                      Compliance Advisor/Ombudsperson

CapEx                    Capital Expenditure

CAPM                   Capital Asset Pricing Model

CBO                      Collateralized Bond Obligation

CCF                      Capital Cash Flow

CCR                      Corporate Credit Rating

CCGT                    Combined Cycle Gas Turbine

CDC                      Commonwealth Development Corporation (United Kingdom)

CDO                      Collateralized Debt Obligation

CDS                      Credit Default Swap

CEN                      Confiscation, Expropriation, and Nationalization (collectively, “CEN” perils)

CEND                   Confiscation, Expropriation, Nationalization and Deprivation

CfD                       Contract for Differences

CGF                      Credit Guarantee Facility

CHIPS                   New York’s Clearing House Interbank Payment System

CIF                        Cost, Insurance, and Freight

CIP                        Covered Interest Parity

CIRR                     Commercial Interest Reference Rates

CIS                        Commonwealth of Independent States

CLO                      Collateralized Loan Obligation

CME                      Chicago Mercantile Exchange

COBA                   Cost/Benefit Analysis

COD                      Commercial Operation Date

COFACE               Compagnie Française d’Assurance pour le Commerce Exterieur (French export credit agency)

COMEX                New York Commodities Exchange

CP                         Commercial Paper

CP                         Currency Pool

CPs                        Conditions Precedent

CPI                        Consumer Price Index

CRA                      Contingency Reserve Account

CSA                      Conditional Sale Agreement

CSF                       Critical Success Factor

CFSB                    Credit Suisse First Boston

CSO                      Civil Society Organization

CTA                       Capacity and Tolling Agreement

CTA                       Common Terms Agreement

CTS                       Common Terms Sheet

CUP                       Cooperative Underwriting Program

CWSRF                 Clean Water State Revolving Fund


DBSA                    Development Bank of South Africa

DCF                      Discounted Cash Flow

DCMF                   Design, Construct, Manage, and Finance

DCR                      Drawdown Cover Ratio

D:E                        Debt to Equity

DFI                        Development Finance Institution

DIBOR                  Dublin Inter–Bank Offered Rate

DIS                        Delay-in-Startup (insurance)

DLDs                     Delay Liquidated Damages

DOD                      Debt Outstanding and Disbursed

DSCR                    Debt Service Coverage Ratio

DSM                      Demand Side Management

DSO                      Direct Service Organization

DSPA                    Debt Service Payment Account

DSRA                    Debt Service Reserve Account

DT                         Design Team

DTC                      Depositary Trust Company


EA                         Environmental assessment

EAP                       Environmental Action Plan

EBIAT                   Earnings Before Interest but After Taxes

EBIT                      Earnings Before Interest and Taxes

EBITDA                Earnings before Interest, Taxes, Depreciation and Amortization

EBRD                    European Bank for Reconstruction and Development

EC                         European Community

ECA                      Export Credit Agency

ECF                       Equity Cash Flow

ECGD                    Export Credit Guarantee Department (U.K. export credit agency)

ECP                       Euro Commercial Paper

ECU                      European Community Unit

EDC                      Export Development Canada (Canadian export credit agency)

EFIC                     Export Finance and Insurance Corporation (Australian export credit agency)

EFL                       External Financing Limit

EIA                        Environmental Impact Assessment

EIS                        Environmental Impact Statement

EIB                        European Investment Bank

EIU                        Economist Intelligence Unit

EMBI                     Emerging Market Bonds Index (published by J. P. Morgan)

EMU                      Economic and Monetary Union of the European Union

EOD                       Event of Default

EPC                       Engineering, Procurement, and Construction

ERBD                    European Bank for Reconstruction and Development (targeted to Eastern Europe and the former Soviet Union)

ERISA                   Employee Retirement Income Security Act

EPS                       Earnings per Share

ESA                       Equity Support Agreement

ESIA                     Environmental and Social Impact Assessment

EU                         European Union


FAQ                      Free at Quay

FAS                       Free Alongside

FASB                    Financial Accounting Standards Board

FCF                       Free Cash Flow

FDI                        Foreign Direct Investment

FERC                     Federal Energy Regulatory Commission

FIAS                      Foreign Investment Advisory Service (part of the World Bank Group)

FIBOR                   Frankfurt Inter–Bank Offered Rate

FIFO                      First In, First Out

FM                         Force Majeure

FOB                       Free on Board

ForEx                     Foreign Exchange

FRA                       Forward Rate Agreement

FRB                       Federal Reserve Board (Washington, D.C.)

FRNs                     Floating Rate Notes

FSC                       Foreign Sales Corporation

FSU                       Former Soviet Union

FV                         Future Value

FX                         Foreign Exchange

FY                         Fiscal Year


GAAP                   Generally Accepted Accounting Principles (e.g., U.S. GAAP)

GATS                    General Agreement on Trade In Services

GATT                    General Agreement on Tariffs and Trade

GDP                       Gross Domestic Product

GDRs                     Global Depositary Receipts

GJ                           Gigajoule

GNF                       Global Note Facility

GNI                        Gross National Income

GNP                       Gross National Product

GSM                      Global systems for mobiles, a mobile phone standard.

GTL                       Gas-to-Liquids

GW                        Gigawatt (one billion watts)

G-5                        Group of five countries (France, Germany, Japan, U.K., and U.S.)

G-7                        The G–5 countries plus Canada and Italy

G-10                     The G–7 countries plus Belgium, the Netherlands, Sweden  and Switzerland. The group has 11 members but is still known as the G10. It aims to coordinate monetary and fiscal policies for a stable world economic system.


ha                           Hectare

HDSCR                 Historic Debt Service Cover Ratio

HIBOR                  Hong Kong Inter–Bank Offered Rate

HIPC                     Heavily Indebted Poor Country

HoldCo                 Holding Company


IA                          Implementation Agreement

IBFs                      International Banking Facilities

IBRD                     International Bank for Reconstruction and Development (a member of the World Bank Group)

ICA                       International Court of Arbitration

ICB                       International competitive bidding

ICC                       International Chamber of Commerce

ICRG                    International Country Risk Guide

ICR                       Issuer Credit Rating

ICSID                   International Center for Settlement of Investment Disputes

IDA                       International Development Association (a member of the World Bank Group)

IDB                        Inter–American Development Bank

IDC                       Interest During Construction

IDRs                      International Depositary Receipts

IE                           Independent Engineer

IFC                        International Finance Corporation (a member of the World Bank Group)

IIC                         Inter-American Investment Corporation

ILFAs                    Individual Loan Facility Agreements

IMF                       International Monetary Fund

IMLAs                   Initial Mandated Lead Arrangers

IPA                        Investment Project Authorization

IPO                        Initial Public Offering

IPP                         Independent Power Producer (or Independent Power Plant)

IPR                         initial project review

IRB                        Internal–Rating–Based (an approach under the Basel II Accord)

IR                          Interest rate (risk or exposure)

IRR                        Internal Rate of Return

ISDA                     International Swap and Derivatives Association

IsDB                      Islamic Development Bank

ITC                        Investment Tax Credit

ITN                        Invitation to Negotiate

ITT                        Invitation to Tender


JBIC                      Japan Bank for International Cooperation

JCI                        Japan Consulting Institute

JEXIM                   Japan Export–Import Bank

JIBOR                   Jakarta Inter–Bank Offered Rate

JFS                        Joint Feasibility Study

JOA                       Joint Operating Agreement


KExim                   Korean Export–Import Bank

KfW                      Kreditanstalt für Wiederaufbau

KIBOR                 Kuwait or Karachi Inter–Bank Offered Rate

kJ                          Kilojoule, a measure of energy

km                         Kilometer

kWh                      Kilowatt-Hour


LAC                      Latin America and the Caribbean

LCAI                     London Court of International Arbitration

LCVI                     Liquidity, Credit, and Volatility Index

LDCs                     Less Developed Countries

LIB                        Limited International Bidding

LIBID                    London Inter–Bank Bid Rate

LIBOR                   London Inter–Bank Offered Rate

LIFO                      Last In, First Out

L/C                         Letter of Credit

LDs                        Liquidated Damages

LLA                       Land Lease Agreement

LLC                       Limited Liability Company

LLCR                    Loan Life Cover Ratio

LME                      London Metals Exchange

LNG                      Liquefied Natural Gas

LOC                      Letter of Credit

LOI                        Letter of Intent

LOT                       Lease, Operate and Transfer

LOU                      Letter of Understanding

LPG                       Liquefied petroleum gas

LP                          Limited Partner

LSTK                     Lump-sum Turnkey Contract

LT                          Levelized Tariff

LTMAs                  Long-Term Maintenance Agreements



MAC                     Material Adverse Change

MACRS                Modified Cost Recovery System

MAE                     Material Adverse Event or Material Adverse Effect

MDB                     Multilateral Development Bank

MIBOR                 Mumbai (formerly Bombay) Inter–Bank Offered Rate

MIGA                    Multilateral Investment Guarantee Association (a member of the World Bank Group)

MIRR                    Modified Internal Rate of Return

MITI                     Ministry of International Trade and Industry (Japan)

MLA                     Mandated Lead Arranger

MLA                     Multilateral Agency (e.g., International Finance Corporation)

MNC                    Multinational Corporation

MOF                     Ministry of Finance (Japan)

MOF                     Multiple Options Facility

MOT                     Modernize, Operate and Transfer

MOU                     Memorandum of Understanding

MPP                      Merchant Power Plant

MSCI                    Morgan Stanley Capital International

MW                       Megawatt (1,000,000 Watts)


NAFTA                North American Free Trade Agreement

NEPAD                New Partnership for Africa’s Development

NFFO                   Non-Fossil Fuel Obligation

NGO                     Nongovernmental Organization

NIF                       Note Issuance Facility

NOPAT                Net Operating Profit after Tax

NWC                    Net Working Capital

NPV                      Net Present Value


ODA                      Overseas Development Administration

ODA                      Official Development Assistance

OECD                    Organization for Economic Cooperation and Development

OM                        Offering Memorandum

O&M                     Operation and Maintenance

OPEC                    Organization of Petroleum Exporting Countries

OPEX                    Operating Expenses

OPIC                     Overseas Private Investment Corporation


p.a.                         Per annum (annually)

PCG                       Partial Credit Guarantee

PDSCR                  Projected Debt Service Cover Ratio

PE                          Public Enterprise

PFA                       Project Funds Agreement

PFC                       Project Financial Completion

PFI                        Private Finance Initiative

PFI                        Project Finance International (a trade journal)

PIBOR                  Paris Inter–Bank Offered Rate

PIM                       Preliminary Information Memorandum

PLCR                    Project Life Coverage Ratio

PLDs                     Performance LDs

PLF                       Plant Load Factor

P/N                        Promissory Note

PPA                       Power Purchase Agreement

PPB                       Provisional Preferred Bidder

PPI                        Private Participation in Infrastructure (Note: can also be the Producer Price Index)

ppm                       Parts per million

PPP                       Public-Private Partnership or Purchasing Power Parity

PQQ                      Pre-Qualification Questionnaire

PRG                      Partial Risk Guarantee

PRG                      Project Review Group

PRI                        Political Risk Insurance

PSEDP                  Private Sector Energy Development Project

PSEF                     Private Sector Energy Fund

PSIDC                   Private Sector Infrastructure Development Corporation

PSIF                      Private Sector Infrastructure Fund

PTC                       Production Tax Credit

PURPA                  Public Utilities Regulatory Policy Act (of 1978)

PUC                       Public Utilities Commission

PUCHA                 Public Utility Holding Company Act (of 1935)

PV                         Present Value


QIB                      Qualified Institutional Buyer


RAAP                   Regulatory Accepted Accounting Principles

RAP                      Resettlement Action Plan

RAROC                Risk Adjusted Return on Capital

RCOD                   Required Commercial Operations Date

RCR                      Repayment Cover Ratio

RDs                       Reserved Discretion(s)

RECs                     Regional Electricity Companies

RFP                       Request for Proposals

RMR                     Reliability Must Run (power plant)

ROA                     Return on Assets

ROE                      Return on Equity

ROI                       Return on Investment

ROIC                    Return on Invested Capital

ROO                     Rehabilitate-Own-Operate

ROT                      Rehabilitate-Operate-Transfer

ROW                     Right of Way

RPI                        Retail Price Index

RPS                       Renewable Portfolio Standard

RRR                       Required Rate of Return

RSA                       Resource Supply Agreement

RUF                       Revolving Underwriting Facility


SACE                    Istituto per i Servizi Assicurativi del Commercio Estero (Italian export credit agency)

S&P                       Standard & Poor’s Corporation

SCP                       Single Currency Pool

SCR                       Sovereign Credit Rating

SDR                       Special Drawing Rights

SEC                       Securities and Exchange Commission (United States)

SIBOR                   Singapore Inter–Bank Offered Rate

SIC                        Standard Industrial Classification

SOE                       State-owned Enterprise

SOT                       Supply-Operate-Transfer

SPA                       Sales Purchase Agreement(s)

SPV                       Special-purpose Vehicle

SRF                       State Revolving Fund

SRI                        Socially Responsible Investment


TDA                      Trade Development Agency

T&D                      Transmission and Distribution

TIBOR                   Tokyo Inter–Bank Offered Rate

TRR                       Target Rate of Return

TRUF                    Transferable Revolving Underwriting Facility (RUF)

TSR                       Total Shareholder Return


UIRP                     Uncovered Interest Rate Parity

UNCTAD             United Nations Conference on Trade and Development

UNCITRAL          United Nations Commission on International Trade Law

UNDP                   United Nations Development Program

UNEP                    United Nations Environmental Program

USAID                   United States Agency for International Development

USEXIM                Export–Import Bank of the United States (U.S. export credit agency)


VAR                      Value at Risk

VAT                      Value-added Tax

VFM                     Value for Money

VRNs                    Variable Rate Notes

VPD                      Vehicles Per Day

VPP                       Volumetric Production Payment


WACC                  Weighted Average Cost of Capital

WTO                     World Trade Organization


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Reference Note:  Many of the definitions contained in this glossary come from or were created from one or more of the following sources.  The definitions have been revised to make them current and consistent across the glossary.


Buljevich, Esteban C., and Yoon S. Park, 1999, Project Financing and the International Financial Markets, Kluwer Academic Publishers (Norwell, MA).

Davis, H., 1996,  Project Finance:  Practical Case Studies, Euromoney Books (London, UK).

Development Bank of Southern Africa (DBSA) web site:  www.dbsa.org/privatesector/project_finance.htm 

Harvey, C., Hypertextual Finance Glossary:  http://www.duke.edu/~charvey/Classes/wpg/glossary.htm 

Hoffman, Scott L., 1998, The Law and Business of International Project Finance, (Kluwer Law International, London, U.K.).

International Finance Corporation, 1999, Project Finance in Developing Countries, Lessons of Experience, number 7, Washington, D.C.

Khan, M.F.K., and R.J. Parra, 2002, Financing Large Projects:  Using Project Finance Techniques and Practices, book manuscript.

MZ Project Finance web site (Produced by Mauro Zajec):  www.mzprojectfinance.com/project_finance/glossary.htm 

Nevitt, P.K., and F.J. Fabozzi, 2000, Project Financing, 7th edition, Euromoney Books (London, U.K.).

Pollio, G., 1999, International Project Analysis and Financing, University of Michigan Press (Ann Arbor, MI).

Razavi, H., 1996, Financing Energy Projects in Emerging Economies, PennWell Books (Tulsa, OK).

Rhodes, T., 2000, Syndicated Lending:  Practice and Documentation, 3rd edition, Euromoney Books (London, UK).

Yescombe, E.R., 2002, Principles of Project Finance, Academic Press—an imprint of Elsevier Science (London, UK).

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If you have any suggestions for additional content, please contact Professor Benjamin C. Esty.
Last updated May 26, 2011

Copyright ©2004 Benjamin C. Esty

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