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Value Recovery After a Default

Project finance lending often is viewed as more risky than corporate finance lending for reasons such as risk related to a single asset rather than a corporation's diversified base of assets or to a greenfield project that may be viewed as equivalent to a start-up. But project finance practitioners believe that well-crafted project finance transactions mitigate risks effectively, yielding a risk profile that is equivalent, if not superior, to corporate lending. This article begins by outlining the salient conclusions of the newly available data on project finance defaults and recoveries. It then summarizes some of the key causes of project default, an understanding of which is vital for informing subsequent decisions during the value-recovery process. Lastly, the article discusses the multiple and interlocking decisions that must be made during value recovery before contrasting this process with the corporate default scenario. As a result, the author hopes to provide an understanding of how project finance structures work in practice and the skill set necessary to implement them.