Nonrecourse financing is debt where the loan is completely secured by collateral, which is often real estate. In case of default, the borrower is not liable because the lender is limited to collateral pledged for that loan—the lender has “no recourse” to the borrower’s other assets.
Nonrecourse financing is typically found in infrastructure projects such as the construction of toll roads and bridges. In this case, the borrower (a large construction company) is under no obligation to make payments on the loan if the revenue generated from the project on completion (the bridge or the toll road when built) is insufficient to cover the principal and interest payments on that loan.
Although the benefits of such financing are obvious (the borrower is not using its balance sheet for the loan and can therefore undertake more leveraged projects than it could otherwise), such financing comes at a cost. Lenders often seek other credit guarantees and will almost certainly charge more for the loan than with more traditional, recourse financing.
Nonrecourse financing does not mean “no risk,” and some companies may undertake projects that have a riskier profile than they should otherwise assume, as will be shown in a case study.
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