Project risks and risk allocation
Project risks and risk allocation

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Project risks and risk allocation
  • Approaching risk allocation in a project finance transaction
  • Sponsor risk in a project finance transaction
  • What is sponsor risk?
  • Dealing with sponsor risk
  • Construction risk in a project finance transaction
  • What is construction risk?
  • Dealing with construction risk
  • Permitting risk in a project finance transaction
  • What is permitting risk?
  • More...

Project risks and risk allocation

Risk is a defining feature of many project finance transactions as explained in Practice Note: Introduction to project finance.

To decide whether or not to lend to a project, project finance lenders must identify and analyse every risk associated with the project. They will want to see that risks are:

  1. shared across the project participants (and not left with the borrower), and/or

  2. mitigated as far as possible, eg with additional credit support or insurance

If the risks involved in a project cannot be sufficiently minimised to the satisfaction of the lenders, this will often be reflected in the margin for the loan. In some cases, the risks associated with a project will mean that the lenders decide that they cannot lend at all. It is very important that the sponsor gets its risk strategy right.

This Practice Note identifies the major areas of risk which are common to many projects and explains some of the ways in which they are usually tackled.

Approaching risk allocation in a project finance transaction

Some general principles of risk allocation are:

  1. each risk should be allocated to the party best placed to bear it (ie the party which is in the best position to manage the risk)

  2. risk bearers should be able to absorb the financial burden of the risk if it turns into a reality, and

  3. risks should

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