Layered Finance

Abstract

The general objectives of subordinated debt in project finance transactions are to mitigate risk for senior lenders and to mobilize a higher aggregate level of project debt than is otherwise justified by the project's underlying cash flows. This article focuses primarily on three purposes of debt subordination in project finance, 1) replacement by project sponsor or other “insider” of equity with debt, 2) provision by other “investors” of equity-like capital on a hybrid basis, and 3) promoting the participation of senior lenders by improving the margin of debt service coverage.