Project finance funds a specific project through a company created solely for it, the SPV. The debt is repaid from the cash flows generated by that project, not from the developer's balance sheet. That is why the bank or investors review the power sale contract, the leases or the concession before your accounts. In exchange, they require robust contracts, security over everything the SPV owns and a cash cushion measured by the DSCR.
This guide is for the sponsor of a renewable, real estate or infrastructure project. It covers the SPV structure, cash flow distribution, the DSCR with an example, guarantees and debt sources. Rules reviewed as of November 1, 2026.
When project finance fits
It fits when the project can stand on its own: an identified physical asset, contracted or predictable revenues and a long term. This is the case for a solar farm with a power purchase agreement (PPA), a rental building with signed tenants or an infrastructure asset with a concession.
The EU banking rules treat it as “specialized financing”: exposures to an entity created to finance or operate physical assets. The lender has substantial control over those assets and their income, and the main source of repayment is the income they generate (Regulation (EU) 575/2013, arts. 147.8 and 122 bis.1). Under the standardized approach, real estate financing falls outside that category (art. 122 bis.1.b).
These rules also explain why the construction phase is more expensive. Under the standardized approach and without an external rating, a project finance exposure carries a 130% risk weight while the project is in the pre-operational phase. In the operational phase it falls to 100%, or to 80% if it meets all the article's quality criteria, including generating predictable cash flows that cover all future repayments (art. 122 bis.3.c, introduced by Regulation (EU) 2024/1623 and applicable from 1-1-2025).
Criterion: if you cannot show who will pay the project revenues and under which contract, you do not yet have a project finance. You have a corporate loan by another name.
Structure: the SPV, the parties and the contracts
The SPV is a new company with no other activity, which owns the asset, signs all contracts and takes on debt. You contribute capital as a shareholder. The guide on what an SPV is explains how it is incorporated in Spain.
| Contract | Who signs it | What risk it transfers |
|---|---|---|
| Shareholders' agreement and articles of association | Developer and equity investors | Contributions, governance and exit |
| Turnkey construction (EPC) | SPV and contractor | Term, cost and performance, with penalties |
| Operation and maintenance (O&M) | SPV and operator | Availability and operating cost |
| Revenue contract: PPA, leases or concession | SPV and buyer, tenants or Administration | Price and volume of revenues |
| Financing, hedges and intercreditor agreement | SPV, banks or bondholders and an agent | Conditions, ratios and payment waterfall |
| Direct agreements | Financiers and key counterparties | Right to step into the contract if the SPV defaults |
| Insurance | SPV and insurer, with the lenders as beneficiaries | Damage and loss of profit |
A nuance about the balance sheet. “Non-recourse” means that the SPV's creditors cannot claim the debt from you, not that it disappears from your books. If you control the SPV, the Commercial Code requires the group's parent company to prepare consolidated accounts (art. 42), unless exempt, for example on the grounds of size (art. 43).
If the SPV raises capital from several investors through marketing, consider with your advisor whether it could be a closed-end collective investment entity, which requires an authorized management company (Law 22/2014, art. 4), or an IIC (Law 35/2003, art. 1). The former is defined by having no commercial or industrial purpose, so how the SPV's activity is described matters.
Criterion: every project risk must be assigned in a contract to whoever controls it best. Risk that is not in any contract is assumed by the SPV, and with it your capital.
The waterfall: the order in which cash is distributed
The financing agreement sets a payment waterfall. All income goes into an account pledged in favor of the lenders and is paid out in this order:
- Operating, maintenance and insurance costs.
- Taxes.
- Senior debt service: interest and principal.
- Funding of the debt service reserve account up to its target balance, for example six months of installments.
- Other agreed reserves, such as the major repairs reserve.
- Debt service on the subordinated or mezzanine debt, if any.
- Distribution to shareholders, only if the distribution test is passed.
The distribution test (lock-up) traps cash in the SPV when DSCR falls below a threshold. Some contracts add a cash sweep: surplus cash is used to prepay debt.
Action: build your dividend forecast after the last step of the waterfall, never on the project's gross cash flow.
DSCR: how it is calculated and what ratio is required
The DSCR (debt service coverage ratio) divides the cash available to pay debt in a period, the CFADS, by what is due in that period. That debt service includes interest and principal. A DSCR of 1.30x means that cash exceeds what must be paid by 30%.
The cited banking rules do not set a minimum DSCR: each lender agrees it in the contract according to the project's risk. As a published reference, the base case for the Central Railway of Uruguay (October 2017) is useful; it was prepared by its financial advisor and published by the Uruguayan Ministry of Economy and Finance. That base case assumed a minimum DSCR of 1.30x for debt in indexed units and of 1.20x for debt in dollars.
A solar plant with a PPA receives €3,200,000 per year, spends €700,000 on operations and pays €200,000 in taxes. Its CFADS is €2,300,000.
- Debt sizing. Assume the bank requires a minimum DSCR of 1.30x. The maximum annual payment is €2,300,000 / 1.30 = €1,769,231. With a loan over 15 years at 5%, that payment supports debt of about €18.36 million.
- Resulting leverage. If the total investment is €24 million, debt covers 76.5% and you contribute about €5.64 million in equity.
- Sensitivity. If in one year production falls by 10% and revenue drops by €320,000, CFADS is €1,980,000 and DSCR is 1.12x.
- Consequence. With a lock-up agreed at 1.15x, you do not distribute dividends that year. If the default threshold is 1.05x, there is still no acceleration.
Criterion: negotiate the minimum DSCR, the lock-up threshold and the default threshold at the same time. The distance between them is the margin you have for a bad year.
Standard security
The lenders take security over everything the SPV owns, and also over the SPV itself:
- Mortgage over the asset or, in public works concessions intended for public service, over the concession (Mortgage Law, art. 107.6).
- Pledge over the SPV's shares or equity interests, granted by the shareholders.
- Non-possessory pledge over the SPV's receivables, including future ones, such as PPA payments. It is created by registration with the Registry of Movable Assets (Law on Movable Mortgages and Non-Possessory Pledges, art. 54).
- Assignment of the SPV's insurance and rights under the project contracts.
- Sponsor support during construction, for example a commitment to inject capital if there are cost overruns.
If the SPV enters insolvency proceedings, claims secured by a mortgage or non-possessory pledge have special priority over the encumbered assets (Consolidated Text of the Insolvency Law, art. 270.1). The pledge over the shares covers an asset of the shareholder, not of the SPV, so it does not grant priority in the SPV's insolvency proceedings.
Criterion: limit the sponsor support in the contract to the construction phase and set when it is released, for example when the operating phase is reached.
Debt sources: syndicated loan, project bonds and tokenized bonds
Syndicated loan. Several banks share a loan with an agent bank. It fits construction, because funds are drawn as construction progresses.
Project bonds. The SPV issues bonds subscribed by investors. They fit better with a project already in operation, for example to refinance the construction loan. The issuance may be secured in favor of its present and future holders by mortgage, pledge or joint and several guarantee from a credit institution, among other guarantees (LSC, art. 404).
Tokenized bonds issued by the SPV. They are bonds with full legal effect represented in a registry based on distributed ledger technology (Law 6/2023, art. 6.1). They require an issuance document (art. 7) and an authorized entity that manages the registration and registry (art. 8.4), unless they are admitted to trading on a market infrastructure based on that technology, which performs that function (art. 8.5). If the SPV is a limited liability company, its issues may not exceed twice its equity. The exception is that they are secured by mortgage, pledge of securities, public guarantee or joint and several guarantee from a credit institution (LSC, art. 401.2).
Be careful with the mortgage. The LSC permits it in favor of present and future holders (art. 404), but the Mortgage Law regulates it for endorsable or bearer securities (arts. 154 to 156) and Law 6/2023 does not provide for a mortgage rule for securities in distributed registries. Its registration in favor of tokenized bonds is not settled: confirm it with the registrar before relying on it.
This is not a theoretical route. In the CNMV register there are 12 issues of tokenized bonds from companies with “SPV” in their name. They range from €1 to €8 million and were registered between December 2025 and October 2026. As of 31 October 2026, that register listed 19 issues of tokenized bonds, all with the same ERIR. HokenFi is the software with which an SPV can issue those tokenized bonds, integrated with URSUS-3 Capital, A.V., S.A., the ERIR registered with the CNMV.
| Route | Who provides it | Best time | Advantage | Drawback |
|---|---|---|---|---|
| Sponsor and co-investors' capital | SPV shareholders | From the start | No fixed fees | It is the last to be paid and the most expensive |
| Syndicated loan | Banks | Construction | Drawdowns based on construction progress | Strict ratios and higher cost in the pre-operational phase |
| Project bonds | Institutional investors | Operation (refinancing) | Long maturities | Disbursed in one go and require an asset that is already proven |
| Tokenized bonds of the SPV | Investors subscribing to the issuance | Operation, or construction tranches with guarantees | Medium amounts, digital register of holders | Investor base to be built, LSC limits if the SPV is an S.L., and registry treatment of the mortgage to be confirmed |
| Subordinated or mezzanine debt | Debt funds | To close the gap between senior debt and equity | Reduces the equity you contribute | More expensive and paid after the senior debt |
Decision: combine routes by phase. Finance construction with bank debt and equity, and refinance in operation with bonds or tokenized bonds if their cost is better than the loan's.
Renewable and real estate projects: what changes
In renewables, the lender focuses above all on the energy sales contract and estimated production. If revenues depend on the market price without hedging, expect more equity and a more demanding DSCR. The page on tokenization for renewable energy summarizes how an issuance is structured.
In rental real estate, revenues are the lease contracts: their term, tenant creditworthiness and occupancy matter. In development for sale there is no recurring cash flow, so repayment depends on sales and the financing is closer to a developer loan. The page on tokenization for real estate developers explains how an issuance is structured.
Criterion: the more contracted the revenues are, the more debt the project can take and the cheaper it is.
Typical mistakes in project finance
- Sizing debt with the most optimistic production or occupancy, without testing a bad scenario.
- Confusing “non-recourse” with “risk-free”: in construction, lenders usually require sponsor support.
- Assuming that the SPV takes the debt off your books when you control and consolidate it.
- Signing contracts that are inconsistent with one another, such as an EPC commercial operation date later than the one required by the PPA.
- Planning dividends without factoring in reserves and the lock-up.
- Believing that tokenization changes the nature of the debt: a tokenized bond remains subject to the rules of the LSC and Law 6/2023.
Action: before presenting the project to a lender, prepare a model with the full waterfall, a downside scenario and the DSCR year by year.
This content is informative and educational. It does not constitute legal, tax or investment advice. Verify the current version of the rules in the official sources before making decisions.
HokenFi is a software and infrastructure provider; it does not provide regulated services (CASP, ESI, EAF, or ERIR). This article is informative and does not constitute financial or legal advice.
Frequently asked questions
What is the difference between project finance and corporate financing?
In corporate financing, the bank lends to your company and is repaid from all its businesses and assets. In project finance, it lends to a company that has only one project and is repaid from what that project earns. That is why the latter requires more contracts and more analysis, but it isolates your company if the project goes wrong.
What is CFADS?
It is the English acronym for cash available for debt service. It is calculated by subtracting operating costs, taxes and maintenance capex from the period's revenue, and it is the numerator of the DSCR. Lenders calculate it using prudent production or occupancy assumptions, not the sponsor's.
Can an SPV incorporated as an S.L. issue bonds?
Yes. The Capital Companies Act allows any capital company to issue bonds. In the limited company (S.L.), the total issued may not exceed twice its equity, unless the issue is secured by a mortgage, a pledge of securities, a public guarantee or a joint and several guarantee from a credit institution. What an S.L. can never issue is bonds convertible into equity interests.
Does non-recourse mean the sponsor risks nothing?
No. You risk at least the capital you contribute to the SPV, which is the last to be repaid. In addition, during construction banks usually require sponsor commitments to cover cost overruns or delays, which are released when the project proves that it works. That is why many professionals prefer to speak of limited recourse, which better describes the actual allocation of risk.
