Sovereign Guarantees in Project Finance Overview
One of the most attractive features of project financing is that it allows the sponsors of a project to guarantee the obligations of a special purpose project company in lieu of incurring direct obligations. Being contingent obligations, guarantees need not be reflected on the guarantor’s balance sheet.
However, guarantees are required to be disclosed in footnotes to financial statements in accordance with the prescriptions of the United States Financial Accounting Standards Board. Indeed, rating agencies often take note of a sponsor’s contingent liabilities, particularly when such liabilities are substantial. Nonetheless, the impact of such guarantees on a sponsor’s credit profile is, by far, much less severe than an equivalent direct liability on its balance sheet. Guarantees have therefore become one of the keystones of project finance.