What is non-recourse funding?

The asset or project is often held in a special purpose vehicle (SPV) so its risks and cash flows are isolated from the sponsor's wider group. The lender takes first ranking security over the specific assets: a mortgage over real property, and a security interest registered on the Personal Property Securities Register (PPSR) over personal property such as vehicles and equipment. It often controls the project bank accounts too.

Income from the asset is applied in a strict order known as a cashflow waterfall: operating and maintenance costs, taxes, lender fees, then principal and interest. If the borrower defaults, the lender enforces against the asset or the SPV. Whether it can recover anything beyond that depends on the carve-outs in the contract and any guarantees given. The structure swaps corporate guarantees for collateral and cashflow quality.

Under a recourse facility the lender can pursue the borrower's wider corporate and personal assets if selling the security falls short. Under non-recourse funding recovery stops at the asset or SPV, apart from the carve-out liabilities. A closely related term is limited recourse, where the lender's extra remedies are narrowed to defined circumstances such as fraud or environmental liability.

Lenders price that difference in. Non-recourse debt generally carries a higher margin and fees, tighter covenants with closer monitoring, and protections such as step-in rights, reserve accounts and escrow. Parent or owner guarantees are common in recourse lending and usually absent, or highly limited, in non-recourse deals.

Typical users are project sponsors in energy, infrastructure and toll roads; asset-intensive businesses in transport, mining and agriculture that want the risk on one asset kept away from the wider group; corporates using sale and leaseback to release cash from productive assets; and property developers in ring-fenced developments. Deal sizes range from equipment leases of a few hundred thousand dollars to project financings worth hundreds of millions.

The appeal for borrowers is ring-fenced loss exposure and the ability to finance large projects without putting the parent balance sheet at risk, which can free up working capital. True off-balance-sheet treatment is much harder to get than it once was, and group leverage only looks better if the SPV sits outside the consolidated accounts. The trade-offs are higher cost, stricter operational controls, extensive due diligence and reporting, and less flexibility to repurpose the asset.

For sale and leaseback structures the ATO looks at whether the arrangement is a genuine asset sale or a financing in substance, which can affect GST and input tax credits. Lenders often ask sponsors to indemnify them for tax liabilities triggered by a disposal or an audit adjustment. On the accounting side, AASB 16 puts most leases on the lessee's balance sheet as a right of use asset and a lease liability, so lease classification no longer decides that. For a sale and leaseback the question is whether the transfer qualifies as a sale under AASB 15, and for an SPV it is whether the sponsor has to consolidate it.

Under the Corporations Act an administrator or liquidator can affect the timing and priority of enforcement, so lenders rely on correctly registered, first ranking security. Get specialist legal, tax and accounting advice before committing to a structure.