Situating Project Finance and Securitization in Context: A Comment on Bjerre

Carl Bjerre has written an interesting analysis of some overlapping legal issues in project finance and securitization transactions.However, some of his reasoning and conclusions do not reflect the broader environment in which these transactions are carried out.Project finance generally results in the creation of a new cashflow producing asset.Because this asset is created not in the originator but in the special purpose vehicle (SPV), no true sale is required.Consequently, project financings are safer from interference in the case of an originator bankruptcy and are less sensitive to originator recourse.Indeed, project financings are typically non-recourse to the originator.Further, in a project finance transaction there is no risk of the financing being recategorized as a secured loan on the balance sheet of the originator, which would result in increased leverage on its balance sheet.Although project finance has structural aspects that provide definite advantages over traditional structured finance, these differences pose problems of their own.Specifically, the opportunities for a project finance SPV bankruptcy are substantially greater than the typically passive SPV designed for structured finance transactions.When an SPV is operating an asset, and the asset is a dangerous or controversial one, there is an increased chance of adverse financial consequences.Project finance receivables generally (but not always) flow from a small number of obligors.These factors introduce greater credit risk than is normally found in structured finance securitizations, which typically consist of receivables from a statistically predictable large pool.Professor Bjerre's comparison and contrast of project financing and securitization is somewhat effective, but he abruptly moves into a