Question

Explain what non-recourse finance is and explain when it might be applicable. What are some potential risks associated with non-recourse funding?

Answer 1

Non recourse financing is a type of finance in which lender will be entitled to repayment only from the profit of the project the loan is funding the borrower with, and not from any of the Other Assets of the borrowers, so it will not be holding the borrower personally liable and it will be recovering its debt from that collateralized asset only. Hence, it will not allow the lender to pursue anything other than collateral.

This type of finance is applicable when there is a high worth of the collateral and there are very low risk associated with the default of borrower and there will be a higher degree of liquidity of collateral as well so the lender will be assured of his risk being covered with the collateral.

Risk related to non recourse financing is that there will be a risk associated with loss of the loan amount being paid because there will be risk of unfulfillment of the the debt entitlement by the secured assets, so it would lead to bad assets on the part of the lender and it will also mean that the lender will be exposed to unsecured loans. These are even non standard form of financing which varies from company to company and there is a higher risk.