The Allocation of Financial Instruments to Project Activity Risks

Abstract

The types of financial instruments available for financing proj-ects have always been of concern to investors and promoters. In many infrastructure projects, the debt-equity ratio is seen to be a measure of the risk in that project; the greater the risk, the greater the amount equity sponsors are compelled to invest. However, the defined debt-equity structure does not provide a breakdown of the financial instruments associated with the risk identified on each project activity. This article examines the allocation of financial instruments, those being senior debt, mezzanine/subordinated debt, and equity. An example shows the way this mechanism is used.