Non-recourse/limited recourse debt

The lender of a non-recourse loan is only entitled to repayment from specific assets and cash flows. Limited recourse debt gives the lender a limited amount of recourse to the borrowers other assets.

Non-recourse lending is common in project finance. It is also used to turn factoring into an effective sale of debt. Securitisation of cash flows is essentially the same. In some the US many residential mortgages are also non-recourse.

Non-recourse lending for project finance is likely to use a limited liability special purpose vehicle for the project (which also provides a way in which equity can be raised).

IFRS require that much non-recourse borrowing should be shown as debt on the balance sheet. Although this is understandable in the light of past abuses of off-balance sheet financing, it does tend to make balance sheets too conservative. Not only might a debt not actually have to be repaid in full, but there is always option value in being able to abandon an asset for the value of the debt secured against it.

This, as is often the case, means that investors need to look at full annual report or results announcement, and the notes to the accounts in particular, to properly understand a company's financial position. That is, in any case, a basic requirement.

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