What is a 'Limited Recourse Debt'

A limited recourse debt is a debt in which the creditor has limited claims on the loan in the event of default. Limited recourse debt sits in between secured bonds and unsecured bonds in terms of the backing behind the loan. Often a limited recourse debt contract is structured so that the debt transitions to unsecured, or "non-recourse", debt pending the completion of a specific event. That event may be the completion of a project or the establishment of a specific revenue stream for which the debt was issued.

BREAKING DOWN 'Limited Recourse Debt'

For example, terms for limited recourse debt for a large project such as a power plant could mean that a creditor is guaranteed to receive 25% of the principal in the event of a default up until completion of the power plant.

Limited recourse debt will typically pay a lower rate than standard issue unsecured bonds because of its relative safety. Claims on limited recourse debt sit above both stockholders and unsecured bondholders in terms of payout hierarchy.

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