A limited recourse clause loan agreement, also known as a limited recourse debt, is a type of loan agreement that limits the lender`s recourse to a specific asset or set of assets as collateral for the loan. This type of loan is often used in project finance transactions or for financing assets that have uncertain cash flows.

Limited recourse clause loan agreements typically provide protection to lenders in case borrowers are unable to pay back the loan. In a limited recourse clause loan agreement, lenders have limited or no recourse to the borrowing entity`s assets beyond any specific collateral that has been pledged as security for the loan.

For example, a limited recourse clause may be used in a project finance transaction for the construction of a power plant. In such a case, the project company would borrow money from lenders to finance the construction project. However, the lenders` recourse would be limited to the assets of the power plant. If the project fails to generate sufficient cash flows to repay the loan, the lenders cannot go after the assets of the project company beyond those associated with the power plant.

The limited recourse clause acts as a risk management tool for lenders, as it mitigates the risk of loss if the borrower defaults. It also helps to encourage lenders to lend to projects or assets that are considered high risk or uncertain, as they have greater certainty of repayment and a lower risk of loss.

Limited recourse clause loan agreements are often complex and require careful drafting to ensure that the terms are clear and enforceable. These agreements will usually include a detailed description of the assets that are being pledged as collateral, as well as the terms and conditions for repayment of the loan.

It is important for borrowers to understand the terms of a limited recourse clause loan agreement before agreeing to it. Borrowers should carefully review the terms and conditions, as well as the collateral that is being pledged, to ensure that they understand the level of risk involved in the agreement.

In conclusion, a limited recourse clause loan agreement is a type of loan agreement that limits the lender`s recourse to a specific asset or set of assets as collateral for the loan. This type of loan is often used in project finance transactions or for financing assets that have uncertain cash flows. It acts as a risk management tool for lenders, as it mitigates the risk of loss if the borrower defaults. However, borrowers should carefully review the terms and conditions before agreeing to such an agreement.