Difference between revisions of "Project Finance"
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==Host government== | ==Host government== | ||
| + | As the name suggests this is the government in whose country the project is being undertaken. The role of the host government in any particular project will vary from project to project and in some developing countries the host government may be required to enter into a government support agreement (see section 6.7). At a minimum, the host government is likely to be involved in the issuance of consents and permits both at the outset of the project and on a periodic basis throughout the duration of the project. In other cases, the host government (or an agency of the host government) may actually be the purchaser or offtaker of products produced by the project and in some cases a shareholder in the project company (although not usually directly but through government agencies or government controlled companies). It is usually the case that the host government will be expected to play a greater role in project financing (whether in providing support, services or otherwise) in the lesser developed and emerging countries. | ||
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| + | Whatever the actual level of involvement the host government of a particular country plays in project financings, its general attitude and approach towards foreign financed projects will be crucial in attracting foreign investment. If there has been any history of less than even-handed treatment of foreign investors or generally of changing the rules, this may act as a serious block on the ability to finance projects in that country on limited recourse terms. | ||
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==Suppliers== | ==Suppliers== | ||
==Purchasers== | ==Purchasers== | ||
Revision as of 20:12, 10 September 2018
Contents
- 1 Introduction
- 2 Parties To A Project Financing
- 2.1 Parties and their roles
- 2.2 Project company/borrower
- 2.3 Sponsors/shareholders
- 2.4 Third-party equity
- 2.5 Banks
- 2.6 Facility agent
- 2.7 Technical bank
- 2.8 Insurance bank/account bank
- 2.9 Multilateral and export credit agencies
- 2.10 Construction company
- 2.11 Operator
- 2.12 Experts
- 2.13 Host government
- 2.14 Suppliers
- 2.15 Purchasers
- 2.16 Insurers
- 2.17 Other parties
- 2.18 Summary of key lenders’ concerns
- 3 Project Financing Documentation
- 4 Project Structures
- 5 Sharing Of Risks
- 6 Security For Projects
- 7 Insurance Issues
- 8 The Project Loan Agreement
- 9 Export Credit Agencies And Multilateral Agencies
- 9.1 The role of export credit agencies in project finance
- 9.2 An introduction to the G7 ECAs
- 9.3 The advantages of involving ECAs in a project
- 9.4 The OECD consensus
- 9.5 Departing from consensus
- 9.6 Categories of ECA support in the context of a project financing
- 9.7 The changing role of the ECA in project finance
- 9.8 ECAs and credit documentation
Introduction
Origins of project financing
With the explosion of project financing in the late 1980s and 1990s, both in Europe and around the rest of the world, there is a temptation to think that the financing of projects on limited or non-recourse terms is a relatively novel concept, and one for which the ingenious lawyers and bankers of the 1980s can take most of the credit. This is, however, far from being true. Indeed, there is early evidence of project financing techniques being actively used during Roman times and earlier still. According to the historians, sea voyages on the Mediterranean ocean were extremely dangerous adventures in Greek and Roman times, mostly on account of the dual perils of storms and pirates. As a result of these nautical perils, some risk averse merchants would take out a fenus nauticum (sea loan) with a local lender in order to share with that lender the risk of a particular voyage. The fenus nauticum worked on the basis that the loan was advanced to the merchant for the purpose of purchasing goods on the outward voyage, which loan would be repayable out of the proceeds of the sale of these goods (or more likely other goods bought overseas with these proceeds). If the ship did not arrive safely at the home port with the cargo in question on board, then according to the terms of the fenus nauticum, the loan was not repayable. At the time, this was viewed essentially as a form of marine insurance, but it can just as easily be classified as an early form of limited recourse lending, with the lender assuming the risk of the high seas and the perils that accompanied her. History also recounts that, in order to protect their interests, these brave lenders would often send one of their slaves on the voyage to ensure that the merchant was not tempted to cheat on the lender (an early ancestor of the security trustee perhaps!).
In modern times too there is plenty of evidence of project financing techniques being used by lenders to finance projects around the world. In the 19th century, lenders in the City of London were financing numerous railway and other projects in South America and India and investing in other overseas ventures that had many features of modern-day limited recourse lending. In most cases these loans were not specifically structured as limited recourse loans as we know them today, but the commercial reality was that this is exactly what they were.
However, limited recourse lending in the UK really took off in the early 1970s when lenders in the UK started making project finance available for the development of some of the early oil and gas fields in the UK continental shelf. The early projects that were financed on this basis were relatively few and far between as there was a relatively small pool of lenders prepared to finance projects on this basis. It would also be true to say that the treasurers of many of the companies operating in the UK continental shelf at this time took some time to appreciate the advantages of financing projects in this way. The first major financing in the North Sea was in the early 1970s. This was British Petroleum’s Forties Field, which raised about £1 billion by way of a forward purchase agreement (see section 4.7 for a description of this structure). Shortly after this transaction two loans were raised by licence holders in the Piper Field (Occidental Petroleum Corporation and the International Thompson Organisation). Other financings of North Sea hydrocarbon assets followed and by the late 1970s and early 1980s what had started as a modest number of transactions had turned into a significant volume of project financings related to oil and gas fields, first in the UK continental shelf and then in the Danish and Norwegian continental shelves.
Much of the documentation and many of the techniques for these early oil and gas transactions were borrowed from practice in the US where adventurous bankers had been lending against oil and gas assets for many years. The significant difference in the context of the North Sea, however, was that bankers were in reality taking significantly more risks in lending against oil and gas assets in the North Sea. Not only were these brave bankers lending against offshore oil and gas assets where the risks were considerably greater (especially in the early days, given the new technology being developed and utilised), but they were also, in some cases, assuming all or part of the development/completion risk. Traditionally, in the early days of project financing in the US, loans were agreed against producing onshore assets, which carried a far lesser degree of risk. The North Sea was, however, an altogether more hostile and hazardous environment.
The 1980s in the UK saw perhaps the greatest growth spurt in project financing, with power projects, infrastructure projects, transportation projects and, at the end of that decade, telecommunications projects leading the way. This was continued throughout the 1990s until the more recent global financial crisis, which saw a huge growth in project financing, not only in Europe and the US but also throughout Southeast Asia and further afield.
Definition of project finance
There is no universally accepted definition of project finance. A typical definition of project financing might be: “The financing of the development or exploitation of a right, natural resource or other asset where the bulk of the financing is to be provided by way of debt and is to be repaid principally out of the assets being financed and their revenues.”
Other more sophisticated definitions are used for special purposes; set out at Fig. 1 is an example of a definition used in a corporate bond issue. This illustrates the aims of the bondholders, on the one hand, to exclude from the definition any borrowings having a recourse element (since the purpose of the definition was to exclude project finance borrowings from the bond’s cross-default and negative pledge) whilst, on the other hand, the aim of the issuer to catch as wide a range of project-related borrowings.
Extent of recourse
The expressions “non-recourse finance” and “limited recourse finance” are often used interchangeably with the term “project finance”. In strict terms, non-recourse finance is extremely rare and in most project finance transactions there is some (limited) recourse back to the borrower/sponsor beyond the assets that are being financed. As will be seen in section 6, this security may amount to full or partial completion guarantees, undertakings to cover cost overruns or other degrees of support (or comfort) made available by the sponsors/shareholders or others to the lenders.
It may even be that the only tangible form of support that a lender receives over and above the project assets is a right to rescind the project loan agreement with the borrower and/or to claim damages for breach of any undertakings, representations or warranties given by the borrower in the project loan agreement. Of course, where the borrower is a special purpose vehicle with no assets other than the project assets being financed by the lenders, then a right to claim damages from the borrower is likely to add little to a claim by the lenders for recovery of the project loan from the borrower. Further, the right to rescind the project loan agreement is likely merely to duplicate the acceleration rights of the lenders following the occurrence of an event of default contained in the project loan agreement. However, in those cases where the borrower does have other assets, or the sponsors are prepared to underwrite any claims by the project lenders for damages against the borrower, then a claim for damages for breach of any undertakings, representations or warranties may afford the lenders some additional recourse.
A claim for damages, however, from a lender’s perspective is not the same under English law (and for that matter most common law based jurisdictions) as a claim for recovery of a debt under, say, a financial guarantee. This is because a claim for damages is subject to certain common law rules; for example:
- The lender must show that the loss was caused by the breach in question
- This loss must have been reasonably foreseeable at the time the undertaking or warranty was given
- The lender is in any event under a duty to mitigate its loss.
In other words, a claim for damages against the borrower is an unliquidated claim as opposed to a claim for a debt, which would be a liquidated claim. All that a lender has to show in the case of a liquidated claim is that the debt was incurred or assumed by the borrower and that it has become due. This is clearly considerably easier than having to satisfy the common law rules and, consequently, lenders and their advisers, wherever possible, will seek to structure arrangements with a view to acquiring liquidated claims against borrowers and others supporting the borrower’s obligations (this is particularly important for lenders in the context of sponsor completion undertakings – see section 6.5).
One of the key differences, therefore, between project financing and corporate financing lies in the recourse that the lender has to the assets of the borrower. As the earlier definitions demonstrate, in project financing this recourse is limited to an identifiable pool of assets, whereas in corporate financing the lender will have recourse to all the assets of the borrower (to the extent that these assets have not been charged to other lenders). Indeed, should the borrower fail to pay a debt when due, then, subject to the terms of the loan documentation, the lender would be entitled to petition to wind up the borrower and prove in the liquidation of the borrower on a pari passu basis with all the other unsecured creditors of the borrower. In the context of a project financing, however, a lender would only be entitled to this ultimate sanction if the project vehicle is a special purpose vehicle set up specially for the project being financed. In those cases where the project vehicle undertook other activities, then it would look to ring fence the assets associated with these activities and in these cases the lender would not ordinarily be entitled to petition to wind up the borrower for non-payment of the project debt. To allow otherwise would be to allow the lender to have recourse to non-project assets, which would defeat the purpose of structuring the loan on limited or non-recourse terms in the first place.
This principle of limited recourse financing was recognised by the English courts as long ago as 1877 (and possibly earlier) in the well-known case of Williams v. Hathaway (1877) 6 CH D 544. In this case, a sum of money (the fund) was paid by way of recompense by a railway company to the vicar of a parish and the incumbent of an ecclesiastical district in accordance with an Act of Parliament which authorised the railway company to take a certain church for its purposes. The Act directed, in effect, that the money be applied by the recipients to provide a new church and parsonage. The recipients of the fund contracted with a builder to build the church and parsonage and the project proceeded. In the event, the cost of the works exceeded the monies in the fund and the builder took legal action to recover the deficiency. Jessel MR, held, inter alia, that it was permissible for a proviso to a covenant to pay to limit the personal liability under the covenant to pay without destroying it. Despite the fact that the contractual arrangements were with the individuals who were for the time being trustees of the fund, it was held that “the object [of the contractual instrument] is to bind the fund” and not the trustees in their personal capacity.
Why choose project finance?
Before examining how projects are structured and financed, it is worth asking why sponsors choose project finance to fund their projects. Project finance is invariably more expensive than raising corporate funding. Also, and importantly, it takes considerably more time to organise and involves a considerable dedication of management time and expertise in implementing, monitoring and administering the loan during the life of the project. There must, therefore, be compelling reasons for sponsors to choose this route for financing a particular project.
The following are some of the more obvious reasons why project finance might be chosen:
- The sponsors may want to insulate themselves from both the project debt and the risk of any failure of the project
- A desire on the part of sponsors not to have to consolidate the project’s debt on to their own balance sheets. This will, of course, depend on the particular accounting and/or legal requirements applicable to each sponsor. However, with the trend these days in many countries for a company’s balance sheet to reflect substance over form, this is likely to become less of a reason for sponsors to select project finance (the implementation in the UK of the recent accounting standard on “Reporting the Substance of Transactions” (FRS 5) is an example of this trend)
- There may be a genuine desire on the part of the sponsors to share some of the risk in a large project with others. It may be that in the case of some smaller companies their balance sheets are simply not strong enough to raise the necessary finance to invest in a project on their own and the only way in which they can raise the necessary finance is on a project financing basis
- A sponsor may be constrained in its ability to borrow the necessary funds for the project, either through financial covenants in its corporate loan documentation or borrowing restrictions in its statutes
- Where a sponsor is investing in a project with others on a joint venture basis, it can be extremely difficult to agree a risk-sharing basis for investment acceptable to all the co-sponsors. In such a case, investing through a special purpose vehicle on a limited recourse basis can have significant attractions
[INSERT IMAGE]
- There may be tax advantages (e.g. in the form of tax holidays or other tax concessions) in a particular jurisdiction that make financing a project in a particular way very attractive to the sponsors
- Legislation in particular jurisdictions may indirectly force the sponsors to follow the project finance route (e.g. where a locally incorporated vehicle must be set up to own the project’s assets).
This is not an exhaustive list, but it is likely that one or more of these reasons will feature in the minds of sponsors which have elected to finance a project on limited recourse terms. Project finance, therefore, has many attractions for sponsors. It also has attractions for the host government. These might include the following:
- Attraction of foreign investment
- Acquisition of foreign skills and know-how
- Reduction of public sector borrowing requirement by relying on foreign or private funding of projects
- Possibility of developing what might otherwise be non-priority projects
- Education and training for local workforce.
Structuring the project vehicle
One of the first, and most important, issues that the project sponsors will face in deciding how to finance a particular project will be how to invest in, and fund, the project. There are a number of different structures available to sponsors for this purpose. The most common structures used are:
- A joint venture or other similar unincorporated association
- A partnership
- A limited partnership
- An incorporated body, such as a limited company (probably the most common).
Of these structures the joint venture and limited company structure are the most universally used.
A joint venture is a purely contractual arrangement pursuant to which a number of entities pursue a joint business activity. Each party will bring to the project not only its particular expertise but will be responsible for funding its own share of project costs, whether from its own revenues or an outside source. Practical difficulties may arise as there is no single project entity to acquire or own assets or employ personnel, but this is usually overcome by appointing one of the parties as operator or manager, with a greater degree of overall responsibility for the management and operation of the project. This is the most common structure used in the financing of oil and gas projects in the UK continental shelf. Partnerships are, like joint ventures, relatively simple to create and operate but, in many jurisdictions, partnership legislation imposes additional duties on the partners, some of which (such as the duty to act in the utmost good faith) cannot be excluded by agreement. Liability is unlimited other than for the limited partners in a limited partnership, but these are essentially “sleeping” partners who provide project capital and are excluded from involvement in the project on behalf of the firm.
In many cases it will not be convenient (or may not be possible) for the project assets to be held directly (whether by an operator or the individual sponsors) and in these cases it may be appropriate to establish a company or other vehicle which will hold the project assets and become the borrowing vehicle for the project. The sponsors will hold the shares in this company or other vehicle in agreed proportions. In most cases where this route is followed, the company or other vehicle would be a special purpose vehicle established exclusively for the purposes of the project and the use of the special purpose vehicle for any purposes unconnected with the project in question will be published. In addition to the constitutional documents establishing the vehicle, the terms on which it is to be owned and operated will be set out in a sponsors’ or shareholders’ agreement.
Whether sponsors follow the joint venture (direct investment) route or the special purpose vehicle (indirect investment) route ultimately will depend on a number of legal, tax, accounting and regulatory issues, both in the home country of each of the sponsors and in the host country of the project (and, perhaps, other relevant jurisdictions). Some of the relevant influencing factors might include the following:
- A wish on the part of the project sponsors to isolate the project (and, therefore, distance themselves from it) in a special purpose vehicle. If the project should subsequently fail, the lenders will have no recourse to the sponsors, other than in respect of any completion or other guarantees given by the sponsors (see section 6.5 for an explanation of such guarantees). The sponsors are effectively limiting their exposure to the project to the value of the equity and/or subordinated debt that they have contributed to the project
- The use of a joint venture or partnership, as opposed to a special purpose vehicle, can often mean that the sponsors must assume joint and several liability when contracting with third parties on behalf of the joint venture or partnership. If the borrowing for the project is through the joint venture or partnership, this is likely to result in each sponsor having to show the full amount of the project debt on its balance sheet, not a particularly attractive proposition for most project sponsors.
- By contrast, the use of a special purpose vehicle may mean that the sponsors do not have to consolidate the project debt into their own balance sheets (if it is not a “subsidiary” or “subsidiary undertaking” or equivalent). This may also be important for cross-default purposes for the sponsor. A sponsor would not want a default by a project company (even if it is a subsidiary) to trigger a cross-default in respect of other contracts or projects at sponsor level. The corporate lenders to the sponsor may agree to this, provided there is no recourse by the project’s lenders to the sponsor in the event of a project company default, eliminating the risk that the project company default will damage or further damage the sponsor’s balance sheet (note the wide definition of “project finance borrowing” used earlier in this section that typically might be used in such a case)
- On a similar note, negative pledge covenants in a sponsor’s corporate loan documentation may prohibit or limit the sponsor from creating the necessary security required in connection with a project financing. As with the cross-default clause, the corporate lenders to the sponsor may agree to exclude security interests created by the sponsor (or a subsidiary or subsidiary undertaking of the sponsor) in connection with a specific project from the terms of the sponsor’s negative pledge
- It may be a host government requirement that any foreign investment is channelled through a local company, particularly where the granting of a concession might be involved. This may be for regulatory or tax reasons or, in the case of a strategically important industry, for security or policy reasons
- The use of a joint venture or partnership can have significant tax advantages in some jurisdictions (e.g. each participant may be taxed individually and may have the ability to take all tax losses on to its own balance sheet) which may make such a vehicle attractive for some sponsors. On the other hand, a limited liability company’s profits are in effect taxed twice, once in the hands of the company and again in the hands of the individual shareholders
- A special purpose vehicle will be attractive where different sponsors require to fund their investment in the project in different ways (e.g. one may want to borrow whilst others may wish to fund the investment from internal company sources) or one may want to subscribe equity whereas another might wish to contribute debt as well (e.g. subordinate the repayment of this debt to the right of project lenders) and
- Practical considerations may also be relevant. Partnerships and contractual joint ventures are less complicated (and cheaper) to establish and operate. Registration requirements in respect of limited companies and limited partnerships eliminate confidentiality. It should also be remembered that it is easier for a company to grant security, in particular floating charges, and this may be an important consideration for the raising of finance.
In the event, the choice will never be a straightforward one and it is often the case that sponsors will have conflicting requirements. This will be one of the many challenges for those involved in project financing. It is, however, important to establish the appropriate vehicle at the outset as it can be difficult to change the vehicle once the project proceeds and, especially, once the funding structure is in place.
Key sponsor issues
Having settled on the structure of the project vehicle, it will then be necessary for the sponsors to agree at an early stage on a number of other key matters. These will include:
- The respective roles in the project of each sponsor (e.g. who will deal with the technical aspects of the project, negotiate the concession, negotiate with the lenders, arrange the project insurances, negotiate with suppliers/offtakers, oversee the establishment of the project vehicle, arrange for the necessary consents and permits). Frequently the allocation of such tasks will have been dictated already in the make-up of the sponsor group, but it is important for each sponsor to have a clear understanding at an early stage of what tasks it is to perform
- The appointment of advisers to the project. The two key appointments will be the appointment of financial and legal advisers to the project. However, other advisers, such as technical, insurance, environmental and market risk advisers, may also be required, depending on the circumstances of a particular project
- The capitalisation of the project or project company. How much capital will be put in, when will this be injected and by what method? There is no hard-and-fast rule for determining how much sponsor capital must be injected into a project. Some projects have been structured on the basis that the sponsors have put up only a nominal amount of capital (called “pinpoint capital”). More typically, however, one might expect to see an overall debt/equity ratio in the 90/10 to 75/25, range depending on the dynamics of a particular project. Most lenders will require that sponsor capital is injected at the outset, and before the banks start funding the project company. They may, however, relax this position if they are satisfied as to the credit standing of the sponsors or have received security (such as a bank guarantee or letter of credit) to secure the sponsor’s capital commitment. Shareholder funds are usually injected by way of a subscription for shares of the project company, although there is usually no objection to shareholder loans so long as these are subordinated to the lenders’ loans and are non-interest bearing (or at least the requirement to pay interest is suspended until dividends are permitted to be paid (see below))
- The dividend/distribution policy of the sponsors. This will frequently be a source of much debate with the project lenders. On the one hand, most sponsors will be keen to extract profits at an early stage. The project lenders, however, will not be keen to see the sponsors taking out profits until the project has established and proved itself and the project lenders have been repaid at least some of their loans. It would be unusual for the project lenders to permit the payment of dividends (or the payment of interest on subordinated loans) prior to the date of the first repayment of the project loan and then only if the key project cover ratios will be satisfied after the payment of the dividends (see section 8.5 for an explanation of key cover ratios)
- Management of the project vehicle. Who will undertake this and how? Will the project vehicle have its own employees and management or will these be supplied by one or more of the sponsors? If one or more of the sponsors is to supply management and/or technical assistance to the project company, then the lenders will expect to see this arrangement formalised in an agreement between the sponsor in question and the project company
- Sale of shares and pre-emption rights. This will be of concern to sponsors and lenders alike. In particular, the lenders will want the comfort of knowing that the sponsor group that has persuaded them to lend to the project company in the first place will continue to be in place until the loans have been repaid in full.
Project implementation and management
The implementation of a project financing is a complicated, time-consuming and difficult operation. For most projects it is a case of years rather than months from inception of the project to reach financial close. It is not unheard of for some complex (and, perhaps, politically sensitive) projects to have a gestation period in excess of five years. The chart in Fig. 3 is an illustration of the more important milestones for a typical project and how long one might expect the process to take. However, each project will have a unique timetable, driven largely by the particular dynamics and circumstances of the project.
With so many parties involved having conflicting interests, the issue of effective project management assumes great significance in most project financings. It does not matter whether the overall responsibility is assumed by the sponsors (and their advisers) or by the lenders (and their advisers). What is crucial, however, is that one of the influential parties assumes overall control for managing the project from its inception to financial close. Without effective project management, a project can very easily go off the rails, with each of the parties singularly concentrating on issues and documents that are relevant to it. Because of the need to understand all aspects of the project with a view to assessing the overall risk profile, it is often the lenders (and their advisers) who are in the best position to manage effectively and steer a project to financial close.
Parties To A Project Financing
Parties and their roles
One of the complicating (and interesting) features of most projects is the considerable number of parties with differing interests that are brought together with the common aim of being involved to a greater or lesser extent with a successful project. It is one of the challenges of those involved with a project to ensure that all of these parties can work together efficiently and successfully and cooperate in achieving the project’s overall targets. It is inevitably the case that, although all of the parties will share the same overall aim in ensuring that the project is successful, their individual interests will vary considerably and, in many cases, will conflict. With many projects, there will be an international aspect which will involve different project parties located in different jurisdictions and there will often be tensions between laws and practices differing from one country to another.
A common feature in many project structures is that different parties will have particular roles to play. This is especially so with many multi-sponsor projects where, for example, one sponsor may also be the turnkey contractor, whereas another sponsor may be the operator and yet another sponsor may be a supplier of key raw materials to the project or an offtaker of product from the project. Frequently it is the case (and sometimes a requirement of local laws) that one of the sponsors is a local company. Even in those countries where the involvement of a local company is not a requirement, this can have many advantages particularly where the foreign sponsors have limited experience of business practices or laws in the host country. Further, the involvement of a local company offers a degree of comfort, for the foreign sponsors and lenders alike, that the project as a whole will not be unfairly treated or discriminated against.
No two projects will have the same cast of “players” but the following is a reasonably comprehensive list of the different parties likely to be involved in a project finance transaction.
Project company/borrower
The project company will usually be a company, partnership, limited partnership, joint venture or a combination of them. As noted in section 1.5, this will be influenced to a certain extent by the legal and regulatory framework of the host government. For example, in some jurisdictions it will be a legal requirement that the holder of a licence or concession be a company incorporated in that particular country. In other there may be strict requirements in particular industries as to foreign ownership of share capital or assets, particularly in strategically important industries.
The project company will in most cases be the vehicle that is raising the project finance and, therefore, will be the borrower. It will also usually be the company that is granted the concession or licence (in a concession-based financing) and who enters into the project documents. As has been seen in section 1, the project company is frequently a special purpose vehicle set up solely for the purposes of participating in a particular project. If the project vehicle is a joint venture then it is likely that there will be multiple borrowers. This can complicate the financing arrangements unless (as is likely to be the preference of the lenders) the joint venturers agree to be jointly and severally liable for the project’s debts. Where, however, the borrower is a special purpose vehicle, then the lenders would expect a newly incorporated company in the relevant jurisdiction and would seek to impose strict covenants on the ability of the borrower to undertake any non-project activities. The purpose of this is to ensure that the lenders are not exposed to any additional risks unrelated to the project itself. An example of the type and scope of such covenants is set out below.
Single Purpose Vehicle Covenants
The Project Company shall not:
- engage in any business or activity, apart from the ownership, management and operation of the Project and activities ancillary thereto as permitted by this Agreement and the Security Documents or
- save as contemplated in the Security Documents, create, incur or permit to subsist any Security Interest over all or any of its present or future assets, other than any Security Interest arising by operation of law and discharged within 30 days or
- make any advances, grant any credit (save in the routine course of its day-to-day business) or give any guarantee or indemnity to, or for the benefit of, any person or otherwise voluntarily assume any liability, whether actual or contingent, in respect of any obligation of any other person, except pursuant to the Security Documents or
- issue any further shares (other than to an existing direct or indirect shareholder) or alter any rights attaching to its issued share capital in existence at the date hereof or• save in accordance with the terms of this Agreement and the Security Documents, sell, lease, transfer or otherwise dispose of, by one or more transactions or series of transactions (whether related or not), the whole or any part of its assets or
- incur any indebtedness other than the Project Loan, unless such indebtedness is subordinated in terms of both payment and security to the satisfaction of the Project Lenders to all amounts due under this Agreement or• save in accordance with the terms of this Agreement and the Security Documents, acquire any asset or make any investment or
- amend its constitutional documents or
- change its financial year.
The project sponsors are those companies, agencies or individuals who promote a project, and bring together the various parties and obtain the necessary permits and consents necessary to get the project under way. As has been noted in section 1, often they (or one of their associated companies) are involved in some particular aspect of the project. This might be the construction, operation and maintenance, purchase of the services output from the project or ownership of land related to the project. They are invariably investors in the equity of the project company and may be debt providers or guarantors of specific aspects of the project company’s performance. Some of the different ways in which the sponsors/shareholders invest in a project are explained in section 1.5.
The support provided by project sponsors varies from project to project and includes the giving of comfort letters, cash injection commitments, both pre- and post-completion, as well as the provision of completion support through guarantees and the like. Support is also likely to extend to providing management and technical assistance to the project company. The different types of sponsor support for a project are covered in more detail in section 6. [INSET IMAGE]
Third-party equity
These are investors in a project who invest alongside the sponsors. Unlike the sponsors, however, these investors are looking at the project purely in terms of a return on their investments for the benefit of their own shareholders. Apart from providing their equity, the investors generally will not participate in the project in the sense of providing services to the project or being involved in the construction or operating activities.
Third-party investors typically will be looking to invest in a project on a much longer time frame than, say, a typical contractor sponsor, who will in most cases want to sell out once the construction has been completed.
Many third-party investors are development or equity funds set up for the purposes of investing in a wide range of projects and they are starting to become a valuable source of capital for projects. Typically, they will require some involvement at board level to monitor their investment.
Banks
The sheer scale of many projects dictates that they cannot be financed by a single lender and, therefore, syndicates of lenders are formed in a great many of the cases for the purpose of financing projects. In a project with an international dimension, the group of lenders may come from a wide variety of countries, perhaps following their customers who are involved in some way in the project. It will almost certainly be the case that there will be banks from the host country participating in the financing. This is as much for the benefit of the foreign lenders as from a desire to be involved on the part of the local lenders. As with the involvement of local sponsors, the foreign lenders will usually take some comfort from the involvement of local lenders.
As is usually the case in large syndicated loans, the project loan will be arranged by a smaller group of arranging banks (which may also underwrite all or a portion of the loan). Often the arranging banks are the original signatories to the loan agreement with the syndication of the loan taking place at a later date. In such cases the arranging banks implicitly take the risk that they will be able to sell down the loan at a later stage.
However, participating in project financings is a very specialised area of international finance and the actual participants tend to be restricted to those banks that have the capability of assessing and measuring project risks. This is not to say that banks not having these skills do not participate in project financings, but for these banks the risks are greater as they must also rely on the judgement of the more experienced banks.
The complexity of most project financings necessitates that the arrangers are large banks with experience in this market, often having dedicated departments of specialists. For the smaller banks with an appetite for this kind of lending, however, there is usually no shortage of opportunities to participate in loans arranged by the larger banks.
Facility agent
As with most syndicated loans, one of the lenders will be appointed facility agent for the purposes of administering the loan on behalf of the syndicate. This role tends to assume an even greater significance in project financings as inevitably there are more administration matters that need undertaking. Usually, however, the role of the facility agent will be limited to administrative and mechanical matters as the facility agent will not want to assume legal liabilities towards the lenders in connection with the project. The documentation will, therefore, establish that the facility agent will act in accordance with the instructions of the appropriate majority (usually 66 2/3 per cent) of the syndicate who will vote and approve the various decisions that need to be taken throughout the life of a project. The documentation, however, may reserve for the facility agent some relatively minor discretions in order to avoid delays for routine consents and approvals.
Technical bank
In many project financings a distinction is drawn between the facility agent (who deals with the more routine day-to-day tasks under the loan agreement) and a bank appointed as technical bank, which will deal with the more technical aspects of the project loan. In such cases it would be the technical bank that would be responsible for preparing (or perhaps reviewing) the banking cases and calculating the cover ratios (see section 8.5 for a more detailed explanation of cover ratios). The technical bank would also be responsible for monitoring the progress of the project generally on behalf of the lenders and liaising with the external independent engineers or technical advisers representing the lenders. It will almost always be the case that the technical bank will be selected for its special ability to understand and evaluate the technical aspects of the project on behalf of the syndicate.
As with the facility agent, the technical bank will be concerned to ensure that it is adequately protected in the documentation and will be seeking to minimise any individual responsibility to the syndicate for its role as technical bank.
Insurance bank/account bank
In some of the larger project financings additional roles are often created for individual lenders, sometimes for no other reason than to give each of the arranging banks a meaningful individual role in the project financing. Two of these additional roles are as insurance bank and as account bank.
The insurance bank, as the title suggests, will be the lender that will undertake the negotiations in connection with the project insurances on behalf of the lenders. It will liaise with an insurance adviser representing the lenders and its job will be to ensure that the project insurances are completed and documented in a satisfactory manner and that the lenders’ interests are observed.
The account bank will be the lender through which all the project cash flows flow. There will usually be a disbursement account to monitor disbursements to the borrower and a proceeds account into which all project receipts will be paid. Frequently, however, there will be a number of other project accounts to deal with specific categories of project receipts (e.g. insurances, liquidated damages, shareholder payments, maintenance reserves, debt service reserves). A more detailed description of the project accounts and their operation is set out in section 8.2.
Multilateral and export credit agencies
Many projects are co-financed by the World Bank or its private sector lending arm, the International Finance Corporation (IFC), or by regional development agencies, for instance the European Bank for Reconstruction and Development (EBRD), the African Development Bank or the Asian Development Bank.
These multilateral agencies are able to enhance the bankability of a project by providing international commercial banks with a degree of protection against a variety of political risks. Such risks include the failure of host governments to make agreed payments or to provide foreign exchange and failure of the host government to grant necessary regulatory approvals or to ensure the performance of certain participants in a project.
Export credit agencies also play a very important role in the financing of infrastructure and other projects in emerging markets. As their name suggests, the role of the agencies is to assist exporters by providing subsidised finance either to the exporter direct or to importers (through buyer credits). Details of the various multilateral agencies and ECAs and a description of the type of financing support they each provide in relation to projects are set out in section 9.
Construction company
In an infrastructure project the contractor will, during the construction period at least, be one of the key project parties. Commonly, it will be employed directly by the project company to design, procure, construct and commission the project facility assuming full responsibility for the on-time completion of the project facilities usually referred to as the “turnkey” model.
The risks associated with the construction phase are discussed in more detail in section 3.4. The contractor will usually be a company well known in its field and with a track record for constructing similar facilities, ideally in the same part of the world. In some large infrastructure projects a consortium of contractors is used. In other cases an international contractor will join forces with a local contractor. In each of these cases one of the issues that will be of concern to both the project company and the lenders is whether the contractors in the joint venture will assume joint and several liability or only several liability under the construction contract. This may be dictated by the legal structure of the joint venture itself (e.g. whether it is an unincorporated association or a true partnership, see section 1.5 for a discussion of the key differences). Lenders, for obvious reasons, will usually prefer joint and several liability.
Although most projects are structured on the basis that there will be one turnkey contractor, some projects are structured on the basis that a number of companies are employed by the project company to carry out various aspects of the design, construction and procurement process which are carried out under the overall project management of either the project company or a project manager. This is not a structure favoured by lenders as it can lead to gaps in responsibilities for design and construction. Lenders will also usually prefer that the project company divests itself of responsibility for project management and that this is assumed by a creditworthy entity against whom recourse may be had if necessary. This is discussed further in section 5.3.
Operator
In most infrastructure projects, where the project vehicle itself is not operating (or maintaining) the project facility, a separate company will be appointed as operator once the project facility has achieved completion. This company will be responsible for ensuring that the day-to-day operation and maintenance of the project is undertaken in accordance with pre-agreed parameters and guidelines. It will usually be a company with experience in facilities management (depending upon the particular project) and may be a company based in the host country. Sometimes one of the sponsors will be the operator as this will often be the principal reason why that sponsor was prepared to invest in the project.
As with the contractor, the lenders will be concerned as to the selection of the operator. They will want to ensure that the operator not only has a strong balance sheet but also has a track record of operating similar types of projects successfully.
The contractor and operator are not usually the same company as very different skills are involved. However, both play a key role in ensuring the success of a project.
Experts
These are the expert consultancies and professional firms appointed by the lenders to advise them on certain technical aspects of the project. (The sponsors will frequently also have their own consultants/professionals to advise them.) The areas where lenders typically seek external specialist advice are on the technical/engineering aspects of projects as well as insurances and environmental matters. Lenders will also frequently turn to advisers to assist them in assessing market/demand risk in connection with the project.
Each of these consultancies/professional firms will be chosen for its expertise in the particular area and will be retained to provide an initial assessment prior to financial close and, thereafter, on a periodic basis. An important point to note is that these consultancies/professional firms are appointed by (and therefore answerable to) the lenders and not the borrower or the sponsors. However, the cost of these consultants/professional firms will be a cost for the project company to assume and this can be a cause of friction. It is usual, therefore, for a fairly detailed work scope to be agreed in advance between the lenders, the expert and the sponsors.
Host government
As the name suggests this is the government in whose country the project is being undertaken. The role of the host government in any particular project will vary from project to project and in some developing countries the host government may be required to enter into a government support agreement (see section 6.7). At a minimum, the host government is likely to be involved in the issuance of consents and permits both at the outset of the project and on a periodic basis throughout the duration of the project. In other cases, the host government (or an agency of the host government) may actually be the purchaser or offtaker of products produced by the project and in some cases a shareholder in the project company (although not usually directly but through government agencies or government controlled companies). It is usually the case that the host government will be expected to play a greater role in project financing (whether in providing support, services or otherwise) in the lesser developed and emerging countries.
Whatever the actual level of involvement the host government of a particular country plays in project financings, its general attitude and approach towards foreign financed projects will be crucial in attracting foreign investment. If there has been any history of less than even-handed treatment of foreign investors or generally of changing the rules, this may act as a serious block on the ability to finance projects in that country on limited recourse terms.
