Project Finance Documentation

Day One

Project Finance Overview

We must establish the key ingredients of limited recourse financings, as well as a perspective of how the various contractual arrangements interface with each other, to convert the physical infrastructure into a cash flow that can service financial commitments.

• Project finance contrasted with corporate lending
• The central role of contract
• Risk allocation
• The part played by security
• Company, partnership, trust, joint venture and other entities; the pros and cons
• The perspective of the structure types in various projects
• Availability projects distinguished from market risk projects

Law & Contractual Breach

Before we look at the individual contracts, there are certain issues relating to jurisdiction and enforceability that are common to all contracts.  Additionally, there are complications in being exposed to contracts to which a special purpose vehicle is a party, as distinct from contracts entered into by ‘normal’ companies.

• Contracts that are required to be under local law
• Why there has been a trend towards contract standardisation since 1993
• Jurisdiction, sovereign immunity, enforceability
• Conflict of laws
• The importance of contract administration
• The problems with litigation
• The two rules of contract negotiation in limited recourse financings
• Alternative dispute resolution, expert mediation, international arbitration

Sponsor Agreements

• Withering clause
• Rights of pre-emption
• Sponsor lock-ins and the range of structural choices
• Corrupt gifts and payments

EPC Contracts

For the majority of projects, the pre-completion phase of greenfield projects is the point of greatest risk. Therefore a sound understanding of the range of those risks and the techniques for managing them is essential to the optimal structuring of the project.

• Overview of the FIDIC silver book
• Liquidated damages, caps, the prohibition against the punitive element
• Policing damages – performance bonds, retention clauses
• The “fixed price” clause
• The control structures for variation and change orders
• Pre-conditions to staged payments
• Certification procedures – progress and cost-to-complete
• Rights of rescission
• Other termination rights and consequences
• Completion guarantees
• Two-phase financing
• Contractor’s contingent redeemable equity
• Latent defects and warranties
• Force majeure
• Blueprint release clause
• Romalpas
• Technology and logistics

Project Finance Documentation Course Case Study #1 – Transport infrastructure

A transport infrastructure project that went badly wrong through mis-structuring of the financing, followed by a loan restructuring that was even more badly implemented!

Day Two

Offtake Agreements

There are three types of Revenue agreements: Concessions (for government-endorsed projects), PPAs (for thermal and renewables power generation), and Offtake agreements (for industrial projects, telecoms and extractive industries). There is overlap between each of these, so we start with the most generic, which is Offtake, and then graduate on to the other two.

• Price and volume
• Payment profiles e.g. take-or-pay, other ‘smoothing’ structures
• Exclusions
• Termination
• Renegotiations
• Hidden recourse in operational contracts

Power Purchase Agreements

Power is differentiated in that it is one of the few things that cannot be stored (in any conventional way), and the demand is exceptionally volatile. Therefore, its sale and purchase involve additional features. Since renewable technologies also have intermittency, there are material differences between thermal PPAs and renewable PPAs. Power represents by far the largest sector that uses project finance.

• Thermal PPAs
• Why such thermal PPAs would not work for most renewable projects
• Renewable projects in non-merchant markets
• Priority dispatch
• Curtailment and deemed generation
• Maxima and minima thresholds
• Termination rights
• Force majeure
• Metering and verifications
• Deemed abandonment
• The emergence of corporate PPAs

Concession-Based Projects

There are two types of Concession: those that drive the project’s revenue, and those that grant a licence to operate, with the Revenue provided by the users of the infrastructure. Again, whilst there is a major overlap, there are also important differences in both the drafting and the commercial implications of the structure.

• Characteristics of BOT and PPP-based projects
• Pre-qualification
• The tendering process
• Warranties and indemnities
• Change Protocols
• Information and audit access
• Benchmarking and market testing
• Change of law
• Delay events
• Relief events
• Force majeure
• Termination with and without fault
• Various approaches to determining compensation
• Step-in rights of grantor
• Step-in rights of financier
• Assignments and change of control
• Handover

Lender Protection

• The six “killers” in project finance
• A classification of the various risk-management methodologies
• Typical security structures
• Direct agreements
• General insurances; pre-completion and operational
• Cut-through agreements
• Non-vitiation
• Assignments, loss payee
• Political risk – insurance – convertibility, civil insurrection, expropriation
• ECA political risk cover
• A/B loan structures of MLAs

Features of Project Finance Loan Agreements -vs- Corporate Loan Agreements

• The layout of the Agreement – definitions, conditions precedent, reps & warranties, undertakings, events of default, administration
• The role of the project finance model
• The cashflow waterfall
• Why the financial covenants are different
• Lockup covenants
• Conditions precedent to Sponsor distributions
• Drawdown stops
• Classification of the methods of risk management
• The six protective mechanisms for special purpose vehicle