Project Financing

name of attorney Bahrain Office

innovative solutions

for dynamic markets

innovative solutions

for dynamic markets

una sola firma de abogados alrededor del mundo

Negotiating the Terms & Conditions of

the Project Debt and Achieving

Financial Close

Kathleen (Bradley) Chouaï

Negotiating the Terms & Conditions of the Project Debt and Achieving

Financial Close The Underwriting Process The Term Sheet Overview of Project Financing and Security

Documentation Loan Agreements & Common Terms Agreement Disbursement (Accounts) Agreement Security Package Sponsor Support Host Government Support Insurances Direct Agreements Intercreditor Agreement

The Underwriting ProcessWhy give an underwriting commitment?

award of mandate exclusivity commitment binding obligations

indemnity fee, costs and expensesclear market

conflict of interest confidentiality

The Underwriting Process

Conditions to underwriting commitment: “subject to contract” due diligence governmental consents no material adverse change market flex

Two important dates expiry date for offer expiry date of exclusivity


Sample MAC clause:“The underwriting commitment set out in this letter is subject to:. . . .

( ) in the opinion of at least [two] of the Underwriters, no material adverse change having occurred (or event which is likely to result in a material adverse change) in any of:

(a) the business, operations, property, condition (financial or otherwise) or prospects of the Group (i.e., the borrower and its subsidiaries) taken as a whole;

(b) the commercial bank, loan syndication, financial or capital market conditions generally that, in the opinion of at least [two] of the Underwriters, can reasonably be expected to prejudice the successful syndication of the facility; or

(c) the political, financial or economic climate of [ country ] which, in the opinion of any two of the Underwriters, can reasonably be expected to prejudice the successful syndication of the Facility.”


Two sample market flex clauses:

“Subject to the Facility Amount remaining unchanged, the Arrangers shall be entitled to change the pricing, terms or structure of the Facility if the Arrangers determine that such changes are advisable in order to ensure a successful syndication of the Facility.”

“Given the duration of the underwriting exposure of the Underwriters, the Borrower acknowledges that if, in the opinion of the Arrangers, it appears likely due to market conditions that a target hold level of US$[ ] each is unlikely to be reached through the normal syndication process on the basis of the agreed pricing of the Facility, the right is reserved, after consultation with the Borrower, to adjust the pricing of the Facility. The commitment to lend under the Facility Agreement is subject to the Borrower’s agreement to any adjustment made under this paragraph.”

The Underwriting Process Types of underwriting

“Fully underwritten” “Best efforts” / “best endeavors” “Partially underwritten”

Legally binding? Should it be? In complex project financing transactions? “Subject to contract”

Primary risk for arrangers Market reputation

The Term Sheet

The purpose of a Term Sheet: basis on which mandate is awarded details of terms and conditions guide to legal counsel summary for other parties point of reference for future negotiations credit committee

Role in project financings

Signed or not?

The Term Sheet What does a Term Sheet contain?

Primary terms and conditions and major points of principle

Parties Major financial terms Conditions precedent to financial close Drawdown conditions and mechanics Changes in circumstances Representations, covenants and events of

default Financial covenants Governing law and dispute resolution

Overview of Project Financing and Security Documentation

Loan Agreements Common Terms Agreement Disbursement (or Accounts) Agreement Security Documents

Mortgages and fixed or floating charges Assignments of contract rights and insurances Control over bank accounts Share pledges Direct agreements

Support Documents Sponsors Host government Insurances

Intercreditor Agreement

Project Financing Documents -Loan Agreements & Common Terms AgreementWhat is a common terms agreement?

Sets out terms and conditions common to all lenders Supplements loan and other credit agreements

Important terms and conditions Cover ratios Drawdown mechanics Interest rate adjustment Repayment and mandatory prepayment Partial prepayment or cancellation Representations and warranties Financial and project information reporting

requirements Project supervision Covenants Events of default Project completion Financial close

Cover ratios forward-looking ratios forecast financial

viability of project on a continuing basis (e.g., every 6 months)

historic ratios test current performance importance of “banking case” (the model) controlling the forecast assumptions

economic assumptions technical assumptions challenges

Project Financing Documents -Loan Agreements & Common Terms Agreement

Types of cover ratios project life cover ratio - ratio of NPV of projected

net revenues over life of project to outstanding bank debt

loan life cover ratio - ratio of NPV of projected net revenues over loan life to outstanding bank debt

drawdown cover ratio - ratio of loan life NPV to maximum amount that is likely to be borrowed from lenders ( “peak debt amount”)

repayment cover ratio - ratio of project or loan life NPV to bank debt actually outstanding

debt service cover ratio - ratio of actual net revenues over a particular period to debt service obligations during same period



Use of cover ratios determine financial viability of project drawstop determine amount of repayment or

prepayment dividend stopper test for “project completion” event of default

Drawdown mechanics

drawings only to pay specific project costs (e.g., approved capital expenditure and construction costs, interest during construction etc.)

drawings only against achievement of specified milestones

certification by lenders’ technical consultant or independent engineer

payment direct to contractor

drawstops may include breach of cover ratio, event of default, material adverse change, etc.


Project Financing Documents -Loan Agreements & Common Terms Agreement Interest rate adjustment depending on cover ratios

Repayment minimum instalments keyed to projected cash

flows determined by reference to loan life cover

ratio sometimes increased if a cover ratio is not met

Mandatory prepayment of insurance proceeds

Partial prepayment or cancellation by borrower only if financing in place for project completion

to be achieved prepayment premium

Representations and warranties corporate status and capacity due execution of documents accuracy of project and financial information

(info memo) governmental consents ownership of project assets validity of obligations environmental compliance

Financial and project information reporting requirements

generally extensive

Project supervision independent engineer


Covenants Purpose - allow lenders to maintain control over

project company Key covenants include:

project contracts project plan good industry practice additional debt sole purpose company dividends disposal of assets environmental requirements insurances


Events of Default Purpose is control rather than acceleration Typical events, e.g., non-payment, covenant breach,

cross-default, insolvency, etc. Project-related events of default

failure to achieve project completion by long-stop date destruction of all or material part of plant cessation of production for sustained period (force

majeure) revocation or prejudicial variation of concession or

other material consents change in law which adversely affects project

economics creeping expropriations or regulatory changes abandonment of project defaults under major project contracts cross-default on major project parties non-availability (at commercial rates) of required

insurance cover ECA cover no longer being in full force and effect breach of a lower cover ratio



“Project Completion” physical completion as certified by independent engineer financial tests bringdown of representations and warranties (including no default) governmental consents legal opinions payment of all fees and expenses no material adverse change

Importance of project completion sponsor support may fall away or reduce substantially interest rate margin may reduce or increase sponsor begins to receive dividends liquidated damages for delay no longer run risk in project facilities passes from contractor to project company defects period starts release of performance bond release of all or part of retention amount

Financial close

all project contracts have become unconditional

all conditions precedent to project credit agreementshave been satisfied or waived


Types of project accounts disbursement account

receives loan proceeds and equity contributions withdrawals subject to borrower (and sometimes IE)

certification withdrawals only to pay project expenditures already

incurred and sometimes projected expenditures proceeds account

receives proceeds of sale of project product debited in accordance with “waterfall” (see below)

compensation account receives insurance proceeds and other compulsory

acquisition payments application of proceeds - mandatory prepayment or repair?

debt service reserve account reserve to meet debt service if other funds not available often for payments due over next 6-12 months

maintenance reserve account for future maintenance expenditures

Project Financing Documents -Disbursement (Accounts) Agreement

“Cascade” or “waterfall” for payments out of proceeds account

prior to default

1st, to pre-agreed operating costs

2nd, to debt service in an agreed order

3rd, to funding reserve accounts to agreed levels

last, to project company for payment of dividends and/or debt service on subordinated loans

on a potential event of default, accounts are frozen

on an actual event of default, proceeds are payable to lenders and other creditors

Project Financing Documents -Disbursement (Accounts) Agreements

What is the purpose of taking security in a project financing?

valuable asset? defensive control

Assets over which security is taken everything there is, and then some! onshore/offshore land, buildings and other fixtures tangible assets used in project (e.g., plant and machinery,

vehicles, pipelines etc.) concession rights, licenses and other operating permits goods produced by project company sales proceeds bank accounts insurance, requisition and nationalisation proceeds technology and process licenses and other intellectual property

rights performance bonds and completion guarantees rights under project documents shares in project company

Project Financing Documents -The Security Package

Difficulties with taking security foreign law restrictions on foreigners taking security over

land, shares, concession rights borrower’s rights in the assets (ownership or

something else)? fixed or floating security over assets not yet in existence preferred creditors lenders’ liability enforcement rights and mechanics perfection formalities release of security on transfer of loans


Types of security

mortgages or fixed charges over land, buildings and other fixed assets

fixed and/or floating charges over moveable assets, book debts and production/work in progress

assignments of rights in underlying project documents

control over project accounts

share pledges

insurance assignments


Types of direct sponsor support include: repayment guarantees completion (shortfall) guarantees cash injection undertakings (e.g., for cost overruns) working capital maintenance agreements price underpinning (to assure “floor” price for

product) comfort letters

Types of indirect sponsor support include: take-or-pay, throughput and put-or-pay contracts unconditional transportation contracts supply maintenance agreements

Other types of support may include: operation and maintenance agreement with one or

more project sponsors

Project Financing Documents -Sponsor Support

Types of host government support include:

concessions

licenses and approvals

expropriation guarantees

exchange availability undertakings

Project Financing Documents -Host Government Support

Types of insurance support include:

commercial insurance

export credit guarantees

multilateral agency guarantee arrangements

multilateral “umbrella”

Project Financing Documents -Insurances

Who are the parties to a direct agreement? project company lenders parties to project’s key commercial contracts, i.e.,

concession grantor design and construction contractors offtaker supplier operator

What is the value of a direct agreement? alternative to terminating project positive value - provides for creditors to complete

project defensive value - prevents other creditors from

interfering with project assets

Project Financing Documents -Direct Agreements

Project Financing Documents -Direct Agreements

Who benefits? investors - who stand to lose their investment contractors - who stand to lose all benefits from

contract offtaker - who is entitled to expect supply of product concessionaire - who will be able to impose stringent

requirements in relation to new project companyPrincipal clauses

notice to third party of lenders’ security third party to notify lenders of defaults by project

company suspend right to terminate lenders’ right to “step-in” lenders’ right to “step-out” “acceleration step-in” other protections

Large financings = multiple funding sources = complex intercreditor issues

Major issues common desire for control acceleration rights disbursement conditions

mismatch of currencies ECA disbursement requirements (“eligible goods”) “true-up”

voting rights with respect to waivers and consents do ECAs taking only political risk have a right to vote?

decisions regarding enforcement actions security sharing subordination

Project Financing Documents -Intercreditor Agreements