Bucharest 21 January 2003
Legal Issuesof Project Finance
Bucharest 21 January 2003
Introduction
The Contractual Framework Project Documents
Concession Contract Construction Contract O&M Contract
Financing Agreements Credit Facility Direct Agreements Security Agreements
Bucharest 21 January 2003
Construction Companies
The Parties Involved
Contractor
OperatorShareholders
Governmental Authority
Consumers / Offtaker
Performance Bond Banks
Concession / Project
Company
Lenders
Insurance Companies
Sub-contracts
Pledge of shares
Revenues
Concession Agreement
Construction Contract
Support Agreements
Credit FacilitiesSecurities
O&M Contract
Supplier
Shareholders Agreement
Bucharest 21 January 2003
Project Documents
The Concession Contract
is essentially a licence granted by a governmental or quasi governmental authority to the concessionaire (Project Company “PC”) to build a project facility or piece of infrastructure, operate it for a fixed period of time (ie: 30 years) (ie: BOT, DBFO)
is the “master” project document in the sense that the other project documents must be “ back to back” with the Concession Agreement, relates to issue of “ bankability ” of the project
Bucharest 21 January 2003
Project Documents
Essential Elements of a Concession Contract
obligation on PC to design the facility/infrastructure to a stated specification by a stated date (liquidated damages)
provisions enabling the grantor to inspect design and monitor progress of the project
obligation on the PC to operate the facility/infrastructure and to maintain it to stated level for a stated time
provisions entitling the PC to charge relevant fees/fares
Bucharest 21 January 2003
Project Documents
Cont… Essential Elements of a Concession Contract
Right for the Grantor to intervene and run the project itself should the PC fail to carry out the project or fail to meet standards ( a “step-in” right for the grantor)
“offtake agreement” may be rolled into the Concession
performance targets during operational phase (liquidated damages, bonuses)
force majeure, termination, arbitration etc...
Bucharest 21 January 2003
The Turnkey Construction Contract
E M P L O Y E R
C O N T R A C T O R
E M P L O Y E R 'SR E P R E S E N T A T IV E / E N G IN E E R
B A N K S
IN S U R E R
IN S U R E R
C IV IL W O R K SS U B C O N T R A C T O R
E Q U IP M E N TS U P P L IE R
D E S IG NS U B C O N T R A C T O R
DESIGN - BUILD CONTRACT
Bucharest 21 January 2003
Project Documents
The Turnkey Construction Contract
Project Company contracts with one entity (the Contractor) to undertake the design, procurement and construction of a facility for a fixed price
Objectives:Single point of responsibilityLimit time/cost overruns (for PC)
Contractor may sub-contract part of the Works, (ie: FOE)
Bucharest 21 January 2003
Project Documents
Essential Elements of a Turnkey Construction Contract
Contractor provides design based on functional requirements submitted by PC
PC has a right to inspect comment on design specifications submitted by Contractor
Contractor to construct facility by a fixed date, subject to extensions
Liquidated Damages “for delay”
Bucharest 21 January 2003
Project Documents
Cont... Essential Elements of a Construction Contract
Fixed Price (subject to “variations”), based on “milestone payments” upon the issue of various interim certificates
Takeover
Performance tests
Performance Bonds posted by Contractor, “first demand”
Bucharest 21 January 2003
Project Documents
Cont... Essential Elements of a Construction Contract
Defects Liability Period (ie: a warranty to “make good” any defects discovered within a certain period)
Insurance - “All Risks” policy, Third Party Liability
Limitation of Liability
Force Majeure, Arbitration, Termination etc..
Bucharest 21 January 2003
Project Documents
Splitting the Turnkey Construction Contract
In order to avoid double taxation or disadvantageous tax rates, it may be preferable to split the turnkey contract
Off-shore Equipment Supply Agreement
On-shore Installation and Construction Agreement
Bucharest 21 January 2003
Project Documents
The Operation and Maintenance Contract
Different Approaches to O&M responsibility
O&M function performed by the Project Company itself Project Company enters into an O&M agreement with a
third party, related (ie: a shareholder of PC) or not Project Company can share the O&M role with a third
party O&M and O&M contractor Operating function can be split from the maintenance
function
Bucharest 21 January 2003
Project Documents
Essential Elements of an O&M Contract
Clear description of scope of servicesRoutine Maintenance, Scheduled Maintenance
(A,B,C Inspections), Unscheduled Maintenance
Standard/Level to be adhered to by the O&M ContractorA general standard “Good Utility Practice”Enumerated performance standards/levels
Bucharest 21 January 2003
Project Documents - O&M Contract
Price: Fee + Performance Related Remuneration Fee
“All in ”, Operator provides all O&M services for a fixed price
“ Cost + Fee”, Operator reimbursed for its costs, and is paid a fee representing its profit
Sticks and Carrots (key issue of bankability)
Liquidated damages for failure to maintain guaranteed levels of performance
Bonus for achieving better than guaranteed levels of performance
Bucharest 21 January 2003
Project Documents - O&M Contract
Procedure for mobilising operator (“Notice to Proceed)
Limitation of Liability Operator will limit its liability to a percentage of the
fees paid to him in any given year (50-100%) In addition, in the case of an “all in” remuneration,
there may be a cap on liability on a “per incident” basis
Performance Bonds, Parent Company Guarantees
Bucharest 21 January 2003
Financing Agreements
Credit Facility
The Term Sheet (3 pages or 50 pages )Negotiation now or laterNot a contract, only of moral valueSets principal terms for final documentation
Concerns of Project CompanyCan you request disbursements when you need
them, in the amount and currency you need ?Is it too restrictive on the activities of the PC (ie: no
dividends, capital expenditures, other debt)?
Bucharest 21 January 2003
Financing Agreements
Principal Characteristics of a Credit Facility
Project Cost and Financing Plan Availability Conditions Precedent Prepayment Repayment Interest and Interest Periods Fees Reps and Warranties
Bucharest 21 January 2003
Financing Agreements
Cont… Principal Characteristics of a Credit Facility
Positive and Negative Covenantsratios, restriction on dividends and capital
expenditures informational covenants, to monitor PC
performanceshould not be too onerous or restrictive
Events of Default and acceleration
Choice of Law
Bucharest 21 January 2003
Financing Agreements
Direct Agreements = “Step in Rights”
Agreements entered into between the Lenders, the PC and the various parties to the key Project Documents which allow the Lenders to “step into the shoes” of the PC
Aggressive function = allows Lenders to seize control of the PC’s rights upon default under Credit Facility (ie: upon enforcement of security)
Defensive Function = protects the Lenders against a precipitous termination of a Project Document
Bucharest 21 January 2003
Financing Agreements
Essential Elements of a Direct Agreement
Consent from 3rd party to assignment of PC’s rights under the Project Document
undertaking from 3rd party that it will not exercise any
right of termination without first giving notice to the Bank
agreement from 3rd party that it will allow the Lenders to assume the PC’s rights and obligations under the relevant Contract
Bucharest 21 January 2003
Financing Agreements
Security Agreements
No Recourse No personal guarantees /Suretyship by Sponsors Limited Project Support Agreement (Costs) Pledge on Shares held in Project Company
Limited Recourse
Project Support Agreement (financial ratios) Third Party Undertaking
Bucharest 21 January 2003
Financing Agreements
Categories of Security – Assets
Immovable vs. Movable Tangible vs. Intangible Present vs. Future Fixed vs. Floating charge
Bucharest 21 January 2003
Limited security
Public vs. Private Assets No security may be registered against Public
Assets
Assets of the Concession No security may be registered against assets necessary to provide public service
Cash Flow Consideration Security on cash flow Generate future cash flow (Direct Agreements)
Financing Agreements
Bucharest 21 January 2003
Financing Agreements
Security on cash flow
Security instruments
Security interest on present and future claims
Accounts receivable
Bank Accounts
Compensation in case of early termination of concession
Insurance proceeds
Assignment of contract rights
Bucharest 21 January 2003
Financing Agreements
Quasi Security
Delegation of income stream
Escrow Agreement
Choice of Law and Jurisdiction
Foreign vs. Domestic
Bucharest 21 January 2003
Financing Agreements
Conclusion - Domestic Security Law
The law should enable the quick, cheap and simple creation of a proprietary security right without
depriving the person giving the security of the use of his assets
Security should be available (a) over all types of assets (b) to secure all types of debts and (c)
between all types of persons There should be an effective means of
publicising the existence of security rights The cost of taking, maintaining and enforcing
security should be low
Bucharest 21 January 2003
Financing Agreements If the secured debt is not paid, the holder of the
security should be able to have the charged assets realised and to have the proceeds applied towards satisfaction of his claim prior to other creditors
Enforcement procedures should enable prompt realisation at market value of the assets given as security
The law should establish rules governing competing rights over persons holding security and other persons claiming rights in the assets given as security.
The security right should continue to be effective and enforceable after the bankruptcy or insolvency of the person who has given it
As far as possible the parties should be able to adapt security to the needs of their particular transactions