Project financing is a method that is used quite often while planning and performing big infrastructure projects. Due to the high risks and huge capital investments required in such projects, project financing (PF) can sometimes be the only possible way of attracting funds for them.
The method of PF analyses the project’s investment qualities and the future income of the created company thus ensuring the return of the investments. Project financing is one of the most popular and effective ways of engaging modern financial instruments for a few reasons. Firstly, it fulfills the task of accumulating large financial resources of different origins. Secondly, it manages to eliminate investment risks since they are redistributed among several participants.
A PF starts with the initiation of a project company (SPV). This step is valuable for investors since it helps to increase capital return.
The process of lending
Banking consortia and international banking organizations attract unsecured borrowing, revolving debt issues and their placement. These are typical for the traditional model of project financing. Banks do their best to diversify the risks in the portfolios by redistributing them, which is a part of their risk management system.
While setting up an SPV, it is crucial to remember that lending is a step of PF that cannot be overlooked. It includes:
- Financial and technical assessment of the project
At first, the lender is expected to process a technical and financial evaluation of the project and submit a loan application to their internal systems. Then, according to the assessment, the lender is able to present the starting conditions of them providing the PF;
- Examination of land
The land where the project will take place must provenly be under the legal title of the SPV. What is more, it can be useful to verify whether any legal title deeds impose any security restrictions on the project’s lenders;
- Legal due diligence
Another step for the lender to follow is to ensure that the bank accepted the project documentation – an EPC contract, PPAs (energy projects), and concession agreements (road projects). Additionally, it is necessary to verify the SPV’s ability to perform the project and the SPV’s compliance with corporate requirements. These measures are aimed to make sure that the creditors’ rights are protected.
By the way, COREDO experts provide a due diligence service as a part of the concession agreement.
PF contracts
There are two groups of project financing agreements:
- Contracts preceding investment
Formation project concepts, a business plan, financial analysis, documentation development;
- Investment contracts
Production implementation, financial programs (until the final funds’ return by the borrowe), external control.
While concluding an agreement that says that the lender will finance the borrower’s project, these documents are necessary to be drawn up:
- Loan agreement
It is an agreement among the lenders, the SPV, and the trustee. Typically, it contains a purpose of the loan, the interest rate, the terms under which the payments are processed, the amortization schedule, the terms of prepayment, the additional interest for the cases of delay or default, etc.;
- Fiduciary and provisional account agreement
Based on the fact that PF transactions are centered around cash flows, the lenders have a right to monitor and use all cash flows in the project;
- Fiduciary agreement
This document is used when it comes to a consortium of creditors;
- Inter-loan agreement
It is a loan signed between the agents and the lenders.
In COREDO we can help you draft a project financing agreement.
Default events and what they bring
The loan agreement must include a section about the events of default which would specify the rights and remedies of the lenders in a default happens.
Some of the default cases are shown here:
- Failure to pay principal or interest;
- Change of control;
- Unsatisfactory provision;
- Violation of applicable laws;
- Insolvency;
- Permit revocation.
In case of a default, the lenders can behave according to the courses of actions dictated by a loan agreement. For example, they can exercise the security interest, expedite repayment, and convert the outstanding debt into equity shares. Another solution that might help in such situations is a restructuring of the defaulted loan ordered by a court.
Help of experts
For those who are planning to conclude a project finance deal, the legal assistance exercised by experts is truly needed.
Specialists from COREDO are prepared to provide experienced legal assistance in the procedure of negotiating and concluding contracts on project financing.