New infrastructure within renewable energy, construction, oil and gas, mining and other large scale industrial projects, require substantial financing. Such financing is typically sourced from several different types of creditors where the core principle is that they will be repaid from the cashflow of the project once operative.
Key features of project financing
Project financing is generally raised by a project entity; a special purpose vehicle (SPV). The SPV is set up solely to develop a particular project from greenfield to a revenue generating enterprise. The owners of the SPV generally provide limited financial support, such as equity, to the SPV, thereby isolating the credit risk to the SPV itself. This is referred to as "limited recourse". A key feature of project financing is thus to allocate the risks inherent in the project between the involved parties. Typical stakeholders are the SPV owners, bank lenders, bondholders, governments, contractors, suppliers and insurers. The balancing of the interests of these parties is a tightrope as every part of the project financing is generally conditional upon all other parts of the project financing coming into place, at the right time. There is rarely an abundance of potential lenders and the project development often cannot start unless all required funding is fully committed.
Timeline and conditions precedent
As the relevant project must be completed and operative in order to generate cashflow, lenders should as a minimum carry out technical, legal and financial due diligence of the project before entering into negotiations for a potential financing. Prior to that, the SPV must have prepared a detailed project plan, risk mapping and risk management and must have tested the feasibility of the project. If land is needed for operation of the project, this should to the extent possible, be acquired by the SPV already in the pre-financing stage. It is not unusual that the preparations leading up to the due diligence, take years and the costs may therefore also be considerable, and often funded with equity.
In order to get comfort that the project will indeed generate income once operative, the SPV should expect to have to negotiate and agree agreements with future customers for all or a majority of the expected output, e.g. offtake agreements. This is commonly a condition to project financing. Other conditions will typically be that the SPV holds the required licenses and authorisations, is not threatened by litigation, that it has sufficient funding for completing the project and other negotiated terms, specific for each project.
Collateral and intercreditor issues
Once committed, the availability of the financing to the SPV is often staggered with every next disbursement dependant on satisfaction of agreed milestones. This provides security to the creditors that all project funding is not used up at once. In addition, the SPV has to provide collateral to the creditors in all of the SPV's assets capable of being pledged. The respective creditors' right to the collateral; order of priority and scope of secured assets, has to be negotiated with the different creditor groups and the SPV.
What we do in a project financing
The project financing structure is generally only used for particularly large infrastructure and industrial projects. The concept of limited recourse is however utilised also in financing where the value of the collateral is deemed sufficient to lend against. We have assisted several clients in project financing and other similar transactions where we
- provide legal advice in the preparatory phase, including with respect to obtaining required licenses and authorisations, acquiring land and securing contractual rights where required for a successful project development,
- legal risk mapping and management, preparation of due diligence for potential lenders and other stakeholders,
- plan the financing transaction structure in collaboration with the clients' financial advisor(s),
- draft term sheets and provide legal input to information memorandums and investor presentation materials,
- draft and negotiate offtake agreements with future customers,
- draft and negotiate supplier contracts and direct agreements,
- draft and negotiate all project financing loan documentation, government guarantees, intercreditor terms, equity offers, derivative agreements and specialty financing plus related security agreements and
- assist with signing and closing and subsequent disbursements requiring legal input.
Do you wish to discuss project financing with us, please do not hesitate to contact us.
