Project finance is the financing of investment projects, in which the project itself is a way of servicing debt obligations. Lenders evaluate the investee in terms of profitability, which will ensure the repayment of the loans provided. The main security for such transactions is the project itself and the assets involved.
In world practice, project finance is most often used in the energy sector, mining, real estate construction, transport infrastructure, and telecommunications. That is, in large-scale projects associated with high technical, economic and political risks.
Project finance abroad
When financing projects abroad, it is necessary to distribute the risks. This is done through a contractual relationship between the parties to the project. And the agreements are directly reflected in the documentation that they draw up.
So, for example, if you want to start financing a project in England, then it is useful to know that in this jurisdiction the parties are free to structure projects and distribute risks at their discretion.
However, not every jurisdiction gives project participants such freedom of action. Therefore, it is important to know and comply with the legal framework of the jurisdictions in which the transaction is planned.
The main tools in identifying risks are agreements between project participants and a certain set of related documents. Below is a brief description of some of the key information you need to provide in order to launch project finance in the UK or any other country:
- Agreements with shareholders / sponsors;
- Credit and security documents;
- Project documentation.
- Preliminary development agreements
Such an agreement is signed by companies that have agreed to conclude a project finance deal abroad and conduct a feasibility study. This document may address the division of responsibilities in relation to a specific offer, and confidentiality. Last but not least, the issues of conditions on which a party can withdraw from agreements should be covered.
Similar agreements can be entered into if the parties have decided to enter into a business combination to bid for a specific contract or concession.
- JV Agreement
If it is intended to create a JV abroad, then a corresponding agreement should be concluded. It addresses issues such as:
- financing a project company abroad;
- voting requirements;
- international disputes resolution on a project finance transaction;
- payment of dividends;
- share sale etc.
From the point of view of the project lenders, the key questions will be:
- Sponsor creditworthiness;
- If sponsors are committing management resources to a project, then lenders will want to see a clear picture indicating who provides what services;
- If sponsors agree to offer additional capital at a later date, then the document must contain the conditions on which this capital is placed.
Project support documentation
If you plan, for example, to register a company for Project Finance in Europe, as in any other jurisdiction, you will need to enter into project security agreements. Such contracts are discussed below.
In most projects, this will be a syndicated loan agreement between the borrower, the lenders of the project, and the agent. It sets out the conditions on which project loans can be used and to which items of project costs they can be used. The agreement includes provisions regarding the calculation and payment of interest and loans. In most projects, interest will be capitalized until revenues from the project begin to flow.
One can conclude a concession agreement in the process of project financing abroad. All that may be required for a project company to give it the necessary legal rights is a license.
Concession agreements are popular, especially in countries where political or budgetary constraints prevent governments from developing critical infrastructure. The concession can offer certain benefits to the host country's authorities, including the encouragement of foreign investment and the introduction of new technologies.
Also, persons who intend to conclude a concession agreement for project finance must assume certain risks associated with changes in legislation and force majeure.
NOTE: The IQ Decision UK specialists offer a consultation on drawing up a concession agreement for project finance in Europe.
The creation of new production facilities, as well as the expansion and modernization of existing ones, are carried out with the help of project financing.
In an infrastructure project, where lenders assume all or part of the risk, the construction contract will be one of the key project documents. Most often we are talking about a "turnkey" contract, according to which one contractor assumes all the risks of the timely completion of a project that meets guaranteed quality standards.
Such a contract defines general quality standards, and the contractor takes full responsibility for the design, construction, testing and commissioning of the facility to ensure that it meets the specified requirements.
If, when registering a project company abroad, construction management responsibilities are taken on by a project company or sponsors, the technical capabilities and resources of lenders increase. There is also a practice where a management agreement is concluded with one management company, which then selects individual contractors and each of them will carry out different parts of the project. One of the reasons lenders prefer turnkey contracts is because they reduce the risk of claims arising between contractors on the same project.
Operating and maintenance agreements
Upon completion, the project enters the operational stage. Most projects will require an experienced and skilled operator, and their knowledge of the task will be critical to the overall success of the project. It is important that the selected operator is a company with proven track record in similar projects.
If you are interested in setting up a project company in Europe, please note that sometimes such a firm will manage the project itself, although lenders will want to make sure that it has both the experience and the necessary staff to fill this role. Most often, the operator is a third party who specializes in the operation and management of facilities. This entity must enter into a commercial operation and maintenance agreement with a foreign project company.
There are several structures for an O&M contract:
- Fixed price. The operator is paid a fixed price for the operation of the project. If the operating budget is overrun, the operator will bear this risk. Conversely, if the operator can cut costs, he will get more profit.
- Additional expenses. The project company will pay the operator an agreed fixed fee along with the costs incurred by the operator in operating the project.
- "Carrot and stick." Operator's remuneration will be tied to strict KPIs. If the operator reaches the agreed KPIs, he will be paid a bonus. Conversely, if he misses the deadline, he will be fined.
Fuel supply agreements
Project finance overseas involves the following types of fuel supply agreements:
- Take-or-pay contracts: In accordance with this agreement, the project company agrees to take delivery of the agreed amount of fuel at the previously agreed price within a specified period.
- Single Supplier Contracts: Under this concept, the project firm agrees that it will purchase fuel for the project from a single previously agreed supplier.
They will be important if the project depends on guaranteed sales of products. A long-term sales contract may include a sale on market terms. The prize is calculated on the basis of market prices at the relevant time, but does not oblige the buyer to make a purchase.
Planning to launch project finance in Europe or Asia? Please note that project agreements play a key role in the risk distribution between the parties. Lenders will carefully check the terms of such contracts to ensure that they reflect the terms agreed upon.
To familiarize yourself with the details of project finance deals abroad, you can request advice on the underlying agreements for project finance overseas from IQ Decision UK experts.