Project financing (PF) is often used to finance large infrastructure projects. It often becomes the only possible way to attract funding due to the high risks of the project and the large volumes of required capital investments.
PF of investment projects is characterized by a special method of ensuring the return on investments, which is based on the investment qualities of the project itself and the income received by the company being created in the future. Currently, the PF is considered as one of the most effective ways of using modern financial instruments and schemes that allow accumulating significant financial resources from various sources and eliminating the risks of an investment project by redistributing them between its participants.
A PF begins with the setting up of a project company (SPV). Setting up a company for project financing is a profitable option for investors because it helps to maximize the return on capital.
The most traditional for the classical model of PF are unsecured borrowing, revolving debt issues and their placement, which are attracted from banking consortia and international banking organizations.
Acting within the framework of a risk management system, banks seek to diversify the risks of their investment portfolios by distributing them.
If you are planning to register an SPV, please note that lending is an important step in PF, which implies the following steps:
Project technical and financial assessment
The lender first evaluates the project from a technical and financial point of view and processes the loan application through their internal systems. Based on this assessment, as a rule, the lender issues approximate conditions under which he will be ready to provide the PF.
Legal due diligence of the project
The lender must make sure that the bank accepts project documents such as an EPC contract, concession agreements (for road projects) and PPAs (for energy projects). The SPV's compliance with corporate requirements and the SPV's ability to implement the project must also be verified.
This will ensure the creditors’ rights protection in relation to shareholders. Please note: the specialists of our company provide such a service as due diligence when drawing up a concession agreement.
It must be ensured that the SPV has legal title to the land on which the project will be developed. Another important aspect to check is whether there are land title deeds that impose any security restrictions in favor of the lenders over the project.
Project financing contracts can be divided into two groups:
- preceding investment (formation project concepts, financial analysis, a business plan and documentation development );
- investment (implementation of production, financial programs until the complete return of borrowed funds and ensuring external control).
Carrying out a transaction to finance a project, as a rule, implies an agreement between the lenders and the borrower of the following financial documents:
- Loan agreement. This agreement is between the lenders, the SPV and the trustee (in the case of a consortium of creditors). Includes: purpose of the loan, interest rate, terms related to payments, amortization schedule, prepayment terms, additional interest payments for default or delay, etc.;
- Fiduciary and provisional account agreement. Since PF transactions are based on cash flows, lenders control and use all cash flows related to the project;
- Fiduciary agreement. Often used for a consortium;
- Inter-loan agreement. Concluded between the lenders and agents.
Please note that our experts provide legal advice on drafting a project financing agreement.
Default events and their consequences
The rights and remedies of the lenders if an event of default occurs must be specified in the ‘events of default’ section of the loan agreement.
Some of the typical defaults covered include:
- change of control;
- failure to pay principal or interest;
- inadequate provision;
- revocation of permits;
- violation of applicable laws;
Possible courses of actions that lenders may take when an event of default exists under a loan agreement: to exercise the security interest, expedite repayment and convert the outstanding debt into equity shares. An out-of-court restructuring of the defaulted loan is one of the solutions to save the situation.
If you have made a decision to conclude a project finance deal, it is recommended to enlist the support of experienced legal advisors.
IQ Decision UK experts provide qualified assistance in negotiations on project financing.