Typical documents in a project finance transaction

As one would expect, there are many documents involved in any project finance transaction. Projects are typically facilitated through an entity that is owned or controlled by the project sponsor, and this entity is usually a special purpose vehicle (SPV) set up by the project sponsor specifically for the project. Against this background, this guidance note provides an overview of the principal documents that the SPV will enter into in order to procure the performance of the project. The principal documents are broadly divided into five categories, being:

• • the finance agreements;
• • the investment agreements;
• • the construction contract(s);
• • the operating contract(s); and
• • the offtake contracts.

See Typical documents in a project finance transaction.

Key finance documents in a project finance transaction

Many of the standard finance documents used in a straightforward syndicated transaction will also be required in a project finance transaction. Project financing is, after all, a form of syndicated lending.

This guidance note provides an overview of the following key finance documents:

• • a term sheet that sets out the key commercial terms of the transaction, which is often coupled with a mandate letter;
• • a facility agreement, which is often coupled with a common terms agreement;
• • an inter-creditor agreement that governs the relationship between the project finance lenders and any other parties providing finance to the project;
• • any hedging documentation that addresses market risks associated with the financing of the project;
• • direct agreements (or tripartite agreements) that give the project lenders direct rights in respect of certain key project documents; and
• • account agreements that address the types of project accounts that are required, the cashflow waterfall, and the relationship between the borrower (project company), the lenders and the account bank.

See Key finance documents in a project finance transaction.

Key project documents in a project finance transaction

This guidance provides an overview of a selection of key project documents:

• • offtake contracts under which a third party (the offtaker) agrees to buy a certain amount of the product produced by a project at an agreed price;
• • concession contracts that govern the relationship between the host government (or governmental authority) and the borrower;
• • construction contracts that are entered into with appropriately-skilled contractors to provide construction services; and
• • operation and maintenance contracts that are entered into with operators to provide operation and/or maintenance services.

See Key project documents in a project finance transaction.

Key terms in project finance documentation and drafting tips — conditions precedent

In a project finance transaction, facility agreements include specific conditions that need to be satisfied before funding will occur. These conditions are known as conditions precedent, or “CPs”. There are potentially serious consequences of CPs not being satisfied, for example, the lender is not obliged to provide funding.

This guidance note explores the two types of CPs that lenders will require before funds are made available to the borrower. They are:

• • documentary CPs; and
• • factual CPs.

See Key terms in project finance documentation and drafting tips — conditions precedent.

Key terms in project finance documentation and drafting tips — representations and warranties

Typically, representations and warranties are given on the date the facility agreement is signed by the borrower and any security provider.

Legal representations deal with the legal status of the borrower, any guarantors and any security providers, the ability to enter into the finance documents and compliance with the relevant entity’s own constitution and other laws.

Commercial representations tend to relate to the assets of the borrower and its ability to carry on its business. They also confirm that the business and assets are not at risk due to third party claims or failure to comply with laws or regulations.

This guidance note outlines the key matters to consider when drafting representations in a project finance transaction.

See Key terms in project finance documentation and drafting tips — representations and warranties.

Key terms in project finance documentation and drafting tips — undertakings

In a project finance transaction, undertakings (or covenants as they are sometimes called) are extensive. They are promises given by the borrower and sometimes other obligors (for example, guarantors or security providers) to the lender to perform or not perform certain actions. The breach of an undertaking often triggers an event of default.

In contrast to representations, undertakings will remain in force throughout the life of the facility.

Undertakings are designed to ensure that the borrower develops, constructs and operates the project within the parameters agreed with the lenders. Like undertakings in any other form of financing, they are intended to ensure that the lenders find out about problems as quickly as possible. This guidance note outlines the key matters to consider when drafting undertakings in a project finance transaction.

See Key terms in project finance documentation and drafting tips — undertakings.

Key terms in project finance documentation and drafting tips — financial covenants

For project finance lenders, understanding the financial health of a project is critical. In a typical project finance transaction, the project is the borrower’s only source of income from which to repay the debt.

Project finance lenders monitor the financial health of a project by using a number of different financial covenants, as explained in this guidance note, including:

• • debt to equity ratio;
• • debt service cover ratio;
• • loan life cover ratio;
• • project life cover ratio; and
• • minimum tail requirement.

This guidance note also considers when financial covenants are tested in project finance transactions and the use of financial ratios in project finance transactions, for example, as a default trigger.

See Key terms in project finance documentation and drafting tips — financial covenants.

Key terms in project finance documentation and drafting tips — repayment, prepayment and cancellation provisions

This guidance note explains the types of repayment provisions, prepayment provisions and cancellation provisions that can typically be found in a project finance development term loan facility. This explanation includes examples of how these provisions may differ to the typical repayment, prepayment and cancellation provisions typically found in a corporate term loan facility. It also discusses some of the reasons for these differences, for example, the long term nature of a development term loan facility, the fact that during the development and/or construction phase a project does not generate any revenue and the inter-relationship the repayment and prepayment provisions have with the technical monitoring of a project both during the development and construction phase and during the operating phase of the project.

See Key terms in project finance documentation and drafting tips — repayment, prepayment and cancellation provisions.

Key terms in project finance documentation and drafting tips — events of default

Events of default give lenders a mechanism under which they can, if they choose, take action against a borrower for breach of its obligations under a facility agreement or if certain other events occur. In a project finance transaction, where the lenders are typically solely or largely reliant on the revenues of the project for repayment of the loan(s), the lenders will often want to include events of default which may help them to identify issues with the project’s progress at an early stage to enable them to impose obligations on the borrower to take any remedial steps in good time. Among the most severe consequences of an event of default in a project finance transaction is the right for a lender to cancel its commitment.

Many of the usual events of default for a typical syndicated loan facility will also apply (in some form) to a project finance transaction. For example, failure to pay any amount under the finance documents when due, and breach of a financial covenant.

A key focus of this guidance note is to consider the types of additional events of default which may apply in a project finance transaction, which are categorised into:

• • events of default relating to project parties;
• • events of default relating to project documents; and
• • events of default relating to the project and its ownership.

See Key terms in project finance documentation and drafting tips — events of default.

Key terms in project finance documentation and drafting tips — force majeure clause

A force majeure event is an event that occurs that is beyond the control of the project parties. The event prevents a party, or multiple parties, from fulfilling their contractual obligations. It can materially and adversely affect the completion or operation of a project.

Force majeure risk is particularly acute for the project lenders as any delay or suspension to the generation of project revenues can have serious consequences for the ongoing viability of the project, and, in extreme circumstances, a lengthy delay caused by an event of force majeure may result in termination of the project and insolvency of the borrower.

This guidance note explores the identification and management of force majeure risks, and drafting considerations relevant to force majeure provisions in project documents.

See Key terms in project finance documentation and drafting tips — force majeure clause.

Key terms in project finance documentation and drafting — applicable law and jurisdiction clauses

An applicable law clause and a jurisdiction clause are different. A contract can have different law and jurisdiction, that is, parties to a contract can nominate different law and jurisdiction.

With regards to an applicable law clause, the commercial effect of a contract could vary depending on the law and jurisdiction the contract is interpreted in. For this reason, it is essential that the project parties to a contract agree on these matters.

With regards to a jurisdiction clause, it often accompanies any applicable law provisions in contracts and is designed to specify the jurisdiction in which the parties agree disputes will be adjudicated.

This guidance note provides legal practitioners with commentary to help draft (and review) applicable law and jurisdiction clauses in project documents.

See Key terms in project finance documentation and drafting — applicable law and jurisdiction clauses.