Project finance — Checklist for undertakings

Introductory note:
Undertakings, or covenants as they are sometimes called, are promises given by the borrower and sometimes other obligors (for eg, guarantors or security providers) to the lender to perform or not perform certain actions. The borrower may also undertake to procure that its subsidiaries adhere to the undertakings. In contrast to representations, undertakings will remain in force throughout the life of the facility.
The breach of an undertaking will normally trigger an event of default. Rather than exercising its contractual right following an event of default to accelerate the loan, the lender may in practice use the threat of acceleration to ensure the breaches and any underlying problems with the business are dealt with promptly.
In a project finance transaction, undertakings are extensive, and they are designed to ensure that the project company 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 checklist provides a list of undertakings that legal practitioners should consider including in a facility agreement and/or a common terms agreement for a project finance transaction.