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The Law of International Finance, 2nd. Ed. > Project Finance > Flashcards

Project Finance Flashcards

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1
Q

What is Project Finance?

A

The structured and limited-or-no-recourse funding of development and resource exploitation projects whose value chiefly derives from projected cashflows.

Hereafter, the objects of financing will just be called ‘Projects’.

P. 771.

In this respect, Lenders lean more heavily on commercial and technical assessments than they ordinarily would, considering the Borrower is not the primary focus of the transaction.

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2
Q

What is a Public-Private Partnership (PPP)?

A

An agreement between a public and private body to jointly finance, develop, or operate a Project.

P. 772.

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3
Q

What Sources of Finance may be used to Fund a Project?

A

Syndicated Lending is the default option, but Bond Issuances and Securitizations are also available.

P. 800.

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4
Q

Who are the Parties involved in a Project Finance transaction?

A
  • Lenders.
  • Insurers.
  • Sponsors.
  • Operators.
  • Off-Takers.
  • Contractors.
  • Public Bodies (PBs).
  • Technical Advisors (TAs).
  • Special Purpose Vehicle (SPV).
  • The Borrower (in the form of the SPV).

This list is comprehensive, not exhaustive.

Lecture Notes.

Lenders and Sponsors may collectively be called ‘Financiers’.

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5
Q

What is a Sponsor?

A

The party that initiates and promotes the Project and provides equity (or other financial support) thereto.

Lecture Notes.

Of these, there are several, and their interests may ultimately rest in different stages of the Project, e.g. construction vs. operation.

They collectively act through the SPV that then transacts with the other parties. English and American LLCs are usually the prime choice, but this may vary based on licensing requirements and legal considerations.

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6
Q

Are Sponsors Jointly and Severally Bound?

A

Usually not, although this may vary based on the case.

P. 779.

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7
Q

What is an Operator?

A

The party that manages and operates the completed Project.

Lecture Notes.

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8
Q

What is an Off-Taker?

A

The party that agrees to purchase the Project’s output over a specified period.

Lecture Notes.

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9
Q

What is a Contractor?

A

The party that constructs, engineers, or performs other technical services to complete the Project.

Lecture Notes.

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10
Q

What is a Technical Advisor?

A

The party that provides advice and support regarding a particular technical area, e.g. engineering or environmental impact.

Lecture Notes.

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11
Q

What is the Commercial Conflict of Interests between Lenders and Sponsors?

A
  • Lenders want to see their debt repaid and security conserved; whereas
  • Sponsors want to maximize their return on investment and achieve their strategic objectives.
  • This puts the two at odds because the former inhibits the latter and the latter jeopardizes the former.

Lecture Notes.

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12
Q

Consider their Conflict of Interest with Sponsors, how may Lenders safeguard their interests?

A

Requirements regarding:
* Security: The type and amount of collateral.
* SPV Independence: The SPV’s Articles of Association and Board composition.
* Profit Extraction: Sponsors’ ability to extract profit from the Project, e.g. using dividends.
* Creditor Ranking: The subordination of Sponsors’ claims to Project assets and revenues below their own.
* Financial Support: The type, amount, timing, and utilization of mandatory financial support by Sponsors.
* Credit Enhancement: Sponsors’ creditworthiness and the use of supplementary credit-enhancing measures.
* Financial Covenants: The Project’s financial performance targets, operating restrictions, and reporting requirements (inter alia).
* Change of Control: The SPV’s ability to unilaterally make significant changes to the project ownership or management and the Lenders’ Step-In Rights.

P. 779.

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13
Q

Who are the Documents involved in a Project Finance transaction?

A
  • Credit Ratings.
  • Legal Opinions.
  • Technical Reports.
  • Security Agreements.
  • Licenses and Permits.
  • Financing Agreements.
  • Insurance Agreements.
  • Construction Agreements.
  • Inter-Creditor Agreement (ICA).
  • Inter-Sponsor Agreement (ISA).
  • Operation and Maintenance Agreements.
  • Environmental and Social Impact Assessments (ESIAs).

This list is comprehensive, not exhaustive.

Lecture Notes.

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14
Q

What does the Inter-Creditor Agreement concern?

A

The rights and obligations of the various Lenders vis-à-vis one another and the Project.

Lecture Notes.

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15
Q

What does the Inter-Sponsor Agreement concern?

A

The rights and obligations of the various Sponsors regaring one another and the Project.

Lecture Notes.

Responsibilities across the Project’s lifecycle are distributed at this stage.

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16
Q

Between the SPV and the Main Contractor, what do Construction Agreements concern?

A
  • The Project’s timeline, management, and other practical considerations.
  • The chain of contractor’s size, conditions, and composition.
  • The Project’s design, engineering, technical specifications, and other parameters.
  • The parties’ rights and obligations, particularly regarding default, termination, and dispute resolution.

This list is general, not comprehensive.

P. 786-790.

17
Q

What are the Two Frameworks available to Construction Agreements?

A
  • Direct: The SPV, as the Main Contractor, engages Sub-Contractors and fully constructs the Project.
  • Indirect: The SPV hires a Main Contractor to engage Sub-Contractors and fully construct the Project.

The difference is the SPV’s degree of separation from construction.

P. 786-787.

18
Q

What do Operation and Maintenance Agreements concern?

A

The commercial exploitation of the Project, specifically regarding:
* Its commercial use.
* The sale of its products or services.
* The supply of inputs, like raw material.

Off-Takers are relevant players in this respect.

P. 790-791.

19
Q

What is the Typical Lifecycle of a Project Finance transaction?

A
  1. Project Identification: A Project is identified and investigated. Developers are invited to bid and a winner arises.
  2. Project Development: A detailed Project Plan is drafted, which includes acquiring permits and licenses, creating the financing structure, and formalizing engineering, procurement, and construction plans.
  3. Financing: Prospective investors are attracted, negotitations are had, and agreements are made.
  4. Construction: Construction begins according to the Project Plan and issues are resolved as they arise.
  5. Comissioning: The completed Project is tested by authorities to certify whether it meets regulatory standards.
  6. Operation: The certified Project begins operating and generating cashflow.

This list is general, not comprehensive.

Lecture Notes.

20
Q

Why is a Bidding Procedure necessary?

A
  • To obtain the best possible deal; but also,
  • To gain access to funding from intergovernmental organizations, like the World Bank, who require a bidding procedure.

P. 779.

21
Q

What do Licenses and Permits concern?

A
  • Duration.
  • Termination.
  • Governing law.
  • Dispute resolution.
  • Environmental issues.
  • Royalties, fees, and charges.
  • Risk allocation and insurance.
  • Project description and specification.
  • General warranties and undertakings.
  • Sponsor warranties and undertakings.
  • Scope and content of the Licensee’s obligations.

This list is comprehensive, not exhaustive.

P. 781-785.

These terms and conditions are between the Licensor, usually the State, and the Licensee, the SPV.

22
Q

What is the Chief Concern of a Financier in a Project Finance facility?

A

The Project’s viability, as they need it to be completed as soon as possible for the debt to be serviced.

P. 772.

23
Q

What Risks influence a Project’s Viability?

A
  • Legal risk.
  • Credit risk.
  • Political risk.
  • Financial risk.
  • Currency risk.
  • Technical risk.
  • Operational risk.
  • Construction risk.
  • Environmental risk.

This list is comprehensive, not exhaustive.

24
Q

In a Project Finance transaction, what is Legal Risk?

A

The risk of legal challenges, disputes, or regulatory changes that may hinder the Project’s performance or viability.

Lecture Notes.

Minimizing legal risk means due diligence. Also, Lenders will usually demand that any licenses and permits be assigned to them as security, namely to create a direct relationship with the relevant authorities.

P. 781.

25
Q

In a Project Finance transaction, what is Credit Risk?

A

The risk of the Borrower defaulting on its obligations, usually due to a confluence of other risks.

Lecture Notes.

26
Q

In a Project Finance transaction, what is Political Risk?

A

The risk of adverse political events that hinder the Project’s performance or viability.

Lecture Notes.

Examples include legal changes, political instability, sovereign insolvency, etc.

27
Q

In a Project Finance transaction, what is Financial Risk?

A

The risk of adverse financial events that hinder the Project’s performance or viability.

Lecture Notes.

Examples include market volatility, interest rate increases, liquidity shocks, credit droughts, etc.

28
Q

In a Project Finance transaction, what is Currency Risk?

A

The risk of adverse exchange rate changes that hinder the the Project’s cost of borrowing or cashflows.

Lecture Notes.

29
Q

In a Project Finance transaction, what is Technical Risk?

A

The risk of the Project’s technology, equipment, or other technical components failing, underperforming, or being made redundant by new advancements.

Lecture Notes.

30
Q

In a Project Finance transaction, what is Operational Risk?

A

The risk of loss from inadequate or failed internal processes, people, and systems, or from external events.

Lecture Notes.

Examples include human error, IT system failures, fraud, negligence, etc.

31
Q

In a Project Finance transaction, what is Construction Risk?

A

The risk of cost overruns, schedule delays, or construction defects that hinder the Project’s performance or viability.

Lecture Notes.

Construction risk is comprised of the self-explanatory Engineering Risk, Delay Risk, Cost Overrun Risk, and Completion Risk, the lattermost of which is the most serious.

32
Q

In a Project Finance transaction, what is Environmental Risk?

A

The risk of adverse environmental impacts or regulatory noncompliance that hinders the Project’s performance or viability.

Lecture Notes.

The Law of International Finance, 2nd. Ed. (14 decks)

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