Many of the representations and warranties in the project fi-nancing documents will be identical to the representations and war-ranties in a corporate financing. These include, for example, the traditional representations and warranties addressing the formali-ties of formation, existence, good standing, power and authority, due qualification, legal enforceability of the agreement, possession of consents, absence of litigation, and compliance with laws. The project financing representations will be expanded to give the Lend-ers comfort that the relevant facts pertaining to the project are con-sistent with the Lenders’ understanding and analysis that formed the basis for the Lenders’ internal approval for the project financing.
These representations will be tailored to the specific project and will focus on the essential elements of the project financing, including, in particular, the project documents, budget and projections. The representations relating to the project budget and projections will focus on the construction budget and the expense and revenue pro-jections for the project. The customary representation with respect to the construction budget is that it fairly reflects the construction costs for the project. The customary representation with respect to expense and revenue projections is that they fairly reflect anticipat-ed expenses and revenues.
These representations will form the basis of the financial model prepared by the project company and accepted by the Lenders. The financial model, in turn, forms the basis for determining whether a project is financeable. The model will determine a base case for the project. This base case projection will project the most likely results of revenues and expenses and must be reviewed and accepted by the independent engineer. There will also be models based on varying cost and pricing assumptions covering both optimistic (or upside) and pessimistic (or downside) scenarios. Generally, for a project to be financeable, the likely downside projections should still project funds sufficient to service the project’s fixed costs, including fixed operation and maintenance costs, taxes and debt service.
The representations and warranties relating to the project docu-ments will include representations that the project company has provided the Lenders with true and correct copies of each such project document on the date of closing, that the project documents are enforceable, that there are no breaches or force majeure events existing under the project documents, and that the performance of such project documents do not violate any other project documents or applicable laws. The representations and warranties will also in-clude a provision stating that the project company has obtained all required permits and licenses to operate the project in accordance with applicable law and in accordance with each of the project
docu-ments. Finally the representations and warranties should include a statement that the project company has all rights necessary (or re-quired at that point in time) for the construction and operation of the project for its intended purpose.
[C] Covenants
A financing agreement for a project will also have many cove-nants that are included in a typical corporate credit facility. Some of these relate to the need for the Lenders to maintain the project as expected and not to permit the project company to take actions or fail to take actions that may adversely impact the project or the Lenders’ collateral. These covenants are often very restrictive and subject to significant negotiation. It is the covenant package that typically gives Sponsors pause in deciding whether to project fi-nance a transaction. A few of the more commonly negotiated cove-nants are described below.
The project company will be obligated to maintain stringent in-surance requirements. These requirements can be costly for the project company and often do not provide for changes in market conditions. For example, projects financed before September 11, 2001, generally required terrorism insurance. After September 11, terrorism insurance generally became unavailable or cost prohibi-tive. Many project financings required waivers or amendments to the terms of the agreements that required the maintenance of ter-rorism insurance. A well-crafted covenant to provide insurance should ensure that the obligation to provide insurance is based upon what is reasonably available and commercially feasible in the commercial insurance market. This will be a heavily negotiated pro-vision because such a propro-vision allocates a degree of insurability risk to the Lenders.
The project company will be limited with respect to what it can do with proceeds from claims received under the EPC Contract or any other project document or with respect to insurance proceeds.
The negotiation will usually relate to whether the proceeds will be used to repay indebtedness or whether the project company can use the proceeds to repair the damage or pay damages which may arise under another project document.
The project company will be obligated to cause the project to be constructed in accordance with the EPC Contract. The project com-pany will be limited in its ability to enter into any change orders un-der the EPC Contract without Lenun-der consent. There will usually be a de minimis exception for change orders that do not exceed a nego-tiated amount individually or in the aggregate with all prior charge orders. The project company will also be prohibited from changing
the construction budget or the construction schedule without con-sent from the Lenders.
A project company will be limited in its ability to enter into addi-tional material contracts and will be obligated to assign collaterally to the Lenders any such contract entered (as well as provide a con-sent from the counterparty with respect to such assignment). The key negotiation point with respect to this covenant is the materiali-ty standard. The project company will desire the abilimateriali-ty to operate the business in the ordinary course and to enter freely into con-tracts in the ordinary course. The Lenders will desire to limit the project company’s ability to enter into long-term financial commit-ments, which might increase project risk or decrease the Lenders’
collateral value.
The project company will be required to deposit all project reve-nues into a collateral account and will be required to use all pro-ceeds of the project in a narrowly tailored manner. When project revenues are deposited into a collateral account, the revenues will not be accessible by the project company except in accordance with the waterfall provisions of the collateral account agreement.
A project company will be limited in its ability to effect any ma-terial disposition of assets. This restriction may not appear too dif-ferent from a typical secured credit facility, but it will often provide far greater limitations as to what assets can be disposed of without Lender consent.
One of the more heavily negotiated covenants in a project fi-nancing credit facility is the clause dealing with restricted pay-ments. The project company will be restricted from making any distributions, dividends or other payments to the Sponsors unless certain conditions are satisfied. These conditions are highly negoti-ated but usually include the following:
(i) the project shall be completed;
(ii) there is no existing default or event of default;
(iii) certain historical debt service coverage ratios and projected debt service coverage ratios are satisfied; and
(iv) certain reserve accounts are funded up to a minimum threshold amount.
Another highly negotiated covenant relates to restrictions with respect to the project documents. The project company will be pro-hibited from:
(i) canceling or terminating material project documents or con-senting to or accepting the cancellation or termination of the material project documents prior to the scheduled expi-ration thereof;
(ii) selling or assigning any of its interest in any of the material project documents;
(iii) waiving defaults under or breaches of material project docu-ments, or from failing to enforce, or releasing, material rights under the material project documents; or
(iv) amending or modifying any material project document.
The negotiation of this covenant generally relates to certain ex-ceptions as to the project company’s ability to take certain immate-rial actions or actions which do not adversely affect the Lenders’
rights in the collateral.
Finally, the project company will be required to provide monthly construction reports and monthly operating reports and annual op-erating budgets. These reporting obligations add additional admin-istrative burdens which are not typical in a corporate financing arrangement.
§ 16:4.7 Security Documents
In project financings, the borrower ’s obligations under the fi-nancing documents are generally secured by all of the assets of the project company for which a security interest can be granted. These include a security interest in all personal property of the project company (which will include the plant, equipment, spare parts and other physical assets as well as technology licenses, intellectual property and other intangible assets of the project company), a pledge of the equity interests of the Sponsors in the project compa-ny, and a mortgage over the real property rights of the project com-pany, whether based on a fee interest or leasehold interest in the project site. Project financings usually contain provisions requiring all drawdowns under the financing package and all revenues gener-ated by the project, including liquidgener-ated damages, to be deposited into a deposit account with a depositary bank. The funds in these deposit accounts will also be pledged to the secured parties. Finally, an important part of the security package in a project financing is the collateral assignment of the material project documents.