The structuring and documentation of a multisource project financing inevitably gives rise to complexities that do not arise in a single source project financing. However, there are various ways that the intercreditor and other structural issues that arise from combining different sources of debt in one capital structure may be addressed in the finance documents.
In a conventionally-structured project financing that includes only commercial bank debt, the key finance documents typically are:
a) Loan agreement between the borrower and the commercial bank lenders; and b) Security agreements between the borrower (and other entities providing security)
and the commercial bank lenders (or an agent/trustee on their behalf), granting the commercial bank lenders security over relevant project and other assets.
In a multisource project financing, in addition to the agreements between the project financiers and the project sponsors and the borrower, the arrangements between different groups of financiers must be documented, typically in an intercreditor agreement. There often are also ‘common’ agreements to reflect terms that are applicable to all (or most) sources of debt. The terms contained in (and the names) of these common agreements will vary depending on the type of project (i.e., the industry or sector, geographic location, etc. of the relevant project) and a number of other factors. Set forth below is a brief, high-level overview of some of the key finance documents typically entered into as part of a multisource project financing, the purpose of each such agreement, the parties to it, and certain key terms likely to be included in it.
Common terms agreement47
A common terms agreement generally will be executed by the borrower, each of the project financiers (or their agents on their behalf) and the relevant agents and trustees for the financiers. The purpose of a common terms agreement is to set forth the terms that will apply to each of the different sources of funding comprised in the overall multisource project financing. Such common terms typically include common conditions precedent to funding, representations, warranties, covenants and events of default. Where a
47 In certain multisource project financings, some of the terms discussed herein may be included in other ‘common’
agreements such as a common security agreement.
multisource project financing includes a project bond issuance, the extent to which financing terms applicable to the bonds are the same as those applicable to the other sources of debt will vary from deal to deal. As noted above, in some transactions, the project bonds will be subject to all of the same terms and conditions as the other sources of debt. In those transactions, the bond trustee typically will accede to the relevant common agreements on behalf of all bondholders. In other transactions, the project bonds may be subject only to a sub-set of the otherwise common conditions – such as certain terms and conditions relating to the intercreditor arrangements and the shared security package. In those transactions, the documentation may be structured so that the bond trustee accedes only to certain of the common agreements.
Separate facility agreements, indenture and Islamic financing documentation In addition to the common terms agreement, financiers providing each tranche of debt included within a multisource project financing may enter into separate agreements with the borrower. In the case of commercial banks, ECAs and senior sponsor debt providers, each group of lenders typically will enter into a separate facility agreement with the borrower. Project bondholders and their trustee will enter into an indenture. With respect to Islamic facilities, the documentation will vary depending on the nature of the relevant Sharia-compliant finance product. Each such agreement will set out terms that are relevant to, or required by, only the specific financiers party to that agreement. Such items are in addition to the terms and conditions set out in the common agreements and may include specific additional representations, warranties, covenants, conditions precedent to availability of funding and/or events of default. Examples of such items applicable to certain specific sources of funding include:
eCA facilities
If an ECA is providing tied funding, such ECA typically will require evidence of the procurement to which funding is tied as an additional condition to disbursement of its facility. If an ECA is lending (or providing credit support) for other policy-related reasons (such as supporting imports of natural resources to the ECA’s home nation), such ECA may require particular conditions (such as specific events of default or mandatory prepayment obligations) to apply to its facility should the basis for such support no longer apply at any time (e.g., the project no longer will be providing such natural resources to the ECA’s home nation, or if a sponsor from the ECA’s home country no longer has equity in the project or certain key management functions). ECAs also may require additional representations, warranties, covenants, conditions precedent to availability of funding and/or events of default to satisfy their internal governance rules.48
48 For an example of such requirements, see http://www.exim.gov/products/guarantee/ebd-p-01.cfm, which sets forth some of the conditions to obtaining a project finance loan from US Exim. US Exim will require certain representations, warranties, covenants, conditions precedent and events of default in its direct loan agreement to ensure that these internal requirements are satisfied by the projects to which it makes direct loans.
Project bonds
Bondholders often do not require additional tranche-specific conditions (in part due to the less active role bondholders take in managing the debt following financial close). However, a number of bondholder specific items not addressed in the common agreements typically are addressed in the bond indenture and related documents (e.g., the terms of the bonds themselves, or the requirements for the purchase agreement with the bond underwriters).
Islamic financing
The documents for an Islamic financing tranche typically will include provisions that have a similar effect to those included in the facility agreements for the other forms of financing. However, certain important differences will be reflected in the Islamic financing documentation to reflect the structure of the relevant Sharia-compliant finance product. As use of Islamic financing in multisource project financings has become more common, there now are numerous precedents for combining Islamic and conventional forms of financing in the capital structure for a single project and therefore many of the structural issues resulting from such combination (some of which are mentioned above) now have commonly applied solutions.
Intercreditor agreement
The intercreditor agreement is central to any multisource project financing. This agreement documents the relationship between the financiers providing all relevant sources of funding, including arrangements with respect to voting on consent, modification or waiver requests and decisions with respect to acceleration of debt and enforcement of security. The parties to the intercreditor agreement typically will include each of the project’s financiers (or their agents on their behalf), the common security trustee, the intercreditor agent and the other relevant agents and trustees (including entities such as the accounts banks).
In a multisource project financing, the intercreditor agreement can be used to address items such as voting by individual creditor groups. As noted above, such agreements frequently contain mechanics that act as proxies for bondholder action where a capital structure includes both commercial bank debt and project bonds. This is so that an issuer will have the same flexibility to obtain waivers and consents for anything other than the most fundamental matters (such as releasing security or changing debt maturities or interest rates) as would have been the case if the financing consisted only of a commercial bank tranche (and therefore without the need separately to approach the bondholders for approval). For example, in such a multisource financing the intercreditor provisions may provide that so long as commercial bank loans and ECA supported debt exceeds an agreed threshold (for example, 25 per cent of total project debt), bank lender approval of waivers (other than in respect of agreed fundamental decisions) also will be binding on bondholders. In other cases, the intercreditor provisions may provide that bondholder
consent will not be required for certain actions if an appropriate and agreed third party consultant confirms that such amendment or waiver will not materially or adversely affect the bondholders, or if the relevant rating agencies rating the bonds issued by the relevant project confirm that they would reaffirm the debt rating of such bonds if the proposed amendment or waiver were effected. This is beneficial to the project sponsors because, as noted above, it can be extremely difficult to seek votes from potentially large and disparate groups of bondholders.
In a multisource project financing that includes an Islamic tranche, the intercreditor agreement also will set forth the terms governing the relationship between the Islamic financiers and each of the other financiers to the project. Special provisions are required to address issues specific to an Islamic facility such as the Islamic financiers’ ownership of the assets they finance. As such an ownership interest (a) is inconsistent with the principles of a multisource project financing where all financiers otherwise do not own the financed assets but share in the security provided by all relevant entities in such assets, and (b) otherwise may provide Islamic financiers with a preferential interest in the relevant assets that they finance and own (in essence, structurally subordinating the other lenders that expect pari passu treatment), the intercreditor arrangements may require the Islamic financiers to grant to the security trustee (for the benefit of all financiers) a security interest in such assets. Consistent with such approach of seeking to treat such assets as part of the general collateral pool for a multisource project financing that includes an Islamic tranche, the Islamic financiers also may be restricted under the intercreditor arrangements from creating any other security interest or third party interest in such assets or from selling, leasing, transferring or otherwise disposing of such assets. The intercreditor agreement also may include a requirement that the Islamic financiers follow the instructions of the security trustee with respect to transferring such assets in connection with any exercise of remedies by all financiers participating in the multisource project financing.
Conclusion
The constantly growing global demand for, and increasing size of, infrastructure and industrial development projects, together with other factors such as the impacts of the global financial crisis on the debt capacity of commercial banks, among other things, has led to the increased use of multisource project financing. The capital cost of certain large-scale infrastructure and industrial projects, together with a variety of external factors, has contributed to the increased use of multisource project financing structures by sponsors that require a fully funded capital plan. However, even for projects that could rely on a single source of debt to meet their capital requirements, there are benefits associated with including multiple sources of funding in a single project financing that also have contributed to increased use of such financing structures. Such benefits include the creation of competition in the marketplace amongst alternative sources of finance in order to obtain the best possible terms from each source of debt used to fund a particular project. In order to obtain and maximize such benefits, there are key considerations for sponsors in selecting which sources of debt to include in a multisource project financing,
including structuring, security and intercreditor implications. Although structuring and documenting a multisource project financing may result in complexities that would not arise in a single source financing, with careful planning from the early development stages of a project, the possibility of additional complexity need not deter sponsors from seeking multisource project financing and enjoying the benefits that can be derived from combining multiple sources of debt to fund a single project.
chapter
5 The Role and Impact of Export Credit Agencies in Project Finance
Terry newenDOrP, JOhn SAChS and JennIFer hArA Taylor-DeJongh
The value of export credit agency (ECA) support in international project finance soared in the mid-1990s with the rapid growth of private power investments (IPPs) in the emerging markets. As private developers ventured to build independent power plants in places such as Pakistan, the Philippines, Turkey, India, Colombia and elsewhere, ECA political risk cover was vital for mobilizing capital and for keeping the cost of capital at a level that produced manageable tariffs for the emerging economies. Since 1994, ECAs have provided over US$17bn, as of June 2011, in debt financing, risk mitigation cover and other enhancements for power generation projects globally. But the impact of ECAs was not confined to IPPs. ECAs have also been major catalysts for mobilizing capital for large oil, gas and pipeline projects, such as Qatargas, Ras Laffan, Oman LNG, Nigeria LNG and the BTC pipeline. Since 1996, ECAs have provided US$7.7bn of debt for seven liquefied natural gas (LNG) facilities, both liquefaction and receiving terminals. That financing leveraged an additional US$12.4bn in capital for these LNG projects. ECAs have also provided substantial capacity in the telecoms market, in countries such as the Philippines, India and Kazakhstan. Of the US$22.7bn in financing raised for telecom projects from 1995 to 2005, US$7bn was supported by ECAs.
The range of tools ECAs can bring to bear in project finance transactions includes political risk insurance (PRI), guarantees for commercial debt, and direct lending. Using these financial instruments, ECAs provide both political risk and commercial credit risk coverage that mobilizes commercial bank capacity in many markets. Even where political and credit risk are not a major issue, ECAs can bring additional debt capacity in highly rated markets, such as Qatar and Australia. The industry sectors most benefitted by these instruments include those with the largest capital requirements: LNG, telecoms, petrochemicals, mining and power (both conventional and renewable).