Bucharest 21 January 2003 Legal Issues of Project Finance.

Bucharest 21 January 2003

Legal Issuesof Project Finance


Introduction

The Contractual Framework Project Documents

Concession Contract Construction Contract O&M Contract

Financing Agreements Credit Facility Direct Agreements Security Agreements


Construction Companies

The Parties Involved

Contractor

OperatorShareholders

Governmental Authority

Consumers / Offtaker

Performance Bond Banks

Concession / Project

Company

Lenders

Insurance Companies

Sub-contracts

Pledge of shares

Revenues

Concession Agreement

Construction Contract

Support Agreements

Credit FacilitiesSecurities

O&M Contract

Supplier

Shareholders Agreement


Project Documents

The Concession Contract

is essentially a licence granted by a governmental or quasi governmental authority to the concessionaire (Project Company “PC”) to build a project facility or piece of infrastructure, operate it for a fixed period of time (ie: 30 years) (ie: BOT, DBFO)

is the “master” project document in the sense that the other project documents must be “ back to back” with the Concession Agreement, relates to issue of “ bankability ” of the project


Project Documents

Essential Elements of a Concession Contract

obligation on PC to design the facility/infrastructure to a stated specification by a stated date (liquidated damages)

provisions enabling the grantor to inspect design and monitor progress of the project

obligation on the PC to operate the facility/infrastructure and to maintain it to stated level for a stated time

provisions entitling the PC to charge relevant fees/fares


Project Documents

Cont… Essential Elements of a Concession Contract

Right for the Grantor to intervene and run the project itself should the PC fail to carry out the project or fail to meet standards ( a “step-in” right for the grantor)

“offtake agreement” may be rolled into the Concession

performance targets during operational phase (liquidated damages, bonuses)

force majeure, termination, arbitration etc...


The Turnkey Construction Contract

E M P L O Y E R

C O N T R A C T O R

E M P L O Y E R 'SR E P R E S E N T A T IV E / E N G IN E E R

B A N K S

IN S U R E R

IN S U R E R

C IV IL W O R K SS U B C O N T R A C T O R

E Q U IP M E N TS U P P L IE R

D E S IG NS U B C O N T R A C T O R

DESIGN - BUILD CONTRACT


Project Documents

The Turnkey Construction Contract

Project Company contracts with one entity (the Contractor) to undertake the design, procurement and construction of a facility for a fixed price

Objectives:Single point of responsibilityLimit time/cost overruns (for PC)

Contractor may sub-contract part of the Works, (ie: FOE)


Project Documents

Essential Elements of a Turnkey Construction Contract

Contractor provides design based on functional requirements submitted by PC

PC has a right to inspect comment on design specifications submitted by Contractor

Contractor to construct facility by a fixed date, subject to extensions

Liquidated Damages “for delay”


Project Documents

Cont... Essential Elements of a Construction Contract

Fixed Price (subject to “variations”), based on “milestone payments” upon the issue of various interim certificates

Takeover

Performance tests

Performance Bonds posted by Contractor, “first demand”


Project Documents

Cont... Essential Elements of a Construction Contract

Defects Liability Period (ie: a warranty to “make good” any defects discovered within a certain period)

Insurance - “All Risks” policy, Third Party Liability

Limitation of Liability

Force Majeure, Arbitration, Termination etc..


Project Documents

Splitting the Turnkey Construction Contract

In order to avoid double taxation or disadvantageous tax rates, it may be preferable to split the turnkey contract

Off-shore Equipment Supply Agreement

On-shore Installation and Construction Agreement


Project Documents

The Operation and Maintenance Contract

Different Approaches to O&M responsibility

O&M function performed by the Project Company itself Project Company enters into an O&M agreement with a

third party, related (ie: a shareholder of PC) or not Project Company can share the O&M role with a third

party O&M and O&M contractor Operating function can be split from the maintenance

function


Project Documents

Essential Elements of an O&M Contract

Clear description of scope of servicesRoutine Maintenance, Scheduled Maintenance

(A,B,C Inspections), Unscheduled Maintenance

Standard/Level to be adhered to by the O&M ContractorA general standard “Good Utility Practice”Enumerated performance standards/levels


Project Documents - O&M Contract

Price: Fee + Performance Related Remuneration Fee

“All in ”, Operator provides all O&M services for a fixed price

“ Cost + Fee”, Operator reimbursed for its costs, and is paid a fee representing its profit

Sticks and Carrots (key issue of bankability)

Liquidated damages for failure to maintain guaranteed levels of performance

Bonus for achieving better than guaranteed levels of performance


Project Documents - O&M Contract

Procedure for mobilising operator (“Notice to Proceed)

Limitation of Liability Operator will limit its liability to a percentage of the

fees paid to him in any given year (50-100%) In addition, in the case of an “all in” remuneration,

there may be a cap on liability on a “per incident” basis

Performance Bonds, Parent Company Guarantees


Financing Agreements

Credit Facility

The Term Sheet (3 pages or 50 pages )Negotiation now or laterNot a contract, only of moral valueSets principal terms for final documentation

Concerns of Project CompanyCan you request disbursements when you need

them, in the amount and currency you need ?Is it too restrictive on the activities of the PC (ie: no

dividends, capital expenditures, other debt)?



Principal Characteristics of a Credit Facility

Project Cost and Financing Plan Availability Conditions Precedent Prepayment Repayment Interest and Interest Periods Fees Reps and Warranties



Cont… Principal Characteristics of a Credit Facility

Positive and Negative Covenantsratios, restriction on dividends and capital

expenditures informational covenants, to monitor PC

performanceshould not be too onerous or restrictive

Events of Default and acceleration

Choice of Law



Direct Agreements = “Step in Rights”

Agreements entered into between the Lenders, the PC and the various parties to the key Project Documents which allow the Lenders to “step into the shoes” of the PC

Aggressive function = allows Lenders to seize control of the PC’s rights upon default under Credit Facility (ie: upon enforcement of security)

Defensive Function = protects the Lenders against a precipitous termination of a Project Document



Essential Elements of a Direct Agreement

Consent from 3rd party to assignment of PC’s rights under the Project Document

undertaking from 3rd party that it will not exercise any

right of termination without first giving notice to the Bank

agreement from 3rd party that it will allow the Lenders to assume the PC’s rights and obligations under the relevant Contract



Security Agreements

No Recourse No personal guarantees /Suretyship by Sponsors Limited Project Support Agreement (Costs) Pledge on Shares held in Project Company

Limited Recourse

Project Support Agreement (financial ratios) Third Party Undertaking



Categories of Security – Assets

Immovable vs. Movable Tangible vs. Intangible Present vs. Future Fixed vs. Floating charge


Limited security

Public vs. Private Assets No security may be registered against Public

Assets

Assets of the Concession No security may be registered against assets necessary to provide public service

Cash Flow Consideration Security on cash flow Generate future cash flow (Direct Agreements)




Security on cash flow

Security instruments

Security interest on present and future claims

Accounts receivable

Bank Accounts

Compensation in case of early termination of concession

Insurance proceeds

Assignment of contract rights



Quasi Security

Delegation of income stream

Escrow Agreement

Choice of Law and Jurisdiction

Foreign vs. Domestic



Conclusion - Domestic Security Law

The law should enable the quick, cheap and simple creation of a proprietary security right without

depriving the person giving the security of the use of his assets

Security should be available (a) over all types of assets (b) to secure all types of debts and (c)

between all types of persons There should be an effective means of

publicising the existence of security rights The cost of taking, maintaining and enforcing

security should be low


Financing Agreements If the secured debt is not paid, the holder of the

security should be able to have the charged assets realised and to have the proceeds applied towards satisfaction of his claim prior to other creditors

Enforcement procedures should enable prompt realisation at market value of the assets given as security

The law should establish rules governing competing rights over persons holding security and other persons claiming rights in the assets given as security.

The security right should continue to be effective and enforceable after the bankruptcy or insolvency of the person who has given it

As far as possible the parties should be able to adapt security to the needs of their particular transactions

Bucharest 21 January 2003 Legal Issues of Project Finance.

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Transcript of Bucharest 21 January 2003 Legal Issues of Project Finance.