project finance attorney

project finance attorney

Navigating the Complexities of Project Finance Law: A Comprehensive Guide for Attorneys

1. Introduction to Project Finance

The project is the entity responsible for carrying out the terms and conditions of the construction agreement, operating the project over the operating period, and finally repaying the debt and equity provided by the investors and financiers. The objects of project finance include the separation of ownership, use, management, and risk associated with the project, encouraging participation by otherwise hesitant financiers by providing acceptable levels of comfort, and the efficient—and if not—secure allocation of risk to the parties who are best able to manage those risks. Finally, project finance seeks to minimize the adverse effect that the various project risks have upon the project’s expected cash flow. In this way, project finance achieves success by producing the necessary funds to build the project.

Project finance is the name for the method of financing used exclusively for large, expensive, and time-consuming infrastructure development projects. These projects are typically too expensive for one entity alone, so various investors and financiers collectively agree to form a consortium of related or unrelated parties to finance and develop the project. At the heart of every project is a project company, the entity that is organized to control and operate the project.

The lawyers, consultants, and government officials who practice in the project finance area are confronted with a variety of legal challenges and complexities. This book is a sound resource guide, not only for lawyers specializing in project finance but also for anyone else who wishes to understand more about this intricate but fascinating area of the law. To understand project finance law fully, it is essential to understand the concepts of project finance generally.

2. Key Legal Principles in Project Finance Transactions

Project loans, often provided by export credit agencies, multilateral development banks, or commercial banks, or city, state, and federal government bodies, who often enjoy specific “independent” creditor or security status under local law, serve as a viable alternative to tapping commercial lenders, including non-bank institutional lenders. Various types of bank financing facilities are employed, including: The syndicated term loan facility is used in many transactions involving larger projects. The stand-alone or single bank syndicated LC or synthetic LC issuance does not require a focused lending effort, as would a commitment under a direct loan. Independent regional credit facilities, State Department special risk insurance agencies, and various other governmental entities use their own sources of liquidity, which are provided by bank loans. Banks provide export credit agencies financing in various ways, such as combined purchase and buyback arrangements, as well as other structurings. Banks sometimes are called upon to provide credit enhancement facilities or liquidity for other reasons or commitments.

Project finance is typically non-recourse to the sponsor(s) of the project and provides for the use of off-balance sheet structures. The use of the “Stand Alone, Limited Recourse, or Non-Recourse Project” makes lenders’ reliance on the lead project entity’s (or in a multi-asset project, one of the project entities’) cash flow the principal source of payment, thereby reducing lenders’ exposure to corporate insolvency risk. Non-recourse finance also typically involves “limited recourse” lending under which a broader universe of entities within the corporate group of the lead project entity agree to stand behind the project by providing guarantees of project performance in exchange for a share of the overall return commensurate with their share of residual risk. Such entities also often provide debt service reserve accounts and equity bridge facilities, as well as guarantees of various contracts entered into by the project entity. High yield bonds often represent an offshoot of project finance.

3. Structuring and Negotiating Project Finance Deals

The requirements of the banks will vary between projects and the seniority of the bank debt can impart an element of “force” to the structuring process. This is particularly so in the case of an export credit agency (ECA) pursuant to a limited recourse stand-alone finance; indeed, even the largest sponsors often need ECA support in order to secure funding on the best terms. Any cross-border list will have a large impact on the types of documents which are used and the way the financing is structured. However, in the interests of brevity, the focus of this article will be the principles which underlie the structuring of project finance deals rather than the specialties presented by specific markets for implementation of those principles.

Once a project developer seeks to finance a project by assembling the various pieces of the capital stack, the key contractual relationships and the underlying project documents need to be put in place. The driving principle behind this structuring process is that the capital should follow risk. At the same time, parties will be striving for contractual solutions which manage the risks. One of the key issues which affect the relationship between sponsors and lenders is the extent to which credit risk has to be passed to the borrower as the means of providing the sponsor leaving the project company with the benefit of the upside from the project risks.

4. Risk Management Strategies in Project Finance Transactions

This chapter documents this change in the project finance market and offers a tour d’horizon of the principal types of risk management and allocation strategies relevant to project finance transactions. The structuring considerations, legal documentation, and economics of these strategies are both ever evolving and highly complex. Each of them is subject to often complex financial engineering or reengineering, sophisticated mathematical modeling, and negotiation. Each one requires a thorough understanding of comparative valuation between different risk derivatives vis-à-vis their “underlying” asset or credit, market and credit risks, in-depth experience with various possible model assumptions, accounting, tax and rating agency issues, and triggering events from various perspectives. The strategy should also be employed by project counsel with an understanding of outer regulatory environments in which the project finance transaction and the strategy may operate.

The use of techniques to manage risk in transactions has evolved greatly in project finance in recent years. In the beginning, the main strategy to manage risk was the identification of risk and legal and contractual methods to allocate the risk to the party most appropriate to bear it. These methods include escrowing account reserves, letters of credit, parent guarantees, and reinsurance. As the project finance markets have gained sophistication and depth, so too have risk management techniques. These techniques have outstripped traditional risk allocation methods, and the consequences of a project company not using advanced risk management techniques in a complex project finance transaction can be the loss of a sometimes lucrative or socially beneficial business opportunity. The advent of the LDC and mortgage securities markets and the rapid globalization of finance and financial markets have been the primary markets.

5. Emerging Trends and Future Directions in Project Finance Law

1. Introduction 2. Developing a Deal Structure A. Setting the Stage: An Overview of Project Finance B. Complexity and Opportunity: The Legal Framework C. Understanding Project Analysis and Risk in Structuring the Deal 3. Project Finance Negotiation and Documentation A. An Overview of the Financing Process and Documentation B. Due Diligence C. Developing the Financing Structure D. Risk Sharing E. Guarantees and Other Credit Enhancements 4. Accessing the Capital Markets: Additional Issues in High-Yield Project Finance A. Introduction B. Case Study: Rodenstock GmbH C. Flexibility versus Complexity D. Key Features of High-Yield Debt Financings E. Case Study: Tenneco, Inc. F. Structure of a High-Yield Deal G. Restrictive Covenants H. Equity Considerations in High-Yield Deals 5. Emerging Trends and Future Directions in Project Finance Law A. Introduction B. Developing a Capital Structure C. Sources of Project Financing D. Continually Evolving Legal Issues 1. Structuring the Offering 2. Avoidance of Registration under the Investment Company Act of 1940 3. Tax Advantages 4. Developments Relating to Financial Institutions 5. Conflicts of Interest Not to be mere passive observers, the members of the coalition must actively steer project finance to meet future challenges. These challenges will include introducing the benefits of project finance to participants outside the traditional energy sector. Today’s expanding array of risk-return options make project finance an attractive choice for a variety of businesses, from small mines or manufacturing facilities to theme parks to casinos. As the scope of participating industries widens, however, the shared objectives that define project finance will become increasingly varied.