project finance lawyer

project finance lawyer

Navigating the Complexities of Project Finance Law: A Comprehensive Guide

1. Introduction to Project Finance Law

In addition, the project finance lawyer must pay attention to other specialized issues, including project life-cycle issues, technology and intellectual property, and third-party targets for litigation and potential damages. Each part of a project finance deal has its legal hurdles, tactics, and strategies. Be prepared to handle diverse relationships and relationships that evolve throughout the project’s life. Because a project finance deal is fundamentally about financing using the project’s cash flow and the project’s assets, this area of law will appeal to infrastructure company CEOs and CFOs, and bankers, bondholders, and their counsel. Who sits where at the table can and will change as the transaction moves through its stages.

Project finance law, as distinct from traditional secured commercial finance or real estate finance or other types of financing, is a multifaceted legal specialty that deals with many different areas of law, including contracts, construction law, corporate finance, securities law, bankruptcy law, tax law, and environmental law. Because of the diversity of types of projects, financiers, and sponsors, each project finance deal is a unique blend of these core elements.

Moreover, in the current era of privatization and deregulation of finance and energy infrastructure industries, combined with the increased acceptance of infrastructure privatization in the United States, Britain, and other industrialized nations, project finance has become the dominant force in transacting major infrastructure projects.

Project finance is a transaction structure used primarily for large infrastructure and other projects, typically in the areas of energy, transportation, water and waste treatment, telecommunications, and natural resources, such as mining. The transactions typically involve a single project, and the financiers are repaid from the cash flow of the project, with the project’s assets, rights, and interests held as collateral. Incorporating complex legal arrangements and certain industry-specific kinks, it has its own set of legal issues that are unfamiliar to most lawyers.

2. Key Players and Stakeholders in Project Finance Deals

In addition to the senior lenders and the major sponsors, other key players and stakeholders in significant project finance transactions often include international or legal counsel, technical advisors, and market standard-setting consultants, commercial and political risk insurers and their advisors, co-lenders or interim lenders, hedging banks and advisors, equity investors (either in private equity or public equity or debt markets), offtake or supply counterparties, construction or operating contractors, governmental enablers or sponsors, and end-users. Each of these participants plays an important (and often essential) role in the development, finance, execution, and operation of a project. In countries with developing national judicial systems, project participants often rely heavily upon international arbitration to resolve contractual disputes in connection with projects; however, these cases typically involve the introduction of unfamiliar or undetermined bodies of law into the dispute.

Developing and funding a large infrastructure or commercial project – especially one located in an emerging market country that lacks a mature legal framework for providing collateral and enforcing security – typically requires considerable ingenuity in developing a legal structure and set of contractual relationships among various interested parties on a bankable basis. Consequently, project finance transactions require the active participation of a set of key players and stakeholders in order to bring the project to financial close. Because many of these projects are significant sources of local employment or providers of essential public services, governments often have significant stakes in the successful completion and operation of these projects by their national or local sponsors. Accordingly, project sponsors often look to state-owned banks, export credit agencies, and/or multilateral development banks to provide a portion of the required long-term development and operating capital in the form of debt, and often view these organizations as being critically important to the financial success of these deals.

3. Structuring Project Finance Transactions

The heart of the project finance structure is, in many cases, a company that will hold and manage the project. Its most important structural feature is that the company is separate and apart, with its own existence, risks, and marketing responsibility. Legal separation between project and sponsors is essential. It establishes that a project can fail and the project’s debt is a project’s and only a project’s liability. Note, however, that the separation of the project does not eliminate all parent risks. Management might continue to depend on the strength of the sponsor when it selects and undertakes the day-to-day operation of the project.

The ultimate aim of project finance is to allocate or transfer all significant project risks to parties best suited to manage them. What ultimately distinguishes a project finance transaction from other forms of investment is the allocation of these risks to participants. This distribution of risks often requires particularly complex and structured financial arrangements. Essentially, sponsors bring an inadequate balance of risk-sharing investment. They must be able to transfer these risks to participants who are best able to manage and operate the risks. This transfer of risk is usually accomplished through complex contractual relationships, particularly carefully written, detailed loan and security documents encase the onerous financial risk allocation matrix formed by governing contracts into the simplest, most efficient form.

4. Risk Management and Mitigation Strategies in Project Finance Deals

In some cases, a contractor or operator can reduce the risk by offering completion or performance warranties that ensure that WFDs will produce a set amount of electricity within a designated period. But even if these guarantees are issued, the risk of delays in the completion of the WFD will remain a risk. However, in most cases, a group of pre-selected, experienced, and reputable construction companies (or professional teams) will take up the risk and build the wind farm. In addition, several measures will be taken to mitigate the likelihood of delay during and after the construction phase. Clear compensation should be provided for delays and cancellations caused by third-party interference. It is also possible to mitigate the risk of availability by taking out insurance or by agreeing on the consequences of unavailability.

Offshore wind power projects are particularly risky, if only because of the substantial amounts of money that construction requires. In addition, the WFDs may be particularly prominent for a number of reasons including low supply and increased demand for offshore construction services during the pendency of projects. Long-term service or maintenance contracts are taken into account when a viable means of attracting cheap capital to fund the initial, relatively risky project. Because the costs of building a WFD account for the vast majority of offshore wind power projects, the economic feasibility of completing the WFD project will often depend on the predicted reliability of the wind farm and the predicted costs of operating and maintaining the wind farm over the decades.

5. Recent Developments and Future Trends in Project Finance Law

Given the pressing world need for non-greenhouse gas emitting sources of power and the importance of a continuing cost reduction in the major means of reducing those emissions, renewables and specifically solar power are rapidly growing sectors. As various tools, such as securitization and suitable improvements in the regulatory and tax structure mature, especially with respect to permitting the pooling of hundreds of separately depreciable solar panels on large sites owned by a single developer in accordance with the requirements of both the tax and sec rules in the United States, those factors continue to attract heightened interest from organized markets seeking opportunity for the establishment of related business models if the novel use of new technologies.

As a result of concerns about increased FIN-48 determinations, reduced liquidity in tax equity markets and inverted price curves, the nonrecourse and related securities structures in that sector are likely to evolve more slowly and perhaps in fewer variants than would otherwise be expected. The surge in renewables investment in response to potential economic incentives encourages the market to seek novel and perhaps untested structures and mechanisms for financing such investment. The uncertainties in those areas to date have resulted in a sharp contraction in the available sources of debt and equity funding for such projects at a cost to those ultimate consumers of power that are required to service those projects. Furthermore, those costs exacerbate periods of potentially unattractive gas prices, consumption or other factors otherwise likely to encourage early widespread development of such renewable projects.

In the last few years, developments in the financial and banking industry of relevance to project finance and its regulatory framework have been characterized by tighter capital regulations and requirements that act as a constraint to lending to and provision of funding for such projects. The desire to move lending off balance sheet has resulted in and is likely to continue to result in the creation of structures such as limited recourse funding, infrastructure funds, and the securitization of cash flows. Each of these trends involves both lawyers and setting and due diligence of assets to be financed and banked.