What is the Market Standard Documentation for Project Finance?

“Project Finance documentation should be detailed and comprehensive enough to cover risks and scenarios that the parties could face.”

Project Finance documentation is complex, expensive and time consuming. Due to the limited-recourse or non-recourse structure of project finance transactions, project finance documentation has a great importance for securing repayment of the loan.

There are two groups of project finance document packages that must be created at different times and for different purposes.

The first group is used during presentation of the project to the lenders for arranging the project loan, such as business plan, financial models and feasibility studies.

And the second group is the legal documents that will be used to close the financing. The second group will be summarized in this document.

1   Finance Documents 

1.1 Loan Agreements

Loan Agreements are the documents that establish the loan terms and govern the relationships between the Lenders and the Project Company.

The Loan Agreement includes;

The calculation and imposition of interest and fees based on outstanding loan amounts.
Usual provisions found in a loan agreement.

Financial Institution/Bank specific issues are;

Procurement linked financing
Safeguards
Prohibited list, anticorruption, anti-money laundering, financing of terrorism
Sanctions list

1.2 Intercreditor Agreements

Intercreditor agreements are the documents which govern the terms and the relationships between the Project Lenders that provide finance as a consortium or syndicate of lenders.

1.3 Direct Agreements

Direct agreements are the documents which are required by Project Lenders to establish a direct relationship with themselves and counterparts of the contract.

Project Lenders require the ability to step into the position of Project Company in the event of any default.

1.4 Securtiy Agreements

A Security agreement mitigates the default risk the lender faces. In the event of any default of the borrower the pledged collateral which is a specified asset or property can be seized or sold.

2   Project Documents

2.1 Construction Contracts

In a Project Finance transaction, generally the Project Company is a Special Purpose Vehicle (SPV) which is set up specifically for the project.

Mostly, Special Purpose Vehicles (SPVs) do not have construction expertise and prefer entering into construction contracts with a skilled contractor to provide construction services.

What is achieved by a construction contract is;

Allocating the construction risk to the party which will manage it best

Providing a timetable for the construction of the project

Managing the construction cost

2.2 Concession Agreements

In many projects, particularly Build-Operate-Transfer (BOT) projects, the Concession Agreement will be the key project document that will give the Project Company the right to explore, exploit, develop or operate the concession or other relevant rights to the project.

2.3 Operation & Maintenance (O&M) Agreements

Operation and Maintenance (O&M) agreements are the documents that govern the operations, maintenance and management of completed projects.

2.4 Offtake Agreements

Offtake agreements are the documents that validate project companies cash flow forecasts and secure approval of the loan.

2.5 Supply Agreements

Supply Agreements are the contracts between the Project Company and the significant suppliers. Supply Agreements should have balance with Offtake Agreements. They are critical project finance documents especially for projects which use fuel, electricity, natural gas and other commodities.

3   Shareholder Documents

3.1 Pre-Development Agreements

Pre-Development Agreement is a sufficiently well developed arrangement between the sponsors to warrant a formal agreement. This document covers initial decision making issues and allocation of tasks in relation to assessing a particular project or a proposal.

3.2 Shareholder Agreement

Shareholders Agreement is a document which defines the relationship between the Project Sponsors to establish a Special Purpose Vehicle (SPV) for the project development and managing the construction and the operation.

The shareholder agreement includes:

Injection of share capital

Voting requirements

Dividend policy

Management rules

3.3 Sponsor Shareholders Support Agreements

In some Project Finance Transactions, the sponsors/shareholders enter into a Support Agreement with the Project Company and the Lender. The Agreement contains various commitments which the lenders require with respect to the project and the Project Company.

This information is provided for your convenience and does not constitute any “Legal Advice”. This document is prepared for the general information of the interested persons. This should not be acted upon in any specific situation without appropriate legal advice.

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