Project Finance Documents Overview
Project Finance documents are almost always off-putting to first-time project sponsors and inexperienced project stakeholders. Admittedly, project finance documents are voluminous, complex, expensive and time-consuming. They are also essential to the successful construction and operation of the project, and they are absolutely critical to successful project financing.
Project sponsors who have prior experience with project financings don’t view project documentation as a burden. To them, they are a feature of project finance that provide an opportunity to shape the nature and course of project financings from conception all the way through development and operations. Documents for project financings should be looked at as two very different packages of documents that must be created at different times and for very different purposes.
The initial group of project finance documents should be prepared immediately after the project is conceived and well before they are presented to project lenders to arrange the project loan. These are the forecasting documents and include your business plan, financial models, market feasibility study, financial feasibility study and the like, which we use to convince project lenders to provide you with the project loan. The second group of project documents are the legal documents that will be used to close the financing, develop, build and operate the project. It is this second group of project finance documents which is summarized below.
Because there are so many documents in project financings which are required by various stakeholders, each wanting them to be drafted by their own lawyers, it inevitably seems as if there are too many documents and too many lawyers. Despite the army of lawyers who are involved in the drafting of the project documents, it is a virtual certainty that there will still be gaps because of missing provisions or documents, or there will be overlaps because of duplicative provisions or documents. With legal teams for the project lenders, project sponsors, equity investors and the governmental bodies, conflicts are guaranteed because they all have diverging interests.
Engineering, Procurement & Construction Contracts (EPC Contracts)
Although there are many types of construction contracts used in project financings, the majority of project sponsors and all project finance lenders strongly prefer turnkey contracts. Turnkey contracts are based on the idea that when construction is complete, all you need to do is turn the key.
From the perspective of the project company, project sponsor and project lender the most desirable type of turnkey construction contract in project financings are Engineering, Procurement, and Construction Contracts, or EPC Contracts. With EPC Contracts the contractor is obligated to design, engineer, build and deliver the project for a fixed-price, by a specified date, according to the construction documents, plans, specifications, shop drawings and other support documents.
EPC Contracts and turnkey contracts are similar, but they are not interchangeable. In addition to all of the construction risks and responsibilities born by the contractor in turnkey contracts, with EPC Contracts all of the project design, engineering and procurement risks and responsibilities are transferred to the contractor for essentially all purposes. Learn more about EPC Contracts in project documents.
Operation & Maintenance Agreements (O&M Agreements)
Operation & Maintenance Agreements (O&M Agreements) are project finance documents that govern the operations, maintenance and management of completed projects. When construction of a project is complete and the project is turned over from the contractor to the project company, the focus of the project necessarily transitions from development to operation.
O & M Agreements establish a contractual framework between the project company, as the owner of the project, and a professional operator who is engaged to manage, operate and maintain the project. All aspects of project operations, maintenance and performance are typically delegated to professional operators who are required to have expertise in both the industry and in the subject locale.
The operator can be the project sponsor, project stakeholders, the project company itself, or a third-party, professional operator. If the operator is the sponsor, stakeholder or project company, then the project company or one of it’s key players must retain the responsibility and liability for operations and maintenance of the project. Learn more about Operation & Maintenance Agreements.
Offtake Agreements
Offtake Agreements are only one document in a package of dozens of critically important project finance documents, but Offtake Agreements are often the most important in terms of securing approval of your project finance loan. We depend on well-written, well-presented project documents because they are essential for creating an in toto tenor of favorability.
Offtake Agreements, however, are given much more weight than most of the project documents because they provide the financial assurances lenders need to validate your cash flow forecasts and every project finance lender in the world relies on Offtake Agreements for that reason.
Because we are attempting to place a loan for a project that is not yet built or operating, there is no revenue stream with which to pay debt service. Instead, we present project lenders with financial models which are far less certain. Offtake Agreements provide documentary evidence that validates the financial models upon which the ability to repay is based. Quite simply, Offtake Agreements make many projects bankable. Learn more about Offtake Agreements in project finance documents.
Supply Agreements
Supply Agreements in project financings are contracts between the project company and significant suppliers of raw materials, feedstock or fuel. Supply Agreements contractually ensure the volume of supplies to the project can be increased or decreased. as necessary, depending on the output being produced by the project and sold to an Offtaker.
Supply Agreements essentially counterbalance Offtake Agreements, ensuring that they maintain a balance, because the project production is largely dictated by Offtake Agreements. A Supply Agreement is a critical project finance document for projects that produce, refine or distribute fuel, electricity, natural gas, and other like commodities or utilities.
Supply Agreements can be fixed supply agreements or variable supply agreements, frequently with a minimum and maximim range. Supply Agreements may also provide for an interruptible supply, where some supplies are offered at a lower-cost but are interruptible or they may be uninterruptible. Learn more about Supply Agreements in project finance documents.
Intercreditor Agreements
Project finance documents include an Intercreditor Agreement whenever project financings involve a consortium or syndicate of lenders. An Intercreditor Agreement is an agreement by and between the project lenders who are providing the financing to the project company. It governs the common terms and relationships by and among the lenders in respect of the borrower’s obligations.
If there is a mezzanine funding component in the project financing, the Intercreditor Agreement sets out terms of subordination and other principles to apply between the senior debt providers and the mezzanine debt providers. Learn more about Intercreditor Agreements in project finance documents.
Tripartite Deed
Tripartite Deeds are project finance documents that are typically required by project lenders to establish a direct relationship with themselves and counterparties to the contract. Tripartite Deeds are sometimes referred to as consent deeds, direct agreements or side agreements.
The Tripartite Deed specifies the circumstances under which the project lender may step in to remedy a default under the project documents. Although Tripartite Deeds often gives rise to difficult negotiating issues, the document is critical to a properly documented project financing. Learn more about Tripartite Deeds in project finance documents.
Common Terms Agreement
Project finance documents almost always include – and should always include – a Common Terms Agreement. A Common Terms Agreement is an agreement by and between the project lenders and the project company which calls out the terms that are common to all of the project finance documents as well as the relationship between them, with definitions, conditions, the order of drawdowns, and voting powers for waivers and amendments.
Common Terms Agreements clarify and simplify the multi-sourcing of project loans and ensure that the parties have a common understanding of key definitions and critical events. Learn more about the Common Terms Agreement in project finance documents.
Concession Deed
Concession Deeds are project finance documents that are created by and between the project company and the public entity that has contracting and approval authority over the project. Concession Deeds concede the use of a government asset, such as a plot of land, road or bridge to the project company for a specified period according to specified terms.
Concession Deeds are found in most projects that involve a government or sovereign authority, such as infrastructure projects, and are always executed by a national, regional or municipal government. Learn more about the Concession Deeds in project finance documents.
Shareholder’s Agreement
The Shareholder’s Agreement or SHA, is an agreement between the project sponsors to form a Special Purpose Entity, or SPE, for the project development, ownership and operation. This is the most basic of structures held by the sponsors in a project finance transaction. The Shareholder’s Agreement deals with:
- Injection of share capital
- Voting requirements
- Dividend policy
- Management of the SPE
- Disposal and pre-emption rights
Loan Agreement
Project finance documents that establish the loan terms in project financings and govern the relationship between the lenders and the project company are the Loan Agreement. Because project financings always include construction of the project, Loan Agreements include construction financing terms that establish how the loan can be drawn based on construction progress, the calculation and imposition of interest and fees based on outstanding loan amounts, and the usual provisions found in a corporate or real estate loan agreement.
The Loan Agreement in project finance contains specialty clauses that contractually address the specific requirements of the project and project finance documents. In addition, because project financings are limited-recourse or non-recourse as to the borrower, relying on the project alone as the sole source of loan repayment, the Loan Agreement sets forth dividend restrictions, required project metrics, ratios, and covenants, in addition to general conditions precedent as well as basic terms. Learn more about the Loan Agreement in project finance documents.
Project Finance Learning Center
Project finance was first used in 1299 when an Italian merchant bank provided the project financing to finance the development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines. Project financing has been used to finance thousands of projects since those silver mines, including such notable projects as the Panama Canal and North Sea oil platforms. Our Project Finance Learning Center includes information we hope will improve understanding of this type of finance.
Definition of Project Finance
Project finance is not as well understood than it should be due largely to the fact that there is no consensus definition of project finance. Perceptions of what constitutes project financing vary depending on the definition of project finance you first learned. We list three of the most widely accepted definitions below.
A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.1
The raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project.2
The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.3
Project Finance Questions & Answers
Project Finance Lexicon
Accounts Receivable
Accounts Receivable is money owed to a company by a customer for products and /or services sold. Accounts receivable is considered a current asset on a balance sheet once an invoice has been sent to the customer.
Accounts Receivable Factoring
Accounts Receivable Factoring is a method of Trade Financing where a company sells their accounts receivable in exchange for working capital. The purchaser of the receivables relies on the creditworthiness of the customers who owe the invoices, not the subject company.
For details go to Accounts Receivable Factoring »
Advance Against Documents
Advances Against Documents are loans made solely based on the security of the documents covering the shipment.
Asset Based Lending
Asset Based Lending is a method of Trade Financing that allows a business to leverage company assets as collateral for a loan. Asset-based loans are an alternative to more traditional lending which is generally characterized as a higher risk which requires higher interest rates.
Cash Against Documents
Cash Against Documents is the payment for goods in which a commission house or other intermediary transfers title documents to the buyer upon payment in cash.
Cash in Advance
Payment for goods in which the price is paid in full before shipment is made. This method is usually used only for small purchases or when the goods are built to order.
Cash with Order
Cash with Order is the payment for goods whereby the buyer pays when ordering and in which the transaction is binding on both parties.
Commercial Finance
Commercial Finance is defined as the offering of loans to businesses by a bank or other lender. Commercial loans are either secured by business assets, accounts receivable, etc., or unsecured, in which case the lender relies on the borrower’s cash flow to repay the loan.
Confirmed Letter of Credit
A Confirmed Letter of Credit is a Letter of Credit issued by a foreign bank, which has been confirmed as valid by a domestic bank. An exporter whose form of payment is a Confirmed Letter of Credit is assured of payment by the domestic bank who confirmed the Letter of Credit even if the foreign buyer or the foreign bank defaults.
Consignment
Consignment is a delivery of merchandise from an exporter (the consignor) to an agent (the consignee) subject to an agreement by the agent that the agent will sell the merchandise for the benefit of the exporter, subject to certain limitations, like a minimum price. The exporter (consignor) retains ownership of and title to the goods until the agent (consignee) has sold them. Upon the sale of the goods, the agent typically retains a commission and remits the remaining net proceeds to the exporter.
For details go to Consignment Purchase »
Cross-Border Sale
A Cross-Border Sale refers to any sale that is made between a firm in one country and a firm located in a different country.
Factoring
Factoring is the selling of a company’s invoices and accounts receivable at a discount. The lender assumes the credit risk of the debtor and receives the cash when the debtor settles the account.
For details go to Accounts Receivable Factoring »
Invoice Discounting
Invoice Discounting is a type of loan that is drawn against a company’s outstanding invoices but does not require that the company give up administrative control of those invoices.
factoring invoices
factoring invoices is one of the most common methods of trade financing. Your company sells their invoices to a factor in exchange for immediate liquidity. The factor who purchases the invoices relies on the creditworthiness of the customers who owe the invoices, not the subject company.
For details go to factoring invoices »
Irrevocable Letter of Credit
Irrevocable Letter of Credit is a Letter of Credit in which the specified payment is guaranteed by the bank if all terms and conditions are met by the drawee.
Letter of Credit
Letter of Credit or LC is the most common trade finance solution in the world. A Letter of Credit is a document issued by a bank for the benefit of a seller or exporter, which authorizes the seller to draw a specified amount of money, under specified terms, usually the receipt by the issuing bank of certain documents within a given time.
For details go to Letters of Credit For Imports »
Open Account
Open Account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. The obvious risk this method poses to the supplier makes it essential that the buyer’s integrity be unquestionable.
For details go to Open Accounts »
Pro forma Invoice
Pro forma Invoice is an invoice provided by a supplier prior to the shipment of merchandise, which informs the buyer of the kinds, nature and quantities of goods to be shipped along with their value, and other important specifications such as weight and size.
Receivable Management
Receivable Management involves processing activities related to managing a company’s accounts receivable including collections, credit policies and minimizing any risk that threatens a firm from collecting receivables.
Revocable Letter of Credit
Revocable Letter of Credit is a Letter of Credit that can be canceled or altered by a buyer after it has been issued by the buyer’s bank.
Structured Trade Finance
Structured Trade Finance is cross-border trade finance in emerging markets where the intention is that the loan gets repaid by the liquidation of a flow of commodities.
Trade Credit Insurance
Trade Credit Insurance is a risk management product offered to business entities wishing to protect their balance sheet assets from loss due to credit risks such as protracted default, insolvency, and bankruptcy. Trade Credit Insurance often includes a component of political risk insurance, which ensures the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc.
Project Finance Documents
› EPC Contract
› O&M Agreement
› Loan Agreement
› Offtake Agreement
› Supply Agreement
› Intercreditor Agreement
› Tripartite Deed
› Common Terms Agreement
› Concession Deeds
› Shareholder Agreement
Project Finance Participants & Stakeholders
Project Documents Key Takeaways
Savvy sponsors of project financings are adept at managing the stakeholders in the deal along with their attorneys to keep everyone on task and heading for the closing. The truly savvy project sponsors go a step further and engage Global Trade Funding to prepare and manage the drafting and negotiating of project documents, usually from inception all the way through closing.
Having us prepare and negotiate the project finance documents is a smart solution to a great many problems that will then never occur. This arrangement usually produces the best possible results for everyone involved for a great many reasons.
We are the only ‘principal’ involved in project financings who is not an actual participant in the deal, so the stakeholders generally allow us some leeway because we are an impartial arbiter of project finance documents and are only beholden to a successful project.
With only one team responsible for drafting project documents, they are far more congruous with far fewer inherent conflicts resulting in project documents with fewer overlapping provisions, fewer gaps in provisions, and significantly reduced legal fees.
We also lend tremendous experience to the preparation of project documents because our project team has significantly more experience with project financings than any of the other stakeholders in the deal. If something has been documented in a project financing, we have likely seen it, understand it and understand its effect on the project.
Project finance documents created early in the deal lifecycle are part of the pitch to arrange project financing and must support our efforts to place project finance loans.
Without exception, the first look that prospective project lenders get at the project is the presentation of project documents. Best we orchestrate project finance documents so that they leave every lender with a desire to participate.
Project finance documents created early in the deal lifecycle are part of the pitch to arrange project financing and must support our efforts to place project finance loans. Without exception, the first look that prospective project lenders get at the project is the presentation of project documents. Best we orchestrate project finance documents so that they leave every lender with a desire to participate.
Our Project Finance Services provide clients with advantages that aren’t possible with other financings. We are able to raise tremendous amounts of long-term equity and non-recourse or limited recourse debt, enabling us to fund large projects while at the same time protecting our client’s balance sheet.
The key to shielding project sponsors from recourse liability are well developed Project Finance Documents. To protect our clients we negotiate Project Finance Documents on their behalf to ensure they are well conceived and well written.
One of the key elements of project finance is the allocation of risk among the participants, thus enabling project sponsors to undertake larger, higher-risk projects than would otherwise be possible. We use the project documents to allocate that risk.
Project Finance Documents apply strong discipline to the contracting and operations phases of Project Finance. The documents also mandate the participation of several key private sector participants in the deal which enables us to further allocate risk.
They can also be used to require host country participation which has the effect of limiting a great deal of the political risk typical of projects in emerging markets. One disadvantage of Project Finance Documents is that they typically require supervision of the project management and operations that are considered intrusive.
However, on balance, well-conceived Project Finance Documents are one of the keys to successfully delivering project funding and should be embraced by the project sponsors and project participants alike. Project Finance Documents are summarized below.
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