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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
Project Finance Documents Project Vision Tomoon Architects Engineers
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 maximum 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.
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:
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Injection of share capital
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Voting requirements
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Dividend policy
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Management of the SPE
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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 speciality 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.
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