Middle East conflict: the lender risks of force majeure

Regional volatility has sharpened attention on what disruption does to project cashflows, completion risk and debt service. That focus is intensified by a more liquidity-conscious market.

Last month saw the Central Bank of the United Arab Emirates (CBUAE) launch a resilience package for banks operating from the state, aimed at safeguarding their financial stability against the backdrop of the ongoing conflict.

• Read more: implications of the Middle East conflict for businesses

The package opened up greater liquidity access for lenders to draw on reserve balances and access term liquidity facilities in both US dollars and Emirati dirhams, underpinned by the CBUAE’s foreign exchange reserves.

Lenders operating both in the region and beyond are looking more closely at downside scenarios and the contractual tools available to manage them.

Protecting debt

For lenders, force majeure is not just a contractual label: it is a credit issue. The question is whether the project and finance documents preserve debt serviceability during disruption and, if disruption persists, provide a credible route to protect senior debt.

That focus is particularly important during the construction phase of a project. Many PPP and project contracts provide extension of time where political force majeure disrupts the works. From a lender perspective, however, time relief alone may not be enough.

A delayed completion date can push back revenue, extend interest during construction, distort repayment assumptions and create pressure on liquidity. Lenders therefore focus not only on whether time is granted, but on whether the contractual regime deals with the financial consequences of delay.

In practice, that usually means asking whether financing costs and deferred or lost revenue are addressed through an increased cost or similar compensation mechanism, rather than leaving the project company to absorb the gap.

The same logic applies during the operational phase, but with the focus shifting from delay to revenue continuity. In availability-based PPP structures, political force majeure provisions sometimes allow capacity-based payments to continue, or to be assessed by reference to pre-event availability, even where output is disrupted

Lenders typically view these mechanisms as important credit stabilisers because they reduce the risk of immediate cashflow stress and covenant pressure. Where payment continuation is absent, heavily qualified or narrowly drafted, a force majeure event can translate quickly into debt service pressure even in an otherwise bankable project.

Longer term impacts

If disruption becomes prolonged, the lender focus shifts again: from preserving the project to preserving recovery.

In that scenario, the termination regime becomes critical. Lenders will stress-test whether prolonged force majeure can lead to termination and, if so, whether the compensation formula genuinely protects senior debt.

That analysis goes beyond headline drafting. A termination payment that appears protective may still leave a shortfall if key financing costs are excluded, if break costs are not covered, or if broad deductions and set-offs are permitted.

How this impacts you

For lenders and project operators alike, the ongoing situation requires some careful management and obtaining good advice.

In the current market, lenders are focused less on whether force majeure relief exists in principle, and more on whether the contractual and financing package can carry the project through disruption or, failing that, deliver a clear and credible senior debt-protected exit.

Until conditions ease, this means projects will need to be prepared for increased scrutiny, and what the short- and long-term impacts of delays could mean for financing.