Out-Law Guide | 22 Dec 2011 | 9:19 am | 6 min. read
Many of the provisions of the credit agreement for a project finance initiative (PFI) funding arrangement are similar to those found in a conventional syndicated loan agreement. The following provisions are of particular importance:
The sheer scale of a typical project financing means that most lending cannot be undertaken by a single lender. Instead, a syndicate of lenders will be formed. In a typical syndication, a number of lenders will be parties to the loan agreement. You may wish to refer to our separate OUT-LAW Introduction to project finance documents [link to: OUT-LAW Guides – Banking – Introduction to project finance documents] for further information. As a reminder, we will refer to the private sector company or partner created for the sole purpose of owning the project as 'Projectco', and the contracting local authority entering into the agreement with Projectco as the 'Authority'.
It is common for the credit agreement to make available several facilities, or loans, such as:
The purpose of these funds will be documented carefully in the credit agreement to make sure that their use is restricted to their intended purpose. This will be done by channelling withdrawals or drawdowns through dedicated project accounts from which payments may only be made for certain agreed purposes. These payments can include:
The credit agreement will usually specify a period during which withdrawals and drawdowns can be made subject to the satisfaction of any conditions precedent. A condition precedent is an event that must occur before a contract can be fulfilled, such as supplying certain documents or providing security. See our separate OUT-LAW Guide to conditions precedent [link to: OUT-LAW Guides – Banking – conditions precedent] for more information.
These conditions precedent will be extensive, and will be divided into two categories - conditions precedent to the making of the facility agreement and conditions precedent to each drawing of each loan facility. Such conditions may include:
In addition, legal opinions from the lenders' solicitors will be needed.
The credit agreement will generally recognise two distinct phases in PFI projects - the construction phase and the operation phase.
During the construction phase funds will be drawn down and the need to pay back the debt postponed, either by rolling up interest pending receipt of revenue during the operating phase or by allowing Projectco to make additional drawdowns to finance these interest payments. The availability period for drawings under the credit agreement will end once the project has been completed and becomes fully operational.
Any repayment formula must be structured to reflect the revenues Projectco expects to receive. Usually the formula will require the higher of a minimum repayment and a stipulated percentage of project cashflow for the relevant period to be set off against the loan facility. The minimum payment must ensure that, as a worst case scenario, the repayments will be enough to ensure that the loan is fully paid off within the maximum loan term. The alternative loan repayment formula, a stipulated percentage of cashflow, will generally allow the final repayment to be achieved in a shorter period of time than the term of that facility – for example, up to two or three years ahead of final maturity in a 20 year facility.
Extensive representations, obligations and warranties will be required. There will be a number of project-specific representations and warranties required including:
The usual covenants, or promises, both positive and negative, will be required from Projectco. There are certain information covenants specific to the particular project which Projectco will need to supply to the funders. These include progress reports during the construction phase of the project specifying the rate at which construction is proceeding, the current status of the work, a review of how costs are progressing and details of actual or potential cost overrun. Regular progress reports will also be needed during the operational phase specifying availability, occupancy, usage and any performance points incurred - these will be awarded to Projectco during the operational phase of a project and will reflect how well it is performing. The lenders will also want details of any interruptions to the construction or operation of the project and notice of any insurance claims.
Financial covenants will also be needed. These commonly include:
Credit agreements for a PFI financing will include the usual kinds of events of default which will allow the lenders to cancel the facility, accelerate the loan and exercise their rights under the security documents. The usual events of default - monetary defaults, breaches of representations and warranties and failure to perform other obligations - will be included in a PFI credit agreement.
There will also be some additional events of default which are specific to PFI projects. These include: