Risk Identification, Mitigation and Key Documents in Infrastructure Projects.

1

• Risk Identification, Mitigation and Key Documents
  in Infrastructure Projects.
• Presentation by
• Mohit Saraf
• Partner
• Luthra Luthra
• Law Offices
• May 01, 2002

2
Overview

• Financing
• Risk Identification
• Risk Identification Mitigation
• Financing Documents
• Risk Allocation in the Credit Agreement
• Security Documents
• Insurance
• Conclusion

3
Financing

• Project Financing vs. Balance Sheet Financing vs.
  Asset Financing
• Project Financing
• Source of Finance
• Commercial Banks
• Financial Institutions
• ECAs Multilaterals
• Capital Market

4
Finance Risks
Market Risks
Lenders
Promoters
Supplier
Credit Agreement Security Documents
SupplyAgreement
Shareholders Agreements
Offtaker
OfftakeAgreement
Project company
Insurances
Insurers
Concession Agreement Consents
Operating and MaintenanceAgreement
ConstructionContract
Government
Operator
Contractor
Construction Operation Risks
5

Risk Identification

• Completion Risk
• Technological Risk
• Supply Risk
• Market Risk
• Financial Risk
• Political Risk
• Environmental Risk
• Force Majeure Risk

6
Risk Identification Mitigation - General

• Hate surprises will not accept risks which are
  either incapable of proper assessment or which
  are potentially open-ended in their effect
• No change in law risk
• No discriminatory taxation
• Minimise risk-dumping on project company
• No liability for consequential loss
• Contracts must survive enforcement of Banks
  security
• Application of pre-completion revenues to capital
  expenditure

7
Risk Identification Mitigation - Consents

• Consents must last for duration of project
• Regulators should not be able to vary the terms
  of consents unduly
• Consents should inure to project and not just to
  project company
• Government Support Agreements

8
Risk Identification Mitigation -Promoters

• All equity contributions to be provided up-front
• Promoters to provide cover for cost overruns
• Promoters to provide cover for gaps in
  undertakings including insurance.

9
Risk Identification Mitigation -Concession
Agreement

• Terms of concession fixed for life of project
• No unduly onerous terms on project company
• Extension of term for force majeure
• Compensation for termination must repay debt
• Concession should survive enforcement of security
• Transferability of concession on security
  enforcement

10
Risk Identification Mitigation -Construction
Contract

• Turnkey fixed price contract
• Fixed completion date
• Force majeure, price increases and completion
  must back to back with concession agreement
• Adequate liquidated damages for late completion
• Performance Guarantees

11
Risk Identification Mitigation -Operation
Maintenance Contract

• Proper incentives to run project properly and
  profitably - including penalties for failure to
  meet targets
• Ability to remove operator for poor performance

12
Risk Identification Mitigation - Supply
Contract

• Security of supply and remedy for interruptions
• Take or Pay obligation

13
Risk Identification Mitigation - Offtake
Agreement

• Full pass-through of capital and variable costs
• Foreign exchange protection
• Take or Pay obligation
• Credit enhancement including Government
  Guarantees

14
Financing Documents

• Loan Agreement
• Inter-Creditor Agreement amongst the Lenders
• Indenture of Mortgage
• Deed of Hypothecation
• Agreement for Pledge of Shares
• Security Agency Agreement
• Trust and Retention Account Agreement
• Sponsor Support Agreement

15
Financing Documents(Contd)

• Equity Subordinate Debt Agreement
• Undertakings for Overrun/shortfall/non-disposal
  of shareholdings
• Loan Agreements/Subscription Agreement
• Declaration and Undertaking
• Consents and Agreements
• Any such other documents as the Lenders may feel
  it necessary

16
Risk allocation in the Credit Agreement 1

• Drawdown mechanism
• Staged drawdown
• Contingency reserve (Promoter Cost Over-Run
  Guarantee)
• Currency risk
• Repayment profile
• Match repayments to anticipated income
• Dedicated Percentage linked to financial
  covenantse.g. repayment cover ratio
• Margin
• Increase on termination of construction phase
• Reference to financial performance

17
Risk allocation in the Credit Agreement 2

• Undertakings
• Comply with terms of project contracts
• Project company will diligently pursue its rights
  under the project contracts
• Not to amend the terms of the project documents
• Carry out the project in accordance with good
  industry practice
• Not to abandon the project
• Restriction on the companies ability to pay
  dividends
• Coverage Ratio

18
Risk Allocation in the Credit Agreement 3

• Events of Default
• Usual events of default (non-payment, breach of
  covenants, insolvency events)
• Failure to achieve completion by a long stop date
• Cessation of production (e.g. force majeure) for
  a sustained period
• Abandonment of the project
• Nationalisation of project facilities
• Change in law affecting projects economics
• Sponsors failure to provide equity
• Non-availability of insurances
• Purpose of Events of Default

19
Security Documents 1Purpose of Security Documents

• Offensive nature
• Defensive nature
• Control the Operation of project assets to
  generate cash and repay project debt
• The Banks will want to be able to take control
  of and/or to sell the entire undertaking
  constituting the Project following an Event of
  Default. That means all the assets plus the
  ability of the Project to continue as a going
  concern.

20
Security Documents 2Assets to be secured

• Tangibles
• Land
• Plant and machinery
• Stock and materials (floating charge)
• Intangibles
• Shareholdings useful (but take care)
• Rights and contracts (debts and other rights)
  especially important in Project Finance

21
Security Documents 3Alternative security
arrangements

• Collateral warranties from Project parties
• Direct Agreements
• Direct contractual relationship
• Ability to step-in following Event of Default
  plus a cure period to allow sponsors to cure
• Ability to step-in prior to termination of the
  agreement following default by the project
  company
• Very heavily negotiated

22
Security Documents 4Some things to look out for

• Lender liability
• Shadow directorship
• Must sell assets at a proper price
• Environmental liability
• Possibility of high costs of security in some
  jurisdictions

23
Insurance

• Banks interest
• Ensure adequate insurance
• Ensure its interest in insurances is adequately
  protected
• Adequate insurance
• Undertaking to provide required coverage,
  specified risks, limits and deductions (Also a
  condition precedent)
• Undertaking relating to quality of insurances
  (identity of insurer and terms to be approved by
  the Bank)
• Self help remedy
• Adequate protection of Banks interest in
  insurances
• Assignment of proceeds and notice of assignment
• Loss payable clause
• Banks receive their own insurance contract
  (co-assured
• Cut-through clauses for re-insurers

24
Conclusion

• A risk is any event or circumstance which may
  adversely affect the project companys ability to
  pay interest and to repay principal on the
  contractual payment dates
• Bank will accept risk so long as it is quantified
  and understood
• The margin is not high compared to what the
  other parties are receiving