What Is a Direct Agreement Project Finance

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Construction company: The contractor is one of the most important parts of the project during the construction phase of the project. Typically, a contractor`s assignment is based on one of two models: in addition to financial and security documents, a project financing transaction also includes project documents such as construction contracts, operations and management contracts, and equipment supply contracts. One of the financial documents generally applicable in project financing transactions is direct agreements regarding essential project documents. Direct agreements are usually between the lender or, in the case of a consortium of lenders, the security guard, the borrower and the counterparty to the project document. These arrangements grant the lender(s)/security guard representation rights in the event that the borrower fails to comply with its obligations with respect to the relevant project document. Before a counterparty can terminate a project document due to a breach by the borrower, lenders/security guards have the opportunity to intervene and fulfill the borrower`s obligations, thus ensuring the continuity of the agreement and, therefore, the project. • Counterparty agreement to give lenders a notice period and not to terminate the project document for a certain period of time; Subcontracting: Projectco introduces various subcontracts to share the risks it takes under the project agreement. It is common for Projectco not to carry out any of the key activities itself, but rather to be a vehicle to form the series of contracts associated with the project – hence the term «special purpose vehicle». In addition, project finance guarantee packages often involve the assignment of project documents by the borrower to the lender(s)/security guard. The assignment of project documents usually takes the form of an assignment in securitatem debiti (security assignment) as opposed to an out-and-out mission. In respect of an assignment of securities, the borrower assigns its personal rights relating to the project documents to the lender(s)/collateral agent as collateral for its obligations under the credit facility.

Although the borrower retains ownership of the assigned rights, lenders/security guards have the right to assert these rights against the counterparty of the project document in the event of default occurring under the facility agreement. The designated representative may withdraw after termination. This happens when: a permanent replacement is found, the project is returned to the project company, or the lenders decide that the project cannot be saved. Again, there may be a debate about the extent of the designated representative`s liability in relation to unfulfilled obligations. • Ability of lenders to notify during the specified period or after a default under the facility agreement that they will appoint a company to assume the rights and obligations of the project company under the project document; A direct agreement is an agreement that gives project lenders direct rights to certain key project documents. These rights are explained in direct agreements in project finance operations – Key Provisions. Ownership documents: If the project involves land development, ownership documentation is required to reflect the interests of the public authority and Projectco, as well as the expected ownership position at the end of the project`s term. Some common structures are: Construction Contract: Projectco enters into the construction contract with the contractor, under which Projectco`s construction obligations from the project contract are passed on to the contractor.

Buyers: For infrastructure projects, Projectco usually enters into a contract in advance with a buyer who will purchase the production of the project in the long term. Where appropriate, a direct agreement may contain clauses in which the counterparty to the project document agrees to the calculation or assignment to secure the project company`s rights to the project document. The direct agreement of the lenders: This is a tripartite agreement between the authority, Projectco and the lenders, under which the authority agrees to give the lenders a period of notice of the imminent termination of the project agreement. This Agreement also provides lenders with the opportunity to intervene, either directly or through a nominee or agent, to resolve the termination event or to find another party acceptable to the authority to assume Projectco`s rights and obligations under the Project Agreement. Collateral collateral guarantees: Lenders and the agency typically request contractual guarantees from key contractors and consultants appointed by Projectco. The value of collateral guarantees, in particular for the Authority, is that they protect the Position of the Authority after the end of the project if the Authority`s losses exceed the value of the built (or partially constructed) project. Multilateral credit agencies: Some projects – particularly in developing countries – are co-financed by the World Bank or its investment banking department, the International Finance Corporation or regional development banks such as the European Bank for Reconstruction and Development or the Asian Development Banks. Multilateral organizations like these are able to ensure the bankability of a project by offering commercial banks some protection against political risks, such as a government`s incapacity. B.dem to make the agreed payments or issue the necessary regulatory approvals. Regulatory guarantee agreements: These have emerged as an extension of the concept behind lenders` direct agreements. The authorities shall conclude parallel agreements between the authority and the contractors who conclude contracts with Projectco. If Projectco does not comply with its contractual obligations during the construction phase, the authority may ensure that the project is completed by taking over the appropriate contract from Projectco.

In addition, the agency can accept Projectco`s operating contract when the project is terminated. Host governments/contracting authorities: The government of the country where the project is based is likely to be involved in the issuance of permits and permits at the beginning and throughout the life of a project. The client is the local public authority that concludes the project agreement with Projectco. In addition to the counterparty`s consent not to terminate, if it has the right to do so under the project document, it will also agree that the step-by-step process may be triggered by lenders notifying the default of a project company under the Facility Agreement, the execution of the collateral or the acceleration of the loan. A defining feature of project financing is that it is typically limited-recourse financing, which means that lenders rely only on the revenue from the project itself and the resulting assets to recoup their investment. For this reason, project finance operations pose a high risk to lenders, especially in new projects. Because of this risk, especially in the pre-operational phase of a project, a good set of security that mitigates the risk as much as possible is essential to protect the interests of lenders. .