COVID-19: Key Considerations for Project Finance Documents

Like many other sectors, the COVID-19 pandemic crisis has caused significant disruption to the construction and operations of energy and infrastructure projects across the world.  In this article we some explore key issues and practical steps that borrowers and lenders may wish to consider taking in the context of their existing project finance documents.

Information Undertakings

Borrowers may wish to review their reporting requirements under their loan agreements and liaise in advance with lenders if they foresee any delays in providing required information. In particular, this may be the case if the information in question requires input from third parties such as financial statements, annual budgets and construction progress reports.

Most loan agreements will also contain further information undertakings that the borrower must comply with upon the occurrence of certain events (e.g. breach of a material project agreement) and, in turn, lenders will have the right to request further information in certain circumstances so both borrowers and lenders may wish to consider whether any of these provisions have been triggered.  Note that in most loan agreements, borrowers will have an obligation to actively inform lenders if a default (prior to the lapse of any grace periods) has occurred under the loan.

Financial Covenants

A project finance loan will typically include financial covenant tests for the borrower on a periodic basis which, if not satisfied, will act as an early warning system to lenders in respect of the borrower’s financial health and ability to pay debt service.  Depending on the specific terms of the loan agreement, failure to meet the debt service financial covenants may lead to mandatory prepayment of the loan, restrictions on dividend payments and an event of default.  By way of mitigation, it may be the case that the borrower is able to utilise equity cure rights to comply with its financial ratio tests but, if not, borrowers may wish to engage early with lenders to seek any consent and waivers as necessary.

Events of Default

Parties will need to closely monitor whether any events of default have been triggered as a result of crisis.  it is important to be aware that the scope of many events of default is not limited solely to the borrower and its business but may extend to the obligors, borrower group, major project participants and also other debt incurred by the borrower. 

The more concrete events of default  will typically include non-payment, insolvency and failure to reach construction milestones by specified dates  but, depending on the terms of each particular loan and the specific circumstances in question, parties will also need to consider whether other events of default might be applicable such as suspension or cessation of business, cross default and, as examined in more detail  below, project document defaults and material adverse change.

Project Documents

Parties will need to keep the project contracts under close review as it is possible that breaches under construction contracts, supply and offtake agreements and services contracts will be triggered, for example, by supply chain issues and curtailment of demand from end users.  The occurrence of force majeure under a project contract over a certain time period may also result in the occurrence an event of default under some loans.

MAC /MAE

Project finance loans will commonly either include a  stand-alone “material adverse change” event of default or a “material adverse effect” definition to qualify certain representations, undertakings and events of default.  Whether the relevant event of default or qualification has been triggered will very much  depend how these terms are defined in the loan agreement which can vary widely.  The more lender friendly definitions may include an element of subjectivity (“in the reasonable opinion of the lender”), may be forward looking (“likely to have a material adverse effect”) and wide in scope, capturing  not only the business but the operations, assets, properties, condition (financial or otherwise) and prospects of the borrower group.

There is limited judicial precedent on the interpretation of material adverse change/material adverse effect so, in our experience,  lenders have generally been very cautious in invoking it in the absence of the occurrence of more concrete events of default (e.g. non-payment). The prevailing view, in any event, appears to be that the material adverse effect or change in question should not be of temporary nature so in many cases it may still be too early to determine this.

Conclusion

A clear line of communication between borrowers and lenders will be important in managing any issues arising in their loan agreements as a result of the COVID-19 pandemic crisis.  In the event more liquidity needs to be injected into the borrower group or the borrower anticipates that it may not be able to comply with certain terms of is loan agreement, the parties should be mindful of the timelines required to obtain consents and waivers from a practical perspective. This is particularly the case for larger financings in which approvals may be required from multiple parties.