Security Agreement Project Finance
In the event that the equity promised by the promoter is provided in the form of loans to shareholders, lenders will generally have to provide a guarantee to ensure that all interest in the project is covered by the guarantee package. For the description of the typical security package in a project finance, we have adopted a simple structure in which the sponsor directly owns the shares of the project company, which in turn has no subsidiaries. Security agreements often include restrictive covenants that include fund funding provisions, a repayment plan, or insurance requirements. The borrower may also allow the lender to retain the loan guarantee until repayment. Collateral arrangements may also cover intangible assets such as patents or receivables. These formalities vary from jurisdiction to jurisdiction, but may include requirements regarding the type of document in which security rights are formalized3,the language of the documents,4 registration of security rights in public or private registries5 or the transfer of ownership of the asset from the owner to the beneficiary of the security right. To the extent that the project company owns real estate assets (e.g. B the land on which the project is located), lenders may want to enter into a lien on them. Although liens, such as mortgages, on immovable property are available in most jurisdictions, such security generally entails significant costs (per .B. Stamp Duty), and therefore, as explained in Section III.i (Costs and Taxes), lenders may be willing to waive this security depending on the remaining set of collateral and the nature of the project.
In addition, project companies typically have leases or other rights to use the land in question, rather than acquiring them to reduce costs and minimize risk-free risk if project financing is not completed. In this context, in some jurisdictions domiciled under English law, secured creditors who hold a floating charge on all or substantially all of the project company`s assets that are considered as such under applicable law may designate an insolvency administrator who may take over the security and thereby manage the business and operate the project in the best interests of secured creditors, to repay amounts owed to them or their potential recovery in a future sale (or both). The borrower may have limited options to provide collateral that would satisfy lenders. Even if a security agreement grants only a partial security right in the asset, lenders may be reluctant to offer financing for the asset. The possibility of a cross-guarantee would remain, which would force the liquidation of the property to try to release its value and offer compensation to the lenders. Depending on the jurisdiction, all or most security rights may be granted in an omnibus security agreement, but it is also common to execute a document with security principles that identify the main conditions for each of the local security documents issued in the relevant jurisdictions based on the language or local formalities (e.B.B. notarization). Either by including corresponding restrictive covenants in the security documents or by operation of law, security rights confer on secured creditors certain rights of control, among others. ensure that the validity and enforceability of the security right are not compromised in order to preserve the value of the asset taken as collateral and, ultimately, to have control of the assets (without taking possession of them). IV Other relevant collateral-related issues In accordance with market practice, the security package to be established in the context of the relevant project financing should ensure that it serves as far as possible the tasks and objectives referred to in Section II.
As explained above, in some jurisdictions it is possible to have a floating or flat-rate lien or fee on all (or substantially all) of the project company`s assets. While there are differences between the different numbers available in different jurisdictions, these numbers ultimately allow lenders to provide some sort of collateral for all of the project company`s assets from time to time (i.e. not just the assets that were in place at the time the hedging interest was created, but also any assets that the project may own in the future). While this is indeed an objective of security rights (and certainly an important, at least hypothetical) objective, it should be noted that, apart from the limitations and restrictions generally applicable to the jurisdiction in the enforcement of security rights or to the sale and transfer of the resulting assets or secured rights,2 the enforcement of security rights in project financing is rarely one or is the desired outcome for lenders. since it is unlikely that the proceeds of execution will be sufficient to repay the loan in a situation of non-execution, especially during the construction phase or in the early stages of a project. In this regard, the market for a project that is the subject of a seizure procedure (which in many cases will be the result of structural problems different from mismanagement, such as regulatory changes or problems with key project stakeholders such as the builder) will usually be quite superficial. .