Clearing the Pathway with Bankable Project Contracts

In any project debt financing, the lender and its own counsel will want to make sure that the commercial documents relating to the construction and operation of the project are “bankable”. In other words, a bankable document is one that does not in its terms present an unacceptable level (or allocation) of legal risk to a lender.

In acting primarily for borrowers on project financing transactions, we are familiar with the bankability requirements of project finance lenders – and those requirements will differ depending on the nature of the project and the type of contract.

For key project contracts, lenders usually require tripartite (direct) agreements between the project company, the lender and the contractor. Tripartite agreements typically address any bankability issues and also generally prescribe that the lender be given notice of any breaches by the project company and give the lender the right to step in and cure serious breaches within agreed time frames.

It is helpful to the process if the contractor can agree upfront that it will sign a tripartite agreement on a set of designated terms, if a lender requires it.

Sometimes, if project documentation hasn’t been negotiated with an eye to the project financing, this can result in issues for a lender that need to be resolved with the contractor. This can necessitate the project contract being amended or, as indicated for a key project contract, the issues to be resolved in the tripartite.

An example of an essential bankability requirement for a project contract is for the lender to be able to take security over the project company's rights under the project contact. If a project contract restricts a lender from taking security over it, the lender is likely to require those restrictions to be disapplied. This is a very common issue that often arises. Because negotiations involving changes to a project contract necessarily involve the third party contractor, and also usually involve amendments to terms which the contractor considered were agreed with the project company, delays to the financing process can result.

This situation can be avoided.

A good model we have used successfully on financing transactions is to work alongside the project company in addressing any bankability issues while the project contracts are being negotiated at the outset.

Setting that process in train early can also minimise the potential for strain on the commercial relationship between the contractor and the project company that could otherwise be caused as a result of the lender’s legitimate requirements for bankability.

It is important to seek early advice from an experienced banking and finance lawyer to ensure your project is 'finance ready.' Don't hesitate to contact Wright Legal. We are specifically dedicated to banking and finance.