PROJECT FINANCE – CORPORATE STRUCTURING: SETTING YOURSELF UP FOR SUCCESS

This is the first in a series of short articles which seek to assist borrowers with those ‘what now?’ questions.

Borrowers often find themselves in a situation where lenders are interested in financing the project but they are unclear about the steps that well advised borrowers can take in advance of financing to set themselves up for success and a much easier path through the financing process.

One of the first matters for borrowers to consider is corporate structure. The corporate structure of a company will vary depending on whether the company has been in existence for some time (and potentially already has a number of subsidiaries, some of which may be operating other stand-alone projects) or is a newly created entity. The ideal corporate structure, while influenced by the financing process, will also depend on the company’s strategic direction. For example, is the company likely to be a single project enterprise or, are additional stand-alone projects likely to be undertaken by the parent, or its other subsidiaries, in the future when the financed project is in operation?

As part of the process of evaluating if the corporate structure is optimal for project finance, we suggest asking the following questions:

• Are all the project assets held in one SPV entity? This includes both physical assets like tenements and infrastructure but also any key contracts for the project.
• Does the company have an intermediate holding company under the parent company, which holds 100% of the shares in the SPV entity who will hold the project assets?

The following diagram depicts how a typical/ideal project finance structure should look:

Setting up a company’s corporate structure in this way before any significant engagement with lenders occurs has a number of potential benefits, including the following:

• Saving time and reducing cost. The scope of the lender’s due diligence will, to a large degree, be limited to the relevant project company and intermediate holding company. The need to move assets to other group entities (or move project assets from those companies into the project company) and enter into documentation with third parties to effect these transfers or assignments is also negated.
• A lender can easily identify the relevant project assets and confidently take security over all of the assets of the project by taking security over the specific (SPV) project company. This also reduces the need for other subsidiaries of the parent to be involved, both in due diligence matters and in the provision of additional security/guarantees to the lender(s).
• If the parent is required to provide a guarantee to the lenders to support the financing, this structure allows the parent to be released from the loan arrangements once the project is fully operational, even if the project loan remains outstanding at that time. This gives the parent flexibility to pursue (or support its subsidiaries to pursue) other projects or acquisitions as it will no longer be subject to the raft of project finance covenants restricting its activities. It also allows the parent or its subsidiaries to obtain additional financing for separate projects without the need to engage with the project finance lenders to agree intercreditor arrangements.
• The intermediate holding company between the parent and the project company further reduces the parent’s involvement in the project financing arrangements. The intermediate holding company is able to provide a share mortgage (and all assets security) to the lenders, which affords the lenders the requisite control to sell the project company (and ultimately the project) in the event of insolvency.

While we recommend setting up this kind of corporate structure as early as possible, we appreciate that this is not always possible. If the initial financing stages are well progressed and the appropriate structure is not in place, considering changes to reflect the desired corporate structure remain beneficial (and should still be investigated). The benefits of doing this are still significant.

If you would like any further information on this process, or any other aspect of project finance, please don’t hesitate to contact Wright Legal on +61 8 9327 0800.

For more useful articles and insights about banking and financing transactions head to our Articles and Insights. Wright Legal articles are for general information only and do not constitute legal or other advice.

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