Strategic Equity Investments in Projects: Issues for Project Financing

In this current environment of equity capital and commodity price volatility, there is often a need for sponsors of new projects to bridge an equity funding gap between (a) the total project development cost; and (b) the equity that is available without extensive dilution. Raising the equity capital required by a senior project lender through traditional means may present significant challenges.

Alternatively, a project may be looking to benefit from the introduction of a strategic partner with access to commodity and capital markets, as well as provide valuable expertise and experience in taking the project into production

Pursuing a strategic transaction with a long-term partner that has a vested interest in seeing the project succeed may present a project sponsor with a value-adding solution.

Such a transaction typically involves introducing the strategic partner as a direct equity investor in the project. A notable example is Galena Mining’s recently announced transaction with Toho Zinc to invest $90mln for a 40% interest in Galena’s project holdco [ASX Announcement]. When structuring a strategic transaction, it is a good idea to seek input from your finance lawyers. They can work alongside your corporate lawyers (who will be advising on the strategic transaction itself) and provide input on your term sheet or other transaction documentation.

Why Seek Input from a Finance Lawyer?

A finance lawyer can advise on how the transaction could affect a project financing down the track and can ensure that any potential future roadblocks in your project financing are addressed. How you structure your project financing will differ depending on the form your strategic transaction takes. As a starting point, the issues will be different depending on whether the transaction takes the form of an incorporated joint venture or, alternatively, an unincorporated joint venture. Other examples of areas requiring careful thought are:

1. the effect on offtake arrangements and bankability
2. who will the project lenders look to for credit support (and what form will that credit support take)?
3. how will the project payments waterfall be structured? What are the expectations regarding project distributions?
4. what documentation will the project lender be likely to require your strategic partner and, possibly, offtaker(s) to execute?

There is a multitude of potential issues.

Your strategic transaction will of course be possible, it’s just important to make sure it doesn’t prevent you from doing what you want to achieve later.

Don't hesitate to contact Wright Legal to discuss your banking and finance needs.

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