Project Finance – A User’s Guide To Documentation

The project financing transactions are voluminous and complex. The documents can be broadly categorized as (a) Project documents (the documents for design, construction, operation and maintenance of a project); and (b) Financing documents (the documents for financing and securing a project).

Project Documents

These are the incorporation documents of the project company and its sponsors, the investment agreement (for equity investment by the sponsors, its timing and form), project management agreement (agreement for management of the project company), sponsor or JV agreement (agreement for rights, responsibilities and obligations of the sponsors and their inter-se relationships). The project company is incorporated by the sponsor as per the requirement of the Government authority or taken over from such Authority by purchase of shares.

Operational Agreement

The Operational Agreement is the main agreement under which certain rights/concession is granted by the Government Authority in favour of the project company to develop, construct and operate the facility. It can be either concession/development agreement or EPC contract. A concession/development agreement would have conditions precedent (the conditions to be fulfilled by the project company and the Government Authority), performance security, concession fees, project development and maintenance, obligations of the project company and the Government Authority, financial close, liability and indemnity, dispute resolution and jurisdiction, etc. An EPC contract is a construction contract that provides for complete engineering, construction, procurement and commissioning of project facility by the project company by a certain date for a fixed price, the performance of which is guaranteed by the project company for a certain duration. The risk of cost and time over-runs in such projects is borne by the project company. A typical EPC contract would have clauses defining scope of the project, obligations of project finance company and Government Authority, Representations and warranties, performance security, change of scope, maintenance, defect liability, payments and dispute resolution, etc.

Property Agreement

This is an agreement under which the property or the rights under the same are transferred by the Government Authority to project company and can take the form of deeds, leases or easements. The project company builds the facility on such property.

O&M Contract

The operation and maintenance of the project is sometime taken over by the project company and sometime outsourced to another operator. One of the key issues in O&M contract is efficient management of operations to maximize the revenue so that lenders are paid in full. The operations and maintenance risks are mitigated by engaging with an experienced operator who can manage and operate the project efficiently and cost-effectively. This contract has liquidated damages provisions to mitigate the risk of poor performance by the operator.

Supply Contract

This contract provides for supply of raw materials, fuel or other inputs necessary for operating the facility. The supply can be of coal, water, gas or any other raw material. The price and various terms and conditions of supply contract are important considerations in structuring a project financing. The availability of inputs, consequences of non-supply, minimum off-take, price of the inputs, price escalation, political and force majeure risk should be taken into consideration while negotiating such contract.

Off-take agreement

The off-take agreement is the agreement under which the off-taker purchases the output from the facility built by the project company. The off-take agreement provides constant revenue stream to the project company for timely repayment of debt to the lenders and return to the sponsors.

Financing Documents

Financing documents are the set of contracts between the project company and the lenders which lay out the terms and conditions of financing the project by the lenders. The following are the main agreements:

Funding agreement

The funding agreement provides for funding of the project and contains the following main clauses

  • Fulfillment of conditions precedent by the project company making the project company eligible to borrow money from the lender.
  • The time duration during which the loan shall be available to the project company.
  • Repayment schedule and rate of interest payable by the project company.
  • The margin provisions, which protect the lenders from unexpected costs associated with the project.
  • Representations and warranties by the project company on the basis of which lenders provide finance to the project company.
  • Covenants by the project company. Some of these are submission of periodical reports by the project company; financial covenants such as maintaining a certain debt service coverage ratio and negative convent such as not incurring additional debt.
  • Events of default upon happening of which the consequence of default provisions will get triggered.

Investment agreement

The investment agreement is the agreement between the sponsor and the project company for equity investment by the project sponsor in specified sums and at specified times as per the financial model of the project company. The investment agreement contain provisions that if the sponsor do not provide their equity contributions, the letter of credit provided by them as security for their obligations can be enforced by the lenders or the collateral agent.

Intercreditor agreement

The Intercreditor agreement is an agreement that deals with the competing interest of the creditors in the project company. The Intercreditor agreement will usually provide a restriction on the payments to the junior lenders upon the occurrence of event of default under the senior lender credit agreement. These provisions are referred to as “payment blockage” provisions. If a payment blockage provision is triggered, all payments to the junior lenders will usually be blocked, including interest on their loans.

Security documents

The following are the typical security documents in project finance:

Security Agreement

The security agreement provides for grant of all the security interests in the project company in favour of lenders for repayment of debts and interest thereon. In security agreement, the project company grants the security interest to the collateral agent all the right, title and interest in the project company’s assets. These include all the rights of the project company in the project documents such as off-take agreement, concession/EPC contract and O&M contract, etc. In case of default, the lenders can foreclose the loan and recover the outstanding debt by sale of all the assets of the project company or sell the shares in the project company. Alternatively, the lenders may take control of the project and carry out its operations.

Pledge Agreement

Under the pledge agreement the sponsors pledge all their shares in the project company to lenders as security for performance of their obligations under the financing agreement. In case, the project company defaults, the lenders can foreclose the pledge agreement and sell the equity shares to a third party. Alternatively, the lenders may take control over the project and run the same

Mortgage or deed of trust

The project company mortgages all of its interest in it’s assets, including rights in the project site (whether free or leasehold). In the event of default by the project company, the lenders can foreclose the mortgage and recover their outstanding by sale of mortgaged assets or take control of the project site and run the same.


In India, the project finance is not very old. The project finance has evolved as the tool for ever evolving need for financing of projects on stand-alone basis, where the revenue stream is certain over a period of time. The project finance being document intensive, all the agreements should be carefully drafted and negotiated so as to mitigate the risks and protect the interest of all the stakeholders.

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