The diagram below illustrates how the key finance documents interplay with the typical structure of a PPP transaction. Each core finance document is explored in more detail within this section.

(a)        Loan agreement or common terms agreement

The loan agreement sets out the terms on which the lenders will advance funds to the project company, such as the mechanics for the funds to be disbursed, rates of interest, repayment, representations and warranties, conditions precedent to be met before any funds will be advanced, events of default and the consequences of default.

The loan agreement provides for repayment of the loan once the construction stage is complete. In practice, the date on which any repayment is to be made will not correspond with the receipt of revenues from the project. So in order to avoid monies being spent by the project company before a repayment date, payments by the government (or revenue payments such as tolls) will be made to an account over which the lenders have control (the “proceeds account”). The monies standing to the credit of the proceeds account on the repayment date will then be used for repayments. If there are insufficient funds in the proceeds account to pay the total amount due on the same date, the loan agreement will provide for an order of application, known as the payment cascade or cashflow waterfall. Typically, payments will be made in the order of operating costs, fees and expenses, interest and then principal. Shareholder distributions will rank at the bottom of the payment cascade and will only be permitted upon satisfaction of certain distribution conditions.

In a complex transaction where there are a number of different categories of lender (e.g. commercial banks lending senior debt, multilateral development banks, equity bridge lenders) each category of lender may have its own loan agreement. If this is the case, the parties will usually also enter into a “common terms agreement” which includes the common terms applicable to the project company and all of the lenders, for example, representations, undertakings and events of default.

(b)        Hedging documents

If, for example, the project company receives revenues from the government (or through revenue payments such as tolls) in the local currency, but is obliged to make payments under the loan agreement in another e.g. US dollars, the project company will be exposed to shifts in the exchange rate between those two currencies. The effect of such currency fluctuations can be offset by hedging. This means that the project company enters into an arrangement with a counterparty (often one of the lending banks) to fix in advance the rate of exchange between the local currency and loan repayment currency for a specified period in return for a fee to the counterparty. The lenders will be keen for the project company to reduce its exchange rate exposure by entering into hedging arrangements because if the project company does suffer a loss due to exchange rate movements, the lenders may bear some of that loss.

The project company is also likely to have an obligation to pay a floating rate of interest to the lenders under the loan agreement. In order to ensure certainty of future payment flows, the project company will be required to fix the interest rate under hedging arrangements.

(c)        Intercreditor agreement (sometimes including a security trust)

A typical intercreditor agreement will:

(i)         subordinate the creditors who need to be subordinated. Who gets subordinated will depend on the transaction in question. Usually, you would expect to see shareholder debt subordinated to the bank debt. Also, there will be restrictions placed on any mezzanine debt. It will include a pre and post enforcement waterfall for the application of payments (if this isn’t covered elsewhere in the documents e.g. accounts provisions, loan agreement or common terms agreement);

(ii)        rank the security and deal with any dedicated security (security provided for the benefit primarily of one creditor or group of creditors);

(iii)       include provisions for appointing the security trustee/agent. Note that these might be included in a separate security trust deed if the security trustee is an independent third party trustee such as Law Debenture;

(iv)       regulate decision-making by the lenders. Any significant decision will need to be made in a co-ordinated fashion. The intercreditor agreement will set out the decisions that require the input of all lenders and the voting rights or input of each lender into that decision making process; and

(v)        deal with the position of hedging banks.

Typically, the project company is party to the intercreditor agreement along with all the creditors of the project company (including the senior lenders, agent, security trustee/agent, any mezzanine debt providers and any shareholder of the project company). The project company will have an interest in making sure that the decision-making process of the lenders doesn’t result in unnecessary delays to the project company’s ability to make variations to the concession agreement and other project documents and otherwise adversely impact on its day to day management of the project.

(d)        Security documents

The project company will grant security over the project assets and its immediate shareholder(s) will grant security over the shares in the project company and the right to receive the repayment of any shareholder debt. The security is granted in favour of the security trustee/agent. See further, section 5.6 below.

(e)        Accounts agreement

The lenders will want to exert control over the cashflows of the project. They do this by imposing quite strict restrictions on what the project company can and can’t do with money flowing into and out of the project. All money will need to flow through one of the project accounts. The accounts agreement sets out the terms relating to the project accounts. The account bank (usually one of the lenders) holds the project accounts and it will be party to the accounts agreement, along with the project company, the agent and the security trustee/agent.

In African projects, the borrower is likely to have accounts both “onshore” in the local jurisdiction and “offshore”, for example, in England or the US. An offshore accounts agreement and an onshore accounts agreement will be required if that is the case.

The key accounts you will see in a project finance transaction are as follows:

1. proceeds account – all revenues received by the project company are paid into this account (including payments in the nature of revenue replacement such as delay liquidated damages or delay in start-up or business interruption insurance proceeds). As mentioned above, a “payment cascade” or “cashflow waterfall” operates on this account – this is an order of priority of payments which seeks to prioritise the payment of project costs ahead of debt service and then shareholder returns.
2. debt service reserve account (or “DSRA”) – a feature of project financing is that there is often a requirement for the project company to set aside money in a debt service reserve account to ensure that the project has funds to meet loan repayments and payment of interest over the following six to twelve month period. In the event that the project company is unable to meet its payment obligations at the required time, money can be taken from this reserve account for that purpose. There is usually a requirement to top up the account to the required level at the next available opportunity;
3. maintenance reserve account (or “ MRA”) – this is another type of reserve account. During its due diligence at the outset of the project, the lenders’ technical adviser may identify particular years where heavy maintenance is required and which will involve significant capital expenditure. To avoid this having an adverse impact on the project’s cashflow and increasing the likelihood of project company payment default, the lenders will require the project company to set aside money in advance in the maintenance reserve account to pay for this scheduled maintenance;
4. compensation proceeds account – this account will hold the proceeds of performance liquidated damages, compensation for expropriation or contract termination payments, until it is ready to be applied towards repayment of the debt;
5. insurance proceeds account – this account will hold the proceeds of physical damage insurance to the extent these are not required to be placed into a joint insurance proceeds account held by the project company for the benefit of both the lenders and the government. The money in this account will ultimately be used for reinstatement of the project or prepayment of the outstanding debt.

Quite often, the project company will hold money that it does not need to spend in the immediate future, for example, in the reserve accounts. In the meantime, it makes sense to allow the project company to invest this money until such time as it is needed. The accounts agreement will set out rules relating to the types of investments that are permitted and the terms upon which the project company is allowed to make those investments

(f)         Direct Agreements

Direct agreements create a direct contractual relationship between the lenders and the key contractual counterparties to the project e.g. the construction contractor, operator and government. See further, section 5.5 below.

(g)        Equity contribution agreement / shareholder support agreement

This is the agreement between the project investors, any holding company of the project company, the project company and the lenders (or their agent) which governs the relationship between them and provides for the equity arrangements in respect of the project financing.

The agreement will also include restrictions on the ability of the project investors to transfer their equity interests to third parties, at least, until an agreed period after project completion. This is to ensure that the project investors, who have been selected for their experience in similar projects, will remain in place until the project is performing successfully.