INTRODUCTION

Logic in structuring security for a project finance initiative is linked to financing package as a whole Before analyzing a security, make a few preliminary and institutional comments on the rules and principles regarding security interest and the purpose of security package Security interest have a purpose of segregating the asset as a security for credit

Rights acquired by lender over secured assets

Right to have it sold to a third party and convert the asset into cash Right to preemption, obtain priority over other creditors Right to enforce the security over an asset even if purchased by third party

Structuring a projects security package is done in compliance with the nature and function o project company. Structural difference begins to emerge between security on traditional loans and security package just as project company contains and coincides with the project. Security package is usually commensurated to the value of the secured assets , which should be equal or greater to the value of the loan.

The project company does not own any material asset whosoever at the outset of the project

The value of the security package is enough to cover total exposure to banks

Identifying assets to be secured in favor of lenders does not constitute a contentious point between the parties

There is a defensive and positive functions of the project company. Defensive function pertains to protecting the project and its property from its right of third party

Project lenders need to have security interest directly on project companys assets

Positive reasons that justify the creation of security package are related directly to a possible financial crisis the project may face

The aggregate value of the secured assets is not enough to ensure economically acceptable coverage for financing.

Lenders would have to take possession of the project to avoid the risk of interrupting operations, which would further damage the project and reduce the chances of loan reimbursement

Step in rights

It refers to the mechanism lenders utilize to take total or partial control over the project or some of its components

When project finance faces a crisis, lenders have to safeguard their interests is to take over project and project management. The pledge on the shares of a company gives secured lenders the right to carry out forced sale of these shares. Lenders can sell the part of the pledged shares if the borrower defaults on the loan. Rather selling the shares to the third party, the secured lender can claim ownership over then in certain circumstances. Typically a pledge on the project companys share has primarily a positive function. This is the easiest security to enforce and it is the most effective in terms of protecting lenders. Shares belong to the sponsors and not the project company itself. The question arises as to the function of security created directly on assets owned by the project company and why this cannot be avoided. The answer is that lenders want to take every possible measure to defend the project company's assets.

If the cash flow generated from project operations for funds to repay the loan, then security on the company's credits toward third parties is the lenders who secure this flow.. The receivables deriving from contracts entered into by the project company for payments from the sale of goods of services are credits guaranteed as security. Such credit also influence future and contingent credits for reimbursement, compensation, indemnities and credits arising from the guarantees issue in favor of the pledgor related to these contracts. Each one of the project companys receivables from third parties is subject to a pledge by way of security in favor of lenders. Receivables from off take agreements are revolving credits. They derived from the supply of goods and services by the project company to respective buyers. Only in case of the enforcement lenders reserve the right to demand directly from the third party debtors.

Two ways- first is the fundamental requirement that all assets of the project company must be subject to security. Cash is the most attractiveness for lenders and it is not affected by market risk. Second involves a logical line that from receivables from third parties leads to a pledge on cash from the moment the project company collects a payment and turns a credit into cash or funds in a bank account. All the project companys bank accounts are pledged, the only exception being the account where cash available for distributions to sponsors is credited. The enforcement of this security is regulated as per the other security and follows an event of default. Security on project companys assets, lenders will decide to enforce the security over the project companys assets only if there is no possible way to keep the project running.

Mortgage on the projects property:



Building has not begun when project company takes a mortgage on the plant construction site.

Object of the mortgage will be complete when plant construction is finished.

That Involve public administration right to build and maintain is granted by way of a public authorization.

Soundness of the right to build the project is verified on a case by case basis in the applicable jurisdiction.

Possibility of creating a valid security interest in favour of the lenders over the right to build is also to be ascertained.

Security on other project company assets:



Other assets, besides receivables, cash in bank and real estate secured for benefit of lenders

Defensive function plays role-these assets do not have economic value to attract the interest of lenders.

As with Security interests- project location determines which law is applied to the instruments relating to the assets in question.

Among different jurisdictions, there is significant divergence relating to possibility of securing these assets and effectiveness of this security.

In this case, we can only refer to specific analysis of the various legal systems

Direct Agreements:
 

Are contracts executed directly by the lenders and key counterparties. Recognized as a normal part of a project finance security package that describes the nature and function of security documents.

Purpose: 1) To safeguard the project agreements and 2) To establish a sort of lenders right to take over these agreements on the other.

Contd..

Purpose of these provisions is clear: lenders reserve the right to replace the project company with a different party in the project contracts both to prevent the possibility that a default by the project company may trigger termination and to take control of the project if the need should arise.

This would be the last resort in case of a financial crisis.

THNAK YOU

Presented by Deekshith Ravi Chandra Ann stephen Vaibhav Nagar