Infrastructure Finance: Structuring Projects That Attract Capital

A project finance SPV must be structured to ensure that its assets and cash flows cannot be reached by the creditors of the project sponsors or other participants in the event of a sponsor insolvency, and project finance counsel advising on SPV structuring must evaluate whether the SPV's organizational documents contain adequate separateness covenants and whether the financing agreements contain negative pledge and restricted payment covenants that prevent the SPV from taking actions that would impair its bankruptcy-remote status.

A step-in rights arrangement allows lenders to assume control of the project company's contractual position in the event that the project company defaults under the financing agreements, and structured finance counsel advising on a step-in rights structure must evaluate whether the concession agreement and construction contracts contain adequate direct agreement provisions that give lenders the right to cure the project company's defaults and substitute a replacement operator without triggering termination.

A concession agreement that fails to clearly define when the government will compensate the project company for revenue shortfalls caused by government actions leaves the project company exposed to significant financial risk, and public-private partnerships counsel advising on a concession agreement must evaluate whether the agreement adequately compensates the project company for the revenue impact of changes in law and whether the tariff adjustment mechanism operates automatically or requires regulatory approval.

A concession agreement's termination compensation provisions determine how much invested capital the project company can recover if the concession is terminated before its scheduled expiry, and project development and finance counsel advising on termination compensation must evaluate whether the compensation formula covers outstanding debt service and the investors' equity return in all termination scenarios.

The Equator Principles and the environmental and social standards of development finance institutions require project companies to conduct impact assessments, implement management plans, and report regularly to lenders, and ESG compliance counsel advising on infrastructure finance documentation must evaluate whether the environmental and social covenants in the financing agreements are specific enough to be independently verifiable and whether the monitoring and reporting obligations are realistic given the project's stage of development.

A cross-border infrastructure project must obtain permits and approvals from multiple regulatory authorities in each jurisdiction where the project is located, and foreign direct investment counsel advising on the regulatory strategy must evaluate whether applicable bilateral investment treaties provide adequate protection against regulatory changes that impair the project's economics.

A contractor or project company that seeks to excuse its performance obligations based on force majeure must demonstrate that the event was unforeseeable, outside the affected party's reasonable control, and that the affected party took reasonable steps to mitigate its impact, and energy and construction counsel advising on a force majeure or delay claim must evaluate whether the events claimed to constitute force majeure satisfy the specific definition in the applicable contract.

A dispute between a project company and a government authority that involves the interpretation of a concession agreement or a bilateral investment treaty obligation is typically better suited to international arbitration than to litigation in domestic courts, and international arbitration counsel advising on infrastructure dispute resolution must evaluate whether the concession agreement or applicable investment treaty provides a basis for submitting the dispute to international arbitration.