For any renewables project where third party financing is provided, the third party funder (the “Lender”) will require security. Project financing of renewable energy projects is provided on a cash-flow basis and a Lender is concerned with the project’s ability to service the debt. A Lender usually requires security over all the assets of the project to ensure that the Lender is able to control and enforce against the whole of the project, should problems arise, and to ensure that the Lender has priority over the assets of the project against other creditors.
Debenture and share security
Usually a special purpose vehicle is set up so that the assets of the project are ring-fenced in a single project company. All assets required to construct and operate the project (including lease, project agreements, accounts and insurances) should be owned by the project company and the Lender will take security over all those assets. Security is usually taken by way of a debenture, which will include:
- fixed charges over the lease, equipment and accounts;
- fixed charges / security assignments of all relevant project agreements and insurances; and
- a floating charge over all of the project company’s assets.
A Lender would usually also require security over the shares in the project company. Share security would generally be given on a limited recourse basis, i.e. limited to the value of the shares so as to avoid further recourse to the shareholder(s). Where share security is required over the shares in the project company, it is more straightforward if a single holding company owns and grants security over the shares in the project company. Amongst other things this will avoid multiple corporate or natural persons being party to the security and other finance documents as shareholders.
A common misunderstanding is that security gives the Lender a right to step-in on a potential enforcement. In fact, security gives the Lender a right to realise the value of the secured assets to cover the debt owed to the Lender.
In addition to the debenture and share charge, a Lender would usually require direct agreements in relation to material project agreements. A direct agreement is a tripartite agreement between the Lender, the project company and the counterparty to a project agreement. It gives the Lender the right to appoint a representative to step in and perform the rights and obligations of the project company under the project agreement in order to keep a project running (and thereby preserve cash flow) if the project agreement would otherwise be terminable.
The difference between security assignments and direct agreements is that a security assignment assigns the rights of the project company under a project agreement to the Lender (e.g. payments), whereas under a direct agreement, the Lender has the right to appoint a representative to step in to the shoes of the borrower and perform the contract and carry on the project. The direct agreement prevents the counterparty from terminating the relevant project agreement for a specified period. During that period, the Lender can decide whether to appoint a representative to step in and/or to novate the project company’s role under the project agreement to a suitable substitute.
Any funding provided by investors, and security granted by the project company in respect of such funding, will need to be fully subordinated to the Lender. If a holding company has lent to the project company, the Lender may also seek to take security over that loan agreement by way of security assignment.
Security is a key part of project finance and should be carefully considered when agreeing terms with the Lender. Burges Salmon are happy to get involved at an early stage of the project development and/or financing and to provide advice on the security and corporate structure.