The financing and refinancing of Spanish project finance transactions has long been attractive to international investors. However, the profile of investors is increasingly changing. Many of the more traditional overseas banks are currently selling their participations in long-running infrastructure projects (we have worked with a number of clients over the last year in the sale of participations in loans to long-term projects such as toll roads and renewable energy stations). We are now seeing a variety of funds, such as insurance, pension and sovereign debt funds, moving into the sector in their place. We have recently worked on a deal that has been 100% funded by the direct lending of investment funds. As far as we are aware, this was the first of its kind in Spain.
This change in profile of investors creates a number of new challenges and opportunities that need to be considered, both from a legal and a practical perspective.
From a practical perspective, the nature of investment funds means that the timetable and closing mechanics of project finance deals are different and should be considered from the very early stages of a transaction. When it comes to closing the transaction, many funds often need an extended period to call on funds in order to have them in place for closing. In practice, this means that the documentation must be agreed and signed at least 5-10 days in advance, something that Sponsors should bear in mind when setting timetables for closing. Timing is also key if the transaction is a re-financing, where the repayment of existing facilities and release of existing security needs to be considered. In particular, investment funds are wary of taking credit risk on third party Agents if money is required to be provided and held by the Agent upfront in anticipation of closing.
In respect of the legal documentation, many previous infrastructure deals in Spain were financed using Spanish law documents, however, as the use of English law documents is a key selling point for overseas investors, we have seen an increase in English law governed contracts, and we expect this to continue. When preparing documentation for deals involving investment funds, we have seen an increased focus on three areas in particular:
- how information is provided to lenders during the life of the loan;
- how the relationship between lenders with different lending profiles is regulated (for example, through the use of fixed and floating interest rate tranches); and
- the importance of prepayment provisions. These differences reflect the fact that investment funds are often looking for long term investments and do not want to be voluntarily prepaid.
As investment funds continue to fill the gaps created by banks pulling back from long-term overseas investments, the focus on the documentation and management of project finance transactions here in Spain will continue to grow. With this in mind, look out for a more detailed briefing note looking at the challenges and opportunities that we hope to circulate in the first quarter of 2017.