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Term Conversion
Practical Law Glossary Item 5-579-4988 (Approx. 3 pages)
Glossary
Term Conversion
In a project finance transaction, a set of conditions a project company must satisfy once the project has achieved substantial completion or final completion to convert a construction loan to a term loan. Failure to satisfy these conditions may result in the immediate repayment of the construction loan.
These conditions may include:
- The project company is in compliance with certain financial ratios (for example, the debt service coverage ratio).
- The project documents (including the operations and maintenance agreement, the offtake agreement, and any operating permits) are in full force and effect.
- No default or event of default has occurred and is continuing under any of the transaction documents.
- The administrative agent has received a certification from an independent engineer that the project has been completed in accordance with the agreed specifications and can perform according to the base case and the requirements of the offtake agreement.
Project sponsors want to convert construction loans to term loans because once converted:
- The margin on the loans is typically lower.
- The sponsor may be permitted to receive any agreed distributions.
- The sponsor's obligations under any completion guarantees or equity contribution agreements may terminate.
For more information on term conversion and the conditions to conversion, see Practice Note, Financial Covenants: Project Finance Transactions.