Enter to open, tab to navigate, enter to select
Project Finance Risk Identification and Analysis Toolkit
Practical Law Toolkit w-040-5764 (Approx. 13 pages)
Project Finance Risk Identification and Analysis Toolkit
by Practical Law Finance
| Maintained • USA (National/Federal) |
A Toolkit containing resources counsel can use to identify, understand, assess, and mitigate risks in project finance transactions involving US parties. These resources explain typical risks in project finance transactions and provide tools to assist counsel in structuring, drafting and negotiating project documents to allocate, manage, and mitigate these risks. These resources cover a wide range of risks including change in law risk, construction risk, and environmental and permitting risk.
In a project financing, lenders look primarily to the revenues the project earns from the project and the project assets to repay the loans. The lenders have limited recourse to the project company's equity owners (the project sponsor or project developer) or their assets. It is imperative, therefore, that lenders and their counsel identify and understand the risks to the project assets, the project company's ability to repay the project debt, and the lenders' rights in the project assets and under the project documents. Project sponsors and their counsel must also understand these risks to attract investor interest and develop the appropriate legal and capital structure for the project.
A bankable and commercially viable project requires a thorough understanding of:
- The project structure and how the project will be built and operated.
- The project company's obligations under the project documents. These documents include:
- the engineering, procurement, and construction (EPC) contract;
- the operation and maintenance (O&M) agreement; and
- the key permits and authorizations the project company and other applicable project participants need to construct, operate, and sell the project's output (for example, authorizations from the Department of Energy to export liquefied natural gas (LNG), or permits from a regional transmission organization or independent system operator to connect a wind energy or solar energy project to the grid).
- The project company's revenue sources (including offtake agreements, spot market sales, and hedges) and the circumstances under which payments to the project company may be reduced, suspended, or terminated.
- Any circumstances under which debt service payments may be restricted or suspended.
- Any obligations the project company may have to third parties that may have priority over the lenders or that may otherwise threaten the project company's ability to repay the project debt.
For more information on these issues, see:
Practical Law has many resources to help counsel identify project risks and understand the mechanisms lenders and project developers can use to manage and mitigate these risks. This Toolkit also includes resources to explain these risks in specific sectors including midstream oil & gas, power (conventional and renewable energy), and transportation infrastructure. Whether these resources apply depends on the project and the parties involved in the transaction.