Project Financing is a financial structure for the development of large infrastructure projects under which creditors do not depend upon the financial capacity of those carrying out the project, or on the security they offer, to pay amounts owing. Rather, creditors provide a loan based on the extent to which they consider that the project will produce income which will in turn, guarantee a return to them, and in which they assume, as a consequence, the risk
inherent in the transaction.
As a result of the foregoing, it is necessary to develop and implement a legal structure that allows the risks of the transaction to be evaluated, reduced, and transferred in such a manner as to carry out the project while providing security to lenders or sponsors.
In general terms, Project Financing consists of a contractual network that revolves around the appropriate legal vehicles for the type of transaction (joint venture, commercial company, trust, or even investment promotion companies [sociedades anónimas promotoras de inversion or S.A.P.I.s]). Each party involved (banks, construction companies, operators, etc.) enter into contracts with this vehicle and these govern each specific part of the transaction.
Basham, Ringe y Correa, S.C., as legal advisor for this type of project, advises on structuring the Project Financing in such a way that: (i) the appropriate legal vehicle for each project is specifically determined – special purpose vehicle (SPV); (ii) the risks inherent in the project are identified clearly and quickly; and (iii) an efficient contractual network is structured that ensures the flow of the project and minimizes or transfers risk to the greatest extent possible.
Among the activities undertaken by our firm both for the structuring of Project Financing and for carrying it out, are:
IN THE FORMATION:
- Determine the type of entity to be used as the SPV and prepare its bylaws;
- Review the project to identify risks;
- Prepare the contracts and agreements among the parties to the transaction; and
- Determine the “bankability” of the project.
WHILE THE PROJECT IS BEING CARRIED OUT:
Prepare all contracts to carry out the construction works, as well as necessary subcontracts, such as (EW, EPC and O&M Agreements; PPA Agreements; security for construction contracts; insurance; and purchase and sale agreements, among others).
- Granting powers of attorney to banks, as creditors in the transaction;
- Loan agreements;
- Inter-Creditor Agreements when there is more than one creditor;
- Equity Contribution Agreements;
- Hedging Agreements;
- Due diligence review and legal opinion prepared by lawyers for the creditor; and
- Syndication of the loan.
ECUADOR PRINCIPLES AND ENVIRONMENTAL ADVICE ON PROJECT FINANCING
The Ecuador Principles are a set of voluntary international standards for evaluating environmental and social risks in Project Financing. They were created by a group of international banks and adopted in June 2003. The banks that apply the Ecuador Principles (known as Equator Principles Financial Institutions “EPFIs”) have agreed to apply these principles to projects that require loans greater than ten million dollars and not to finance projects that do not comply with the social and environmental standards set out in these Principles. The most important banks in Mexico which carry out Project Financing have adopted the Ecuador Principles.