From Debt Structuring to Financial Close
A guide for non-investors navigating financing agreements, project security, and conditions to drawdown
In the previous note, CFADS to Cash Sweeps: Decoding Debt in Project Finance, I had expanded on what lenders do in the financial due diligence step when reviewing project finance transactions. That note had covered
The ratios that help them determine your project’s debt capacity.
The two main methods they apply in structuring debt before communicating terms.
Considerations when managing debt drawdowns and disbursements
While discussing managing debt disbursements, I had written briefly about:
Pro-rata drawdown whereby lenders will expect that equity is drawn alongside debt at levels pari-passu or in proportion to the share of equity agreed in the capital structure.
Conditions precedents, which are strict conditions that the borrower must meet to draw down debt capital even after signing agreements.
This note will build on the previous one to cover more of the discussions and documentation that you will encounter, when trying to achieve financial close on a project financed project. This note will the Agreements and documentation you must negotiate and sign, the content of the Security package you must provide when raising project finance with limited recourse, the types of Conditions Precedent to first drawdown that must be met before your lenders disburse the first payment, and the Conditions to subsequent drawdowns.
Agreements and Documentation
A. The Core Loan Agreements
Common Terms Agreement (CTA): This agreement encapsulates the standard terms and conditions that are common to all lenders participating in the syndicate. It deals with issues such as repayment, CPs, representations and warranties, covenants, and events of default.
o Representations and Warranties: Statements made by the Project Company and Sponsors affirming facts about the project and their capacity to meet obligations. They confirm that the Project Company is properly constituted, has executed all necessary contracts, and has provided accurate information.
o Covenants: Ongoing requirements and restrictions imposed on the Project Company throughout the loan term. They could be:
§ Positive Covenants require the Project Company to actively do something (e.g., provide financial projections, maintain required insurance, submit audited accounts, ensure Project Completion by the agreed date).
§ Negative Covenants prohibit the Project Company from taking certain actions without lender permission (e.g., incur operating costs above budget, change auditors, sell assets, or give security to other parties—a “negative pledge”).
o Events of Default (EODs): Stipulated failures that allow lenders to accelerate repayment or cease drawing funds (Drawstop). EODs include failure to pay debt service, insolvency, breach of covenant, or abandonment of the project.
Individual Loan Facility Agreement (ILFA): IF the loan is syndicated across more than one lender, then each lender may require unique treatments or terms. This Document houses provisions unique to a specific lender, particularly concerning pricing, repayment structure, maturity, or unique covenants or termination rights, ensuring that there are no contradictory and conflicting terms across all lenders.
Amendment and Waiver Agreement: Prepared around the time of closing, this provision is common to all lenders, dealing with the amendment and waiver of CPs or other terms.
The first three documents apply are if there are a few lenders – a syndicate of lenders providing the debt. IF the project finance debt is raised as bond in the capital markets, then you and other project sponsors will have to consider the documents listed in point 4.
Bond Documents: These include the Programme Trust Deed (constituting the bond issuance programme and setting covenants), the Pricing Supplement (final terms for the specific bond series), and the Vending Agreement (setting out obligations of issuing houses).
B. Equity Support and Sponsor Commitments
The sponsors’ commitments are detailed in the Equity Support Agreement (ESA). Lenders typically require a substantial equity contribution, as is determinable by the project’s debt capacity and the equity sponsors’ skin in the game, which acts as a cushion against losses and provides co-financing
The ESA addresses several critical sponsor commitments:
Base Equity Commitment: This is the sponsor’s commitment to provide a predetermined minimum percentage of the equity amount from the beginning. This specified percentage could be up to 100% of total equity. For lenders to proceed, evidence of the availability of this amount must be provided before the first drawdown date, with the remainder contributed proportionally before each subsequent loan drawdown.
Completion Guarantee: The sponsors’ recognition or reallocation of completion risk, potentially requiring the sponsor to step in and cover cost overruns if the EPC contractor defaults.
Contingent Equity Commitment: Beyond the base equity, the sponsor may commit to providing Contingent Equity up to a maximum amount. This funding is required to fulfil the completion guarantee if the project faces a Shortfall Amount and the available funding is now insufficient to achieve project completion.
If this contingent equity is contributed to bridge a claim (such as liquidated damages from a contractor or insurance proceeds), it may be structured as a bridge loan, which is repaid from the project afterwards.
Maintenance of Ownership: The sponsor undertakes to maintain the legal and beneficial ownership of 100% of the Project Vehicle’s shares for a specified period after the Commercial Operations Date.
C. Cash Management and Drawdown Provisions
The Project’s Account Agreement governs the administration of project accounts, and it is where lenders dictate and manage the flow of project revenue.
This agreement establishes various segregated accounts for example, Proceeds Account, Operating Account, Debt Service Payment Account, Debt Service Reserve Account, Major Maintenance Reserve Account.
All loan advances, equity proceeds, and project revenues must flow into the Proceeds Account.
This agreement stipulates restrictions on the distribution of cash flow in the form of dividends, requiring that, before any dividends are paid, there is no default, no outstanding project costs, the first repayment instalment has been paid, and the DSRA and Major Maintenance Reserve Account are fully funded to their required balances.
This agreement also details the Order of Priority of distributions – “the Cashflow Waterfall” that ensures all inflows are used in a way that ensures debt is serviced predictably. A typical Cashflow Waterfall is:
First: Project Costs, certain permitted pre-completion payments, and funding of Operating Accounts to meet operations costs.
Second: Transfers to the Major Maintenance Reserve Account.
Third: Debt Service payments.
Fourth: Transfers to the Debt Service Reserve Account (DSRA).
Subsequent Priorities: Voluntary prepayments and, finally, transfers to the Restricted Payments Account for dividend pay-outs to Equity holders.
The Security Package and Agency Documents
A comprehensive security package is essential for project finance debt. The security documents—often consolidated into an All Assets Debenture Deed—create a first-ranking security interest over all assets of the Project Vehicle in favour of the Security Trustee, a trustee who is secured to hold them on behalf of all lenders.
All Assets Debenture Deed: Creates a First-Ranking Fixed over major assets, then a Floating Charge over the rest of the assets of the Obligor and/or Co-Obligors (the Project SPV raising and carrying the debt on its balance sheet and/or the parent companies). This includes moveable and immovable assets, interests, income, bank accounts, insurance policies, and material contracts, with security being immediately enforceable upon an Event of Default.
Mortgage/Charge over Real Assets: A simple or legal mortgage over the Project Vehicle’s interest in the site, and a charge over permanent fixtures and immovable assets.
Charges over Movable Assets: fixed charges over all movable assets.
Floating Charge: A floating charge over all remaining assets, including receivables and the business as a going concern.
Assignment of Contracts and Claims: Assignment of the Project Vehicle’s rights under all major Project Documents (e.g. Off-take Agreement, Construction Contracts) and all insurance policies and actionable claims.
The security package could also include any or all of the following:
Recourse Deed: Governs the ongoing relationship and compliance. It sets out reporting requirements (quarterly/annual financial statements, technical, E&S updates), contractual restrictions (e.g., negative pledges, limitations on asset disposal, no new business), and establishes Monitoring/Consent Rights, including Step-In Rights. It also mandates the funding and operation of the Reserve Account.
Deed of Share Charge: A pledge over 100% of the shares in the Project Vehicle (subject to what is allowed by law).
Subordination Agreement: Ensures that any existing or related party loans (e.g., intercompany loans, or third parties to senior lenders are subordinated to the senior obligations.
Direct Agreements: These are contracts entered into between the lenders directly with other major project counterparties - like the EPC contractor or Off-taker, supplier, O&M - that allow the lenders rights to step-in directly in the event the Project SPV defaults.
In the note A Non-Lawyer’s Guide to Project Contracts – Part 1, I had covered the 7 principles for creating bankable contracts. The 6th principle of Signing in the right name, is relevant here.
Lenders seek to enter “Direct Agreements” with the Project SPV’s counter parties so that, as part of the project security package, they can “step in” and receive rights accruing to the project SPV across all other agreements to recover capital. Meaning that for direct agreements with lenders to be effective, the Project SPV that is the borrower must be the named party receiving the rights from the agreements with the other counterparties.
Subordination Agreement: Ensures that any existing or related party loans (e.g., intercompany loans, or third parties to senior lenders are subordinated to the senior obligations.
Agency Agreement: governs the roles of i) the Inter-creditor Agent - who coordinates activities like disbursement and managing defaults among the lending syndicate if it is more than one lender, and ii) the Security Trustee - who executes, perfects, holds, and enforces the securities.
However, to achieve financial close, signing the agreements is not enough; there are conditions to be met before the first drawdown and conditions to be met for subsequent drawdowns.
Both sets of conditions will have been discussed and negotiated alongside the financing agreements. I provide a glimpse into both, because while they are part of the discussions, meeting them allows drawdowns and actually keep the capital flowing into the construction of the projects
Conditions Precedents to first draw down
A. Documentary CPs to First Drawdown
These are the items you can “see and feel with your hands”. They are required to be executed and in acceptable form before the first round of funds is released. They will fall into any of the following categories:
Executed Project Documents: properly executed project agreements like Concession Agreement, Off-take Agreement, Strategic Resource Supply Agreements, Land Lease Agreements, Construction Contracts (EPC), Operations agreements. In the Note, A Non-Lawyer’s Guide to Project Contracts – Part 2 I had listed the common types of project contracts and went into details about their form and content of each, and what lenders will look for. If these forms, content, and counterparties are not acceptable, Lenders will make it a condition precedent to address these issues.
Security Perfection: Evidence that the documents that confirm the security package are in place. For example, the all asset debenture, 100% share pledge is registered and perfected, including undated share transfer forms executed in blank. Evidence of registration of mortgages/charges over the site and assets with relevant registries.
Final due diligence or audit Reports: Final Technical Advisor’s due diligence, Insurance Advisor’s Report, and Financial Model Auditor’s letter confirming the model review.
Legal Opinions: Legal opinions from lenders’ counsel, and/or external counsel (as necessary) confirming the legality, enforceability, and validity of the documents and security package.
Evidence of Compliance: Copies of all required governmental approvals, licenses, permits, for the construction and operations of the project. Also included are approved Environmental Impact Assessment (EIA), Resettlement Action Plan or livelihood restoration plans for projects that require them.
Payments or commitments to cover Fees & Expenses: Evidence that all fees, costs, and expenses due to the Finance Parties and their advisors (due diligence fees, commitment fees) have been paid or will be paid from the first disbursement proceeds.
B. Non-Documentary CPs to First Drawdown
These non-documentary conditions focus on financial commitments and confirmations of compliance:
Evidence of Base Equity : The sponsor must provide evidence that the agreed amount of Base Equity (often 30% to 40% of the sponsor’s commitment, or sometimes 100% of all equity) is available before the first drawdown has been paid into the Project Vehicle’s accounts.
Lender Confirmation: Each lender must confirm that all CPs specifically referred to in their respective Individual Loan Facility Agreements (ILFAs) have been satisfied or waived.
Conditions for subsequent drawdowns
For future drawdowns, the Project Vehicle must satisfy additional Conditions before each subsequent drawdown can occur. The satisfaction of these subsequent CPs is vested jointly in the Project Vehicle and the Project Sponsors.
These conditions are sometimes about following a stipulated process to request the drawdown, sometimes they are a certification or confirmation of project progress. They include some or all of the following
Formal Request: The Project Vehicle must submit a formal written request for further disbursement in the specified form, typically 5 to 7 business days before the proposed date.
Certification of Costs: The Project Vehicle’s independent auditor must certify the project costs already spent, ensuring they align with the agreed plan and schedule.
Certification of Milestones: A technical Advisor approved by lenders must certify that construction milestones relevant to the prior disbursement have been met (e.g., specific pile work or clearing completed).
No Default / No Material Adverse Change (MAC):
The Project Vehicle must confirm that no Default or Event of Default has occurred or is continuing. Defaults often arise from failure to comply with covenants (e.g., maintaining specific operational metrics or not incurring unauthorized financial indebtedness).
The Project Vehicle must confirm there is no Material Adverse Change (MAC) in the financial condition of the sponsor, the Project Vehicle, or any major participant (e.g., EPC contractor). Proving a change is not materially adverse often requires clear communication and agreement from all lenders.
Unfunded Cost Overrun Check: The Project Vehicle must ensure that the Remaining Project Costs do not exceed the Available Funding (i.e., you haven’t run out of money and need an uncommitted bailout).
Proportional Equity Contribution: The sponsor must have contributed additional Base Equity in an amount necessary to maintain the agreed debt-to-equity ratio for that particular drawdown.
If the conditions precedent to the first drawdown are met, then financial close is achieved. Proper management of conditions to subsequent drawdowns allows the flows of the construction finance raised to be disbursed efficiently.
Bringing it all home
As I was writing this note, I was reminded of a Yoruba saying. “Owo olowo soro na” – Roughly translating into “someone else’s money is hard to spend how you like.”
Achieving financial close after due diligence is a series of rigorous discussions and negotiations over several documents
It is not easy at all.
I do not say this to discourage you; rather, to inform you that you will have a lot to do.
If you have noted and followed all the advice given in past notes and properly organised yourself and your team, you will be far better prepared to raise capital and achieve financial close.
Let me recap some of the advice:
No project development, no capital deployed: The smoothness and ease of raising capital are strongly correlated to how well you did in the first four stages of project development.
Make sure the project is worth the effort – As you see you will do a lot of work.
Prioritise and focus your efforts – You cannot spread yourself and your team across many of these projects at once. – Stop pretending you can.
Secure a dedicated core project team internally to be on top of all that is needed
Do proper risk assessment.
Hire quality advisory – Secure quality experience, legal and financial advisers early, at least from Mid-stage (stage 3) and from early stage (Stage 2), secure technical, commercial, and ESG for work preceding due diligence and raising capital, so your outputs align with investor requirements
Maintain and organise your records – Simple and underrated, yet deadly to transaction progress and success if ignored.
Expect conditions precedents: You will notice many of the documentary CPs are outputs of earlier stages of project development. Now you see how a stitch in time saves nine, or in this case, project development done on time saves a multi-million-dollar transaction.
Prepare to manage conditions to subsequent drawdowns: Do not view these conditions subsequent as a simple checklist to be completed at the end. They must be proactively managed. Delayed disbursements lead to a delayed project.
Secure Equity: Understand that your equity contribution (Base and Contingent) is the “cushion” that de-risks the debt and signals your commitment. Have the financial capacity and commitment ready to fulfil the equity obligations before the first disbursement.
Reviewed to complete this note
Financing Infrastructure Projects – A paid course developed by The African Catalyst and Brickstone
Work done with previous employers, especially InfraCredit
All errors in naming, description, and categorisation are mine.