Security in project finance transactions
Security in project finance transactions

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Security in project finance transactions
  • Principles of security in project financing
  • Taking security—the project assets
  • Taking security—types of security in a project finance transaction
  • Share security and the holdco structure
  • Onshore and offshore security—relevant jurisdictions
  • Tripartite/direct arrangements
  • Intercreditor issues

Principles of security in project financing

Project finance is a type of secured lending.

Some of the reasons for taking security in a project finance transaction reflect the main advantages of taking security in any commercial finance transaction, including:

  1. giving the lenders priority over unsecured creditors of the borrower

  2. giving the lenders a better chance of recovering their money in an insolvency scenario

  3. giving the lenders the right to appoint a receiver or administrator if certain conditions are met (see Practice Note: Enforcement—debentures and floating charges), and

  4. providing a way for the lenders to control the borrower's (and any other security provider's) assets

Security in a project finance transaction is particularly important because the borrower is typically a special purpose entity which is set up specifically to develop and operate the project. In such cases, the borrower will have no credit history and its only assets are likely to be the project assets.

Given its relatively low independent corporate worth, the credit risk associated with the borrower is usually of less importance to project finance lenders than in a straightforward corporate loan transaction. Offering security over the project assets is one way for the borrower to enhance its creditworthiness and increase the lenders' confidence about being repaid.

Prudent lending in a project finance transaction is also about assessing the risks associated with the project and ensuring

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