Projects are typically financed on a limited recourse basis through one or more sources, including: • government contributions • senior debt provided by commercial lenders and/or funds (see Practice Note: Project finance—key finance parties), and • equity provided by project sponsors (see Practice Note: Project finance—key project parties—Sponsor) However, in certain jurisdictions, senior debt provided by commercial lenders and/or funds may be difficult to obtain due to the limitations on local liquidity and/or actual or perceived local political risks (see Practice Note: Project risks and risk allocation—Legal and political risk in a project finance transaction). This funding gap in developing markets may be bridged by funding provided by institutional lenders, such as Export Credit Agencies (ECAs) and multilateral or bilateral (national) Development Finance Institutions (DFIs). Alternatively, lenders providing senior debt may be supported by an ECA or DFI by means of a guarantee or other form of insurance cover. Typically, ECAs are involved

Many of the usual conditions precedent for a typical syndicated loan facility will also be applicable to a project finance transaction. For information on those conditions precedent, see Practice Note: Conditions precedent. This Practice Note looks at additional conditions precedent which may apply in a project finance transaction. Purpose and timing of conditions precedent in project finance Conditions precedent are included in finance documents for the benefit of the lenders. Conditions precedent give the lenders justification for refusing to lend if they are not sufficiently comfortable about the issues on which they have based their credit appraisal. Conditions precedent confirm key information about: • the borrower and any other obligors (eg their capacity to enter into the transaction documents and their financial standing), and • the transaction (eg adequacy of security and receipt of necessary licences and approvals) In a project finance transaction, lenders also need particular assurances about the viability of the project and the terms of the contracts which underpin the project. When in the transaction are conditions precedent required to be provided? As

Due diligence is an important part of any commercial finance transaction but it is absolutely critical in project finance transactions because projects are inherently risky. For more information on the typical risks involved in a project finance transaction, see Practice Note: Project risks and risk allocation. Many projects share certain key areas of focus for the due diligence process. This Practice Note provides a summary of those areas and guidance on the type of information that the lenders will require. Scope of due diligence in project finance transactions Due diligence in a typical project finance transaction covers a broad spectrum of issues including: • legal and political matters • environmental and social matters • insurance requirements, and • tax and accounting issues The scope of the due diligence reports, particularly the legal report, is often heavily negotiated by the lenders and the sponsor. For more information on the role of a sponsor, see Practice Note: Project finance—key project parties—Sponsor. The lenders will be keen to ensure that all aspects of the project

Many of the usual events of default for a typical syndicated loan facility will also apply (in some form) to a project finance transaction. For information about those events of default, including what events of default are, common events of default and distinguishing between an event of default, default and potential events of default, see Practice Note: Events of default. This Practice Note examines the types of additional events of default which may apply in a project finance transaction. Purpose of events of default in a project finance transaction Events of default give lenders a mechanism under which they can, if they choose, take action against a borrower for breach of its obligations under a facility agreement or if certain other events occur. This is preferable to relying on general contract law for remedies for breach of the terms of the agreement. There are advantages for all parties in listing out the events of default rather than the lenders having a generic right to act on any breach. These are: • certainty as to when the lenders can

For project finance lenders, understanding the financial health of a project is critical. In a typical project finance transaction, the project is the borrower's only source of income from which to repay the debt (see Practice Note: Introduction to project finance—Concept of project finance). Undertakings (also known as 'covenants') are promises given by the borrower (and sometimes also members of the borrower's group) to the lender about performing or not performing certain actions. For more information on undertakings generally, see Practice Note: Undertakings (covenants). Financial covenants are a specific type of covenant or undertaking. They are promises to meet or comply with certain financial thresholds. Financial covenants are used in many different types of commercial finance transactions (for more information on financial covenants generally, including on relevant provisions in Loan Market Association documentation and accounting principles, including International Financial Reporting Standards (IFRS), see Practice Note: Introductory guide to financial covenants). Financial covenants are generally used: • to enable lenders to monitor the financial performance of the borrower and/or its group • to give an indication

Before embarking on a potential project, the proposed sponsor must prepare a 'feasibility study' to assess the project's viability. A feasibility study analyses the key elements of a proposed project (eg issues relating to the economics of the project, technical matters, contract terms, any necessary government support and market need for the project). If the sponsor decides that the project is viable, it will often then use the feasibility study to explain the project to potential lenders and equity investors. An important part of the feasibility study is the 'financial model'. This Practice Note explains what the financial model is, what it is used for and how it is checked by the lenders. For more information on the content of the feasibility study, see Practice Note: Project finance—due diligence and 'bankability'—Technical due diligence/feasibility study in project finance transactions. What is a financial model? In the context of a project finance transaction, a financial model is a spreadsheet which is used to generate, among other things, the forecast revenues and outgoings of the project. A

Documents for a typical project finance transaction can be split into three broad categories: • finance documents—the finance documents govern the debt financing for the project including the senior debt and any related facilities (eg a cost overrun facility or other standby facility) or ancillary facilities (eg a letter of credit facility or a working capital facility) • project documents—the project documents are the contracts which underpin the project itself and they typically include the concession agreement (if any), construction contract, the operation and maintenance contract and any supply and offtake contracts (for more information, see: Project documents—issues for lenders—overview), and • shareholder or equity documents—the shareholder or equity documents govern the terms of the equity investment and the relationship between the investors in the project (for more information on equity support in project finance, see Practice Note: Equity support in project finance) This Practice Note examines the first category of documents, the finance documents. It explains what they are and some of the key terms in them. Overview of the

The main finance parties in a typical project finance transaction are similar to those involved in any syndicated lending transaction, ie: • the lenders • hedging counterparties • the arranger(s) • the intercreditor agent (sometimes called the common agent) • the facility agents, and • the security trustee/security agent In a project finance transaction, there are usually other roles to be played in the financing arrangements and/or on behalf of the finance parties. These include: • the account bank(s) • the role banks, and • specialist/technical advisers to the finance parties Some of these additional roles can be filled by one or more of the banks or financial institutions already involved in the transaction. The main project parties in a typical project finance transaction are explained in Practice Note: Project finance—key project parties. Finance parties The term 'finance parties' in a project finance facility agreement generally refers to the banks or other financial institutions that: • provide the debt financing for the construction and/or operation of the project, and/or • perform

The main project parties in a typical project finance transaction are: • the sponsor(s) • the project vehicle (referred to in this Practice Note as the 'project company') which is typically the borrower of the project loans • a holding company • contractors and sub-contractors • suppliers • off-takers, and • the host government The main finance parties in a typical project finance transaction are explained in Practice Note: Project finance—key finance parties. Sponsor The sponsor is the party which develops and manages the project. The sponsor is typically a private company or group of companies. The government of the country in which the project is located (the host government) may also sometimes be a sponsor particularly in projects involving public services, eg infrastructure (roads, rail, ports etc), social facilities (schools, hospitals, prisons etc) or natural resources (oil, gas, mining etc). Even where a host government is not involved in initiating a project, it often has an important role to play in making a project viable—see Host government below. In some

Projects involving the development of a new asset or facility (known as 'greenfield' projects) are generally split into two phases: construction and operation. In a project finance transaction, completion marks the end of the construction phase of the project and the start of the operating phase. This Practice Note explains how completion is defined and tested and what effect it has on the project. Defining completion in a project finance transaction The way completion is defined tends to vary. For example, it can be referred to as: • 'practical completion' (common in real estate projects) • 'economic completion' (common in mining projects) • 'construction completion' (common in infrastructure projects), and/or • 'mechanical completion' or 'ready for start-up' (common in oil and gas projects) The way completion is defined is very important to project lenders and the project participants. A number of aspects of the project will change at completion so the definition has to be as precise as possible and it must deal with everything that each party considers necessary to

Many of the usual representations and warranties for a typical syndicated loan facility will also be applicable to a project finance transaction. For information about those representations and warranties, including what representations and warranties are and why they are used, see Practice Note: Representations and warranties. This Practice Note examines the types of additional representations and warranties which may apply in a project finance transaction. Purpose of representations and warranties in a project finance transaction Under general contract law, representations and warranties differ in meaning: • representations are pre-contractual statements of fact made by a party to a contract which induce another party to enter the contract—if a representation is incorrect or misleading, it may give rise to a claim for misrepresentation under general law, the remedy for which will be rescission and/or damages depending on the type of misrepresentation • warranties are terms of the contract, breach of which will give the innocent party a right to sue for damages but not rescind the contract For more information, see Practice Note: Representations and warranties—Meaning

Undertakings, or covenants as they are sometimes called, are promises given by the borrower(s) and any obligors to the lender (or finance parties in a syndicated facility) to perform or not perform certain actions. The borrower may also undertake to procure that its subsidiaries adhere to the undertakings. In contrast to representations, undertakings will remain in force throughout the life of the facility. The breach of an undertaking will normally trigger an event of default. Rather than exercising its contractual right following an event of default to accelerate the loan, ie demand repayment of the loan, the lender may, in practice, use the threat of acceleration to ensure the breaches and any underlying problems with the business are dealt with promptly. For more information on events of default and acceleration, see Practice Note: Events of default. Many of the usual undertakings for a typical syndicated loan facility will also apply (in some form) to a project finance transaction. For information about those undertakings, including what undertakings are and why they are used, see Practice Note: