The global financial crisis has impacted on the margins and risk profile on which many infrastructure project finance business plans were based.
Against this background of changing economics, Project Finance Lenders need to be clearer on the robustness of their contractual and commercial agreements and how they stand up against their financial projections and the predictability of completion dates.
Investors and banks holding infrastructure assets are increasingly demanding a better understanding of the agreements and the operational risks in infrastructure project finance agreements, particularly in comparison to the original conditions when the loan agreement was set up.
Key areas of interest for banks when understanding the risk profiles of contracts include:
• Income producing agreements to gauge the certainty of income from the demand side
• Operator cost agreements to determine the certainty of costs
• Management and maintenance agreements to ascertain asset longevity
• Health and Safety strategy to understand the risk of shut-down and resulting income
• Technology upgrade as a precursor to reduced asset value
• Third party interfaces that may impact the certainty of completion.
All banks should have an up-to-date understanding of the current status of contracts against the above criteria. Therefore, whether it is managing risk or keeping good clients, Project Finance banks need to have a toolkit that keeps them up-to-date with the asset’s risks and enables them to provide added-value advice to their borrower clients.
Understanding the assets to mitigate risks
Without an understanding of the assets, it is more difficult to grasp which contractual risks affect the CAPEX and OPEX budgets for the asse,andwhich impact the debt risk. It is also difficult to develop the appropriate mitigation plans.
Banks should undertake a sound contractual and forensic review based on deep knowledge of the asset class, in addition to sourcing a pure legal opinion. The contracts are the glue which bind the assets to the banks and act as underlying covenants against the debt. If the glue is fixed either to the wrong parts of the assets or to incomplete assets then their value can be significantly reduced.
Keeping clients and winning more business
An asset review linked to the contract review is also an opportunity for Project Finance banks to act as a learned lender to their clients. Instead of being a lender competing on price, there is an opportunity to share valuable knowledge and insight with the borrower. The contract and asset review will also highlight areas and opportunities for improved performance risk or improved value.
A project finance bank’s ability to provide this level of advice to borrowers will help position them as a true partner to the borrower, rather than just a commodity provider of debt.
To support Basel III requirements, a review should be implemented at least once a year to ensure that the robustness of agreements, in terms of risks and returns, truly reflects the prevailing market conditions.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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