Security Documents

8/6/2019 Security Documents

1/15


2/15

INTRODUCTION

Logic in structuring security for a projectfinance initiative is linked to financingpackage as a whole

Before analyzing a security, make a fewpreliminary and institutional comments onthe rules and principles regarding securityinterest and the purpose of security

package Security interest have a purpose of

segregating the asset as a security forcredit


3/15

Rights acquired by lender over

secured assets Right to have it sold to a third party and

convert the asset into cash

Right to preemption, obtain priority overother creditors

Right to enforce the security over an

asset even if purchased by third party


4/15

Structuring a projects security package isdone in compliance with the nature andfunction o project company.

Structural difference begins to emergebetween security on traditional loans andsecurity package just as project companycontains and coincides with the project.

Security package is usuallycommensurated to the value of the securedassets , which should be equal or greaterto the value of the loan.


5/15

The project company does not own any material asset whosoever at

the outset of the project

The value of the security package is enough to cover total exposure to

banks

Identifying assets to be secured in favor of lenders does not constitute

a contentious point between the parties

There is a defensive and positive functions of the project company.

Defensive function pertains to protecting the project and its property

from its right of third party


6/15


7/15


8/15

When project finance faces a crisis, lenders have to safeguard their interests is to take

over project and project management.

The pledge on the shares of a company gives secured lenders the right to carry out

forced sale of these shares.

Lenders can sell the part of the pledged shares if the borrower defaults on the loan.

Rather selling the shares to the third party, the secured lender can claim ownership

over then in certain circumstances.

Typically a pledge on the project companys share has primarily a positive function.

This is the easiest security to enforce and it is the most effective in terms of protecting

lenders.

Shares belong to the sponsors and not the project company itself.

The question arises as to the function of security created directly on assets owned by

the project company and why this cannot be avoided.

The answer is that lenders want to take every possible measure to defend the project

company's assets.


9/15

If the cash flow generated from project operations for funds to repay the loan, then

security on the company's credits toward third parties is the lenders who secure thisflow..

The receivables deriving from contracts entered into by the project company for

payments from the sale of goods of services are credits guaranteed as security.

Such credit also influence future and contingent credits for reimbursement,

compensation, indemnities and credits arising from the guarantees issue in favor of the

pledgor related to these contracts.

Each one of the project companys receivables from third parties is subject to a pledge

by way of security in favor of lenders.

Receivables from off take agreements are revolving credits.

They derived from the supply of goods and services by the project company to

respective buyers.

Only in case of the enforcement lenders reserve the right to demand directly from the

third party debtors.


10/15


11/15

Mortgage on the projects property:

Building has not begun when project company takes a mortgage on the

plant construction site.

Object of the mortgage will be complete when plant construction is

finished.

That Involve public administration right to build and maintain is

granted by way of a public authorization.

Soundness of the right to build the project is verified on a case by case

basis in the applicable jurisdiction. Possibility of creating a valid security interest in favour of the lenders

over the right to build is also to be ascertained.


12/15

Security on other project company assets:

Other assets, besides receivables, cash in bank and real estate

secured for benefit of lenders

Defensive function plays role-these assets do not have economic value

to attract the interest of lenders.

As with Security interests- project location determines which law is

applied to the instruments relating to the assets in question.

Among different jurisdictions, there is significant divergence relating to

possibility of securing these assets and effectiveness of this security.

In this case, we can only refer to specific analysis of the various legal

systems


13/15

Direct Agreements:

Are contracts executed directly by the lenders and key counterparties.

Recognized as a normal part of a project finance security package that

describes the nature and function of security documents.

Purpose:

1) To safeguard the project agreements and

2) To establish a sort of lenders right to take over these agreements

on the other.


14/15

Contd..

Purpose of these provisions is clear: lenders reserve the right to replace the

project company with a different party in the project contracts both to

prevent the possibility that a default by the project company may trigger

termination and to take control of the project if the need should arise.

This would be the last resort in case of a financial crisis.


15/15

THNAK YOU

Presented by

Deekshith Ravi ChandraAnn stephen

Vaibhav Nagar