One of the cornerstones of the NPD model is the principle that the Project Company should at all times be managed by the parties whose lending is at risk. It follows that, in the absence of dividend-bearing equity, the ownership and control of the Project Company lies with the junior lenders (subject to senior lenders' step-in rights).
In the absence of equity returns, the junior lenders are incentivised to manage the "equity risk" to protect their investment and secure their forecast return. The junior lenders appoint the majority of the Project Company's directors (pro rata to their investments of junior debt) to give them the control needed to manage this risk. To preserve this link between investment risk and control, the shares in the Project Company are "stapled" to the junior debt investment so that the ownership and control of the Project Company always transfers with the investment (and vice versa).
Junior funding may come from sub-contractors, senior lenders or third party funds and institutions. When it comes to managing the affairs of the Project Company conflicts of interest may arise, depending on the nature of the junior lenders, around issues such as:
• Changes to senior and/or junior debt terms, particularly where junior lenders are also senior lenders
• Changes to sub-contracts if junior lenders are also sub-contractors
• Application and enforcement of penalties
• Levels of insurance cover
Conflict is perhaps best avoided if the investor structure is a mixture of both contractors and funders, although this may not always be possible. The potential for conflicts of interest must be dealt with up-front through the Project Company's articles of association. The standard suite of documentation produced by SFT contains standard conflict of interest provisions.