The loan agreement between the lenders and the project company generally provides the bulk of the financing for the project company.
Key Issues
The following issues need to be considered for a loan agreement.
• Facility. This means information about the terms of the loan facility, including:
o Commitment, the amount of the loan.
o Availability, draw down period and conditions. The project company would usually provide a draw down notice with documents as required by the lenders to show that the conditions for draw down have been met.
o Interest rate, this is usually expressed as a formula for a quoted risk free interest rate (for example LIBOR) plus a fixed amount of interest.
o Repayment, the repayment dates, and the last day for repayment
• Application of funds. The loan agreement would specify how the project company should disburse of the loan amount.
• Conditions precedent. There are two types of conditions precedent to consider. First, conditions to the effectiveness of the loan agreement. Second, conditions to drawdown. Most loan agreements provide for the borrower (the Project Company in this case) to draw down by providing notice to the Lender, together with confirmation and documentary evidence that the Project Company has completed its conditions of draw down.
• Representations and warranties. These are statements about the status of the project company made by the project company. These are usually made at the date of the agreement and repeated on each date of the draw down notice.
• Covenants. These are undertakings by the project company to do (positive covenants) or not do (negative covenants) certain things. The negative covenants are usually extensive as it is the lenders who drafted the documents.
• Security Documents. The perfection of security documents is almost invariably a condition precedent for the validity of the loan agreement.
• Information rights. The lenders would normally insist on being provided with certain information. For example, the. In addition, the lenders would require information to ensure that the construction of the infrastructure is progressing on time and within budget. Lenders may request:
o operating results and plans such as audited financial reports and annual budget;
o that the lender is notified in the case of delays or cost overruns in the construction process;
o monitoring rights in relation to completion tests and regulatory and environmental compliance; and
o that it be notified in case of any breach of the covenants.
• Insurance. Lender normally require the project company to take out certain insurance cover and to name or assign the lenders under the policies.
• Default. Events of default and consequences of events of default. A distinction is made between a serious default that would cause all outstanding principal and interest to be payable, and a minor breach of a covenant.