Significant claims and scope changes are of key concern to project lenders and the Project Company's loan documents will likely contain restrictions on what scope changes are permitted and when lender consent is required. The threshold for when consent is required is typically low. The lenders want to be involved where there is a significant change to the scope and risk profile of the project, whether or not lenders are required to finance the scope change. Any change to the risk profile agreed at financial close may have an impact on the cash available to pay debt service obligations to the lenders and could lead to a default under the finance documents. The Procuring Authority should be aware of this to ensure it is considering the interests of the lenders in assessing a potential scope change and give the lenders the time required to complete their due diligence and associated assessments, and give their approvals.
EXAMPLE Lender approval requirement There were a range of changes that had to be implemented on the InterCity Express Programme project in the UK and the associated commercial negotiations were complex and time consuming. Lender approval needed to be secured and this led to the extensive use of external advisors. Nevertheless, the parties were able to work collaboratively to overcome these challenges. For more information, see the Intercity Express Programme Case Study. |
It may be difficult to assess how the Procuring Authority should move forward if the lenders ultimately decide that they are not willing to proceed as the new risk profile is outside parameters they are comfortable with and they believe that the Project Company has a legitimate right to reject the proposed scope change. In the case of a major proposed change, this objection may only come at the end of a costly and time-sensitive preparation process. In such circumstances, the Procuring Authority may have limited options. One option would be for the Procuring Authority to agree up front with the Project Company the parameters that the scope change will take and for the Project Company to agree to forgo its right to reject the scope change if it stays within these boundaries. Another possibility might be to undertake it through a separate contractual process outside of the existing contract regime. A more extreme and less common route is for the Procuring Authority to buy out the debt, on the basis that, after the change is implemented, the Procuring Authority will transfer the debt, once the project has reached a new equilibrium.