What’s it all about?

Project finance involves the long-term financing of a wide range of infrastructure and industrial projects such as power stations, wind farms, oil and gas pipelines, petrochemical plants, sports stadia, mines, prisons, hospitals, schools and transport networks.

Typically, project finance involves a group of investors (known as sponsors) who provide the equity (shares) funding for a project and a group of banks that provide debt financing. The sponsors set up a special purpose company which borrows the funds needed to develop the project. Debt is secured against the project assets and shares in a special purpose company, and repaid using cash generated by the project.

This is known as limited recourse financing because if the project defaults on its debt there is no recourse to the sponsors apart from their equity in the special purpose company. In other words, the lenders cannot recover the shortfall from the sponsors.

So when drafting underlying project documents (construction contracts, operation and maintenance contracts, off-take purchase agreements and sales/supply agreements) you have to aim to achieve performance levels that will maintain required cash flows so the project can service its debt in the context of the legal framework set out for its development.

The working culture

Work can be fast-paced and diverse. Transactions generally last between six and 18 months from inception to close depending on their size, nature and complexity, together with the state of the markets.

Commonly, junior lawyers help senior lawyers draft project, finance and security documents and liaise with local counsel and specialist advisers (financial advisers, technical, insurance and environmental consultants). They also help manage the collection and delivery of conditions precedent to the financing. On a weekly basis this involves conference calls, emails and meetings, both internal and external. Many parties are involved in project financing such as financial institutions, sponsors, governments, construction contractors, off-takers and specialist advisers, and these can be scattered around the world. With diverse projects and clients you will learn about global business and legal practices in a range of jurisdictions. You will also have the prospect of travelling to exotic locations.

What other practice areas do project finance lawyers work most closely with?

We work with other finance lawyers and our corporate team on a number of deals. On pure project deals we will often seek advice from our litigation, tax and competition law colleagues.

What phrase is a project finance lawyer most likely to use and what does it mean?

Life as a project finance lawyer is extremely varied and stimulating. No working day, conference call or meeting is the same. Therefore, there is no set catchphrase but if there was one it would certainly involve as many acronyms as possible.

Skills required

Project finance involves simultaneously documenting financial terms according to which bank is prepared to lend as well as recording the process by which the project will be constructed, operated, maintained and, if relevant, its product sold. So, as with other practice areas, you need to have a firm grasp of the law and a good commercial understanding of the process involved in bringing a project from concept to completion within the parameters required by your clients. Additionally, clients expect their lawyers to have a keen awareness of their business goals and the market in which they operate.

The transactional nature of the work calls for the ability to work in highly pressurised environments and often to tight deadlines. You need to be organised and have excellent time management skills. Given the team working and long hours involved at certain points in financing, maintaining a sense of humour and a positive approach to working with colleagues and clients is essential. Communication skills are also important because clients from a commercial background will require you to cut through the jargon to explain legal concepts.

Recent developments

For some time project finance was seen as less risky than other forms of financing partly because many projects are government-backed, with some risk assumed by governmental entities rather than lenders. But given the reduction in liquidity in debt markets which are yet to recover fully from the financial crisis, large scale project financings are now frequently achieved by a combination of commercial debt, export credit agency and multilateral loans, bond offerings and Islamic financing. This means that financial and legal advisers are having to become more inventive and rigorous in their approach to structuring and financing deals. Lenders are now also inclined to impose more stringent terms. These can include higher pricing of debt, tighter financial covenant packages, a requirement for sponsors to invest more and an increased emphasis on early warning indicators such as the delivery of financial statements and involvement in the borrower’s budgeting process.

Nevertheless, the project financing market is showing signs of renewed strength. In the past year our team in London has seen the conclusion of the financing for the landmark $2.1bn (£1.3bn) Al Dur integrated water and power project in Bahrain. This was the first Middle East power project to include a mix of commercial debt, export credit direct loans, export credit covered loans and Islamic financing, and the first Middle East power project financing to close since the collapse of Lehman Brothers.

We have also completed the $6bn Dolphin refinancing, the Middle East’s largest cross-border gas project involving the processing of raw gas in Qatar, a sub-sea pipeline to Abu Dhabi and a connection to Oman, together with the first project financing of a cement plant in Syria.

Suzanne Szczetnikowicz, Associate, Shearman & Sterling