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. Though this really depends based on their size, nature and complexity, the state of the markets and geopolitical factors. For example, one project financing we closed recently in Egypt took six years from start to finish.
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; if there was, it would certainly involve as many acronyms as possible.
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 have excellent time management skills and be incredibly well organised; document management is key. You have to be able to put your day to day work in the context of the bigger project and see its impact across the suite of project documents. Rarely can you afford to look at a document in isolation.
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.
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, Islamic financing and bond offerings. Choose carefully where you do your training contract if you would like to get exposure to Islamic financing, not every firm does it. Also you are most likely to gain project bonds experience if you join a firm that has strong project finance and high yield practices.
Because of the markets, financial and legal advisers are having to be 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, shorter loan terms, 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 members of the projects team based in our London office have seen the conclusion of the financing for the landmark $ 3.7 billion Egyptian Refining Company project. This financing is the largest ever project financing in Africa. It relates to the redevelopment of a refinery in Mostorod, Egypt. Once completed, the refinery redevelopment will enable Egypt to reduce its present level of diesel imports by approximately 50%.
This year has also seen the completion of the $900 million permanent financing for the Tamar gas development project, the largest ever internationally-led project finance deal in Israel. The Tamar gas field, located approximately 56 miles off the Israeli coast, was the largest global gas find of 2009 and its exploration is of huge strategic importance for Israel. It will enable the country to become self-sufficient in terms of gas supplies for approximately 20 years.
We are also currently advising the Dow Chemical Company in its joint venture with Saudi Arabian Oil Company (Saudi Aramco) to build a $20 billion petrochemical plant at the Arabian Gulf port of Jubail. The project will be one of the world’s largest integrated chemical facilities and the largest ever built in one single phase.
Jean-Louis Neves Mandelli is an associate at Shearman & Sterling