Key Risk and Structuring Provisions for Bankable Transactions 107may impose additional credit conditions such as performance bonds
and parent guarantees.
Performance Risk
Performance risk is measured in terms of the end user’s payment
obligations in the event of a performance deficiency and/or performance
default. If the end user has an absolute and unconditional payment
obligation to the lender regardless of ESCO performance problems,
then the lender’s exposure to performance risk is minimized. On the
other hand, if the end user’s payments are conditional upon satisfac-
tory performance, then the lender must have recourse to the ESCO for
non-payment resulting from performance deficiencies. In that case, the
lender will closely scrutinize performance risk and the ESCO’s ability to
satisfy its obligation in the event of actual or alleged non-performance.
As mentioned above, additional structural and credit enhancements
may be required.
Structural Risk
S tructural risk stems from the contractual nature of the transac-
tion and the specific terms and conditions therein. In order to develop
a bankable energy services transaction, it is critically important to con-
sider and properly address these risks early in the transaction develop-
ment process. Failure to clearly specify these risks and allocate them to
the appropriate parties is probably the most common mistake that leads
to a non-bankable transaction. The most important of these risks and
the most effective ways to mitigate them are identified and discussed
in detail below.
PERFORMANCE RISK VS. CREDIT RISK
An important general rule of thumb in financing energy services
projects is that the capital markets are in the business of taking credit
risk, not performance risk. As a result, transactions must be structured
with bright line separation of these risks, with credit risk clearly allo-
cated to the lender and performance risk clearly assumed by the ESCO
or the end user obligor. This bright line separation enables the lender
to evaluate and underwrite the transaction according to standard credit
procedures, without focusing on technical specifications, savings esti-