Appendix B 303
project perform to expectation? Performance related risks that are scat-
tered among several participants may make project financing more dif-
ficult. Usually, the lender wants the risk of performance to be between
the ESCO and the owner only, acting as “Consultant” to the owner. It
is difficult for a lender to assess creditworthiness if payments can be
impacted by a variety of parties. In such cases the lender will price the
financing to the creditworthiness of the lowest common denominator.
2.3.1 Ability to Pay
Debt service coverage, which is the ratio of the projected cash
savings to repayment amount, is a critical measure of the project’s
financial viability. It serves as an indicator of the project’s ability to be
supported solely by the savings. When coverage falls below a certain
level, (125% for example), the project will be subject to increased scru-
tiny by financiers. Most important to the calculation of coverage is the
confidence with which savings are estimated and ultimately measured
(or stipulated).
2.3.2 Construction Risks
Terms (risks) embodied in common construction contracts are also
present in a financed energy efficiency project, if construction financing
is used. (Often permanent financing is initiated after construction is
finished and accepted.) Basic risks and questions include:
- Who is responsible for the design? Who builds what, by when?
- Who pays whom, how much and when?
- What cost overruns are likely, what contingencies are in the con-
struction budget, and what recourse does the financier have in
event of overruns? - What is the maximum construction delay, what can cause it and
how can it be cured.
Performance bonds cover the risk associated with the first item
for both owners and lenders. Escrow and progress payment contracts
cover risks associated with the second item. Lenders are interested in
liquidated damage provisions and payment and performance bonds as
a way to limit potential losses from construction delays.