Key Risk and Structuring Provisions for Bankable Transactions 105guides a successful transaction development process and serves as the
structural foundation for all bankable transactions. In order to attract
capital markets investors, a transaction must present a risk profile
commensurate with the nature of the financing (i.e. debt or equity)
and anticipated investor returns. This concept is frequently and most
commonly described in terms of a basic risk/reward analysis—higher
risk requires a greater return to the investor. This is the foundational
structuring concept it its simplest form, but risk analysis and mitigation
in energy management transactions is significantly more complex than
simply pricing the transaction to provide attractive investor returns.
In underwriting an energy management transaction, the capital
markets analyze four broad categories of risk:
- Obligor Credit Risk
- Construction/Installation Risk
- ESCO Credit Risk
- Structural Risk
In order to structure a bankable transaction, each of these risks
must be considered and mitigated to the extent required by the (debt)
capital markets. To do so, one must understand the nature of these risks
and the capital markets’ tolerance for each of them.
Obligor Credit Risk
Obligor credit risk is the core risk for all financing transactions and
simply translates to the end user’s ability to satisfy all of its obligations
(payment and otherwise) under the terms of the transaction. Despite
the wide variety of financing structures for energy services transactions,
their common foundation is the end user’s obligation to make pay-
ments in exchange for the products or services received. In whatever
form it takes (i.e. lease payment, loan payment, services payment, usage
payment, etc.), that payment obligation provides the lender’s primary
source of debt service and return on the equity investment, if any. As
a result, the bulk of the lender’s underwriting activities are focused on
a detailed analysis of the end-user’s overall credit profile. Operating
performance, cash flow, debt service capacity, liquidity, balance sheet
strength, market position, management capabilities, and future projec-
tions are among the many factors thoroughly examined during the
underwriting process. In order to achieve the desired end result, i.e.