106 Energy Project Financing: Resources and Strategies for Success
transaction approval, the credit analysis must conclude that the obligor
is capable of fully satisfying its obligations throughout the full term of
the transaction.Construction/Installation Risk
C onstruction/installation risk is defined as the risk of loss to
the investor during the period of time the necessary facilities and
equipment are being constructed or installed at the customer’s site.
Construction/installation risk is a function of the project specifications,
the length of the construction period, the nature of the customer, and
ESCO obligations during the construction period, as well as the ESCO’s
technical capabilities and financial condition.
The assessment of construction/installation risk begins with iden-
tifying the party responsible for guaranteeing repayment to investors
should the project not be completed. In most cases, construction/instal-
lation risk is borne by the ESCO and/or its subcontractors (in the form
of repayment guarantees to the lender in the event that the project is
not completed to the end user’s satisfaction and there is no commence-
ment of debt service payments). Depending on the credit strength of the
party or parties guaranteeing the repayment of funds advanced during
the construction period, the lender may also require performance bonds
from a creditworthy surety.ESCO Credit Risk
ESCO credit risk is a function of the ESCO’s role in the construc-
tion and ongoing operations and maintenance of the project, typically
taking three main forms: construction/installation risk, performance
risk, and general risk of insolvency. Because these ESCO credit risks
stem from different circumstances, the lender must analyze them indi-
vidually and mitigate each to the maximum extent possible.
As previously discussed, the lender must have a reliable source of
repayment for all funds disbursed during the construction/installation
process. Direct recourse to the ESCO is the most common vehicle for
sufficiently mitigating construction/installation risk. In order to rely on
its recourse to the ESCO, the lender will require a thorough review and
approval of the ESCO’s credit profile. The ESCO should be prepared to
provide at least three years audited financial statements, historical per-
formance data, and any other information necessary to underwrite the
transaction. Depending on the credit strength of the ESCO, the lender