Energy Project Financing : Resources and Strategies for Success

108 Energy Project Financing: Resources and Strategies for Success

mates, energy costs, equipment reliability and a host of other factors

that affect the ESCO’s ability to perform as required under the terms

of the contract. The bottom line is that the lender must be protected

from any risk of non-payment due to an actual or alleged performance

deficiency or default.

IMPORTANT PROVISIONS

Payment Obligation(s)

Payment obligations are closely related to and sometimes a func-

tion of the separation of performance and credit risk. The lender’s pre-

ferred structure is to have a “hell or high water” payment obligation

directly from the end user obligor regardless of ESCO performance.

This is typically the case with basic debt financing and enables the

lender to perform a standard analysis of the obligor’s creditworthi-

ness and to underwrite the transaction if that analysis indicates a high

likelihood of repayment. In a structure where the end user obligor

does have the right to suspend payment due to alleged or actual per-

formance deficiencies, the lender will look to the ESCO to guarantee

repayment. In all cases, the clear separation of performance and credit

risk is critical to the lender’s ability to preserve the hell or high water

nature of the repayment obligation. If done properly, the lender’s risk

will be limited solely to the creditworthiness of the end user obligor

or, in a performance guarantee scenario, the technical capabilities and

creditworthiness of the ESCO.

Funding During Construction/Installation

There are a number of ways to provide for funding of the project

during the construction/installation period (e.g. escrow funding, direct

disbursements from the lender, bridge loans, etc.). Regardless of the

funding mechanism, the related documents must address specific issues

such as mechanics and contractor liens; procedures for invoice submittal,

approval and payment; escrow or payment agent costs; title and security

interest in the equipment; and waivers and consents, if necessary.

Payment and Cash Flow Logistics

Not only do the debt capital markets require a strict repayment

obligation, but they also require certainty as to the timing and logistics