110 Energy Project Financing: Resources and Strategies for Success
- Reasonably limited rights of the lender to access, inspect and/or
remove the equipment without liability to the end user or the
ESCO.
Termination Provisions
Many energy services transactions allow for early termination at
the option of one or more of the parties, or upon an event of default.
Optional early termination provisions do not pose a problem for the
capital markets as long as the mechanics of the termination process
provide for written notice 60 to 180 days in advance and protect the
lender from any loss on its investment. To achieve this acceptable end
result, the transaction must contain unambiguous termination language
that provides for payment of an early termination value equal to the
lender’s outstanding principal balance plus customary early termination
fees. The fee is usually calculated according to a pre-negotiated sliding
scale based on when the early termination takes place—the earlier in
the term, the higher the fee. Depending on the preferences of the par-
ties, the early termination value can either be calculated at the time
of early termination or be predetermined and documented in an early
termination table within the documents.
In the event of early termination resulting from a performance
default, the lender will still require payment of either the defined early
termination value or a casualty loss value, as defined in the documents.
The structure of the financing will dictate which party is obligated to
pay the early termination value. In standard financing transactions
directly between the end user obligor and the lender, the obligor will
be required to pay the early termination payment. Depending on the
terms and conditions of its contract with the ESCO, the obligor may or
may not have recourse to the ESCO if the early termination was caused
by the ESCO’s performance default. In bundled service agreement
structures, the defaulting party is usually obligated to make the early
termination or casualty loss payment, which is assigned to the lender.Equity/Residual Risk
In some structures, such as operating leases and synthetic leases,
the lender or third party investor(s) will make an equity investment in
the project. As a result, the obligor’s payments will not fully amortize
the project cost. The investor must rely on the residual value of the
equipment at the end of the term to recoup his original investment