Key Risk and Structuring Provisions for Bankable Transactions 111plus, ideally, a reasonable return on the invested capital. Due to the
limited secondary market for the assets used in energy services proj-
ects, most investors take very limited residual risk or simply avoid it
altogether.
Assignment Rights
The lender’s unlimited right of assignment is a critical component
of a bankable transaction. Without this feature, the deal will be com-
pletely isolated from the capital markets and extremely difficult, if not
impossible, to fund. This reality stems from the fact that all lenders
must maintain liquidity in their investment portfolios by having the
right to sell (i.e. assign) their paper to other investors in the second-
ary market. Conversely, liquidity is further enhanced by prohibiting or
precisely limiting the assignment rights of the other party or parties
to the transaction. This is a necessary recognition of the fact that the
lender’s investment decision is based on the creditworthiness of the
original obligor. By controlling the obligor’s right of assignment, the
lender can prevent credit and portfolio deterioration that would result
from assumption of the borrower’s obligations by an entity with weaker
credit profile than the original obligor.
Contracts & Documentation
Once the parties have agreed upon the basic business and struc-
tural terms of the transaction, the deal must be documented in compli-
ance with the standards and expectations of the capital markets, most
of which have been identified above. An experienced legal team is key
to achieving this requirement. Among the most common mistakes that
must be avoided are:
- Lack of Clarity. The parties’ rights and obligations must be stated
clearly and unequivocally so as not to be open to interpretation,
either by the parties themselves or in a court of law. Something
as intuitively simple as the customer’s payment obligation can
create significant funding problems if not written with the clarity
necessary to ensure consistent interpretation by all parties. - Co-mingling of Lender & ESCO Risks. The documents must
achieve a bright line separation between the lender’s credit risk
and the ESCO’s performance risk.