This right of the lender to intervene in the contractual relations of the project is an important tool to restart projects that have been deported or blocked and can only be properly anticipated and regulated if the situations that allow the trigger are correctly identified in the due diligence carried out for the project. It is also important to remember that project financing involves a network of agreements between different companies – sponsors, lenders, different agents, EPC (Engineering Procurement and Construction) companies, operations and maintenance (O&M) companies, etc. – each of which plays a specific role in the structure of the project, but also depends on the fulfilment of their obligations by the others. In fact, these are the mitigation strategies to be applied in any project when the results of due diligence confront developers, lenders and other stakeholders with the risks of projects, especially those that may affect different stakeholders, especially local communities. Having established the importance of due diligence in project finance transactions, we believe it could also be worthwhile to try to identify the most common risks that project finance transactions may face. Take some time to read the sections of the Facility Agreement that deal with reporting (often referred to as „disclosure obligations“). The lender needs regular financial information, as well as ongoing construction or operation reports and budgets detailing project costs and revenues. Among the many risks that generally affect international projects. This question will help you determine how difficult or easy it is to start the business. If competitors leave and participate freely, you may be able to start a project yourself. Assessing the strength and reliability of each of these units is also critical to the project. Lenders will also want to address and ensure that capital contributions are made in a timely manner and that the level of equity contributions is proportionate, i.e.
the risks perceived by lenders in the project. This perception of risk will certainly have an impact on the project`s debt-to-equity ratio. Sales, mergers and acquisitions of companies should all follow the same checklist to avoid unforeseen problems. Sellers can also create a reverse due diligence checklist to analyze the buyer. Tip: If a security clearance and replacement are required, working with the lender early on will help facilitate the transaction process. If replacement security is required, the lender will likely hire outside lawyers to advise them during the process, so keep in mind that there are additional legal fees. An evaluation report ideally includes a report on the company`s track record, its management and ownership schemes, its physical and financial performance, the objective of the project to be financed, details of the associated costs and means of financing, the company`s product market, future prospects and profitability forecasts, risk analysis and sanction conditions. Buying a business is not easy. This requires thorough planning and analysis of your due diligence checklist. Even with experience, you`ll likely have questions along the way. Therefore, you should publish your legal needs on UpCounsel. These lawyers know the specifics of business sales, mergers and acquisitions.
The main objective of risk allocation in a project should be to assign a particular risk to the party that is best placed (because of its experience, technical capacity, etc.) to deal with that risk, so that there are very limited or residual risks for the SPE. Since project funding for repayment of funding is largely dependent on the project`s source of revenue, the reliability of the project model and the determination of the risks to which a particular project is exposed are of paramount importance in project funding. Another reason why a due diligence checklist is important is that the buyer needs to know if the business is right for their business. If the selling company provides a service that the buyer does not provide, it becomes beneficial. It also provides a way to measure the duration and cost of integration, as well as potential revenue. This is the market standard and shouldn`t interfere too much with how you run the project (after all, you and the lender have a common goal – a profitable asset), but it`s important to familiarize yourself with these regulations, both to check if there are any real dealbreakers and to make sure you continue to deliver on those commitments. as soon as you own the asset. On the contrary, other authors believe that the credit rating of an individual project is sometimes cheaper than a credit rating of the project promoter(s), and that a more attractive risk profile generally leads to more favourable interest rates on other credit-related costs.
While there are several steps involved in conducting due diligence in project financing, there are four key processes that require significant evaluation. It is not uncommon for lenders, especially multilateral institutions, but also banks and other financial institutions, to exercise increased diligence in assessing environmental, social and governance projects, seeking to identify, mitigate or avoid the heavy negative burden that these problems currently have and are also perceived by local communities and the public. And please, don`t consider this just a problem for lenders. Shareholders are also interested in properly identifying the risks of the project, the interests of lenders and shareholders are (or should) aligned, because the goal is to have an operational project that works according to the basic model (or exceeds the results of the basic model), freeing up the resources needed to repay the financing, and resources, which are necessary for the return on own funds. This implies that draft material agreements are also subject to due diligence analysis, particularly in the case of non-operational projects. The ability to pre-analyze drafts of physical agreements allows the lender to intervene in the negotiation of these agreements and, therefore, mitigate all possible risks identified in due diligence.