The effects on liquidity (and its knock-on effect on pricing) in the debt markets is one direct challenge to the procurement and financing of greenfield projects. The financial crisis of 2008 saw bank liquidity for project construction decline sharply, with some banks essentially withdrawing from the market. With regulatory reform in the years to come, banks should now be better able to handle financial market volatility, and policymakers have been eager to announce stimulus packages to avert a crisis. There's been a slowdown in international project finance as well. Although the majority of enforcement concerns would relate to the borrower, possible pitfalls for lenders will also be present, including:
Funding: Should the recession affect individual lenders' ability to finance drawdowns, this may result in the credit documents causing defaulting lender provisions unless the problem can be defined as a disturbance to the broader financial markets.
Plans for skeleton staffing or absences due to illness may lead to delays in responding to voting requests, potentially causing banks to fall foul of snooze and lose provisions.
Banks engaged in agency positions can be hampered by their ability to execute administrative functions and to handle lender community communications.
Banks that are suffering from rating downgrades can become ineligible for financing to perform the functions of an LC provider, account bank, or hedge provider, or else to be 'Approved Bank.'
As part of their due diligence analysis, lenders would need to consider COVID-19 and its consequences, including its influence on the capacity of the host government to fulfill support commitments through multiple projects, any currency indexation clauses in project documents, information covenants, insurance policy exclusions, the ability of project counterparties to meet their obligations wherever they are involved.
Borrowers and supporters should be mindful of clauses in their funding documentation in current projects that could be activated as the situation progresses. Where practicable, these concerns should be defined in advance to allow an organized dialogue to be obtained in advance with lenders and exemptions to prevent problems of default and cross-default before they occur. COVID-19 related circumstances can cause different aspects of the documentation:
Labor or spare parts shortages can result in decreased operations or, in the worst-case scenario, outages. Force majeure relief may be available to undersupply/offtake agreements, but this will not translate into financial records where debt repayment schedules will be calculated. Some ventures, usually those in the commodity-based industries, may include restricted provisions for deferred repayment of their debt, which may allow repayment of debt for a maximum of one or two repayment dates. Otherwise, for about six months, debt service reserve funds could offer relief. To minimize the effects of operational problems, borrowers would also need to think about insurance availability.
Projects exposed to demand or price risk (particularly those exposed to commodity markets or the transport sector that may be severely affected by social lockdowns) may suffer a breach of forward-looking financial ratios as economic forecasts worsen. Utility-based ventures should be pretty well removed from these problems for now, with long-term fixed-price offtake agreements, given their operations are unaffected. In such incidents, financial ratios are primarily organized only as historical, based on actual evidence, so they are not vulnerable to pessimistic forward-looking estimates.
Material Adverse Effect Clauses:
For projects comprising stand-alone MAE/MAC clauses, circumstances related to COVID-19 will likely cause these. However, the events under which this could occur should be restricted because these clauses are usually drawn up in such a way that they are caused only by events that have a direct effect on the project rather than by a broader macro-economic or social climate. To the degree that covenants or default incidents are individually caused, carve-outs and qualifications of material adverse effects will need to be checked. Again, assuming that such regulations are drawn upon customary market terms, they should be triggered only to the degree that the project has an identifiable effect.
Borrowers should be aware of their duty to inform lenders of material circumstances affecting the project, such as commercial counterparty notices or claims of force majeure. These reporting responsibilities also have very limited timeframes, and creditors are at risk of breaking their financial records before realizing they have an obligation.
Rating Downgrades: project sponsors may be subject to downgrades in their credit scores, making them ineligible to provide financial documents with corporate guarantees to back up obligations or enable them to collateralize those obligations with cash.
I hope you will find this article useful in some way, and if you or know of any companies looking for Project Funding, please reach out to us. We have access to the funds you need to get your project funded. We have partnered with lenders specialized in project financing. They have funded projects in Billions of Dollars globally in various types of projects. We work with projects located in US-friendly countries/and or countries not located in politically sensitive jurisdictions.