The horror stories of turnkey real estate investing are abundant, full of shoddy operations with ruthless operators taking your money and never giving you the


Lenders do not have grasp and sense of the running of the various businesses that the borrowers are engaged in.

They are contended to let the borrower run their own business in the best possible manner.

They are satisfied to prescribe (and not to supervise) do’s and don’ts in the form of COVENANTS and just to keep the lender in the loop about things (in the form of information covenants).

The lenders have no appetite for risk.

Have no control over the affairs of the borrower.

Lending exercise is supported with certain representations and warranties to ensure that there are no unknown/ unrevealed/ concealed damaging secret of the borrower left to be covered by due diligence.

All these are done to cover their back in a crisis situation.

Detailed representations and covenants are a necessity,

A negative list is bound to be bigger than a prescriptive list of things (such as AFFIRMATIVE RIGHTS and management clauses).

It can be said as (for the borrower) as just enforceable guides of good moral and business conduct.

Borrowers also are happy from the fact that the lenders are not so strict with invoking rules in events of default except in extreme instances.

Distressed assets result in NPAs provisioning and in most jurisdictions, protracted litigations.

While all this is happening one has to think of keeping the business running, a task lenders are ill equipped to handle.

In case of fundamentally sound businesses, renegotiations and restructuring are more likely.

Even, there are litigations among liability of arrangers/ lead bank/ agents etc etc.

In a Crisis situation nobody is gentleman. The strategy changes to survival of the fittest.

In case things have gone bad, Banks have not shied away from suing their counterparts.

Always the issues of fraud, fiduciary duty and misrepresentation have been taken up in the context of syndication.

A multitude of provisions relating to inter-se obligations of lenders are reasons for all the above.

Like provisions relating to independent credit appraisal, information memorandum, and the Finance Parties and or the Lenders’ Agent etc etc.

In order to minimise the obligations of these entities the market has evolved long exculpatory clauses without much result except where there are clearly limitations, (such as, fraud).

The issue of syndicate democracy and achieving a semblance of balancing of rights of minority and majority lenders are problem to be addressed in Syndicated/ club deal.

The area of finance has been considerably changed with the growth in propensity to sell down and securitise the loans and the democratisation of syndicates.

In background of various interest and profiles of lenders and participants the above provisions assume importance.

There are clauses requiring majority, supermajority and all lender decisions.

Many people (notably, in case of increased costs, illegality, non-funding or non-consenting lender) come across provisions relating to replacement of lenders and automatic consent in Indian as well as LMA (Loan Market Association) documents (colloquially called ‘yank the bank’ and ‘snooze you loose’ provisions in the London market) in certain circumstances

It is advantageous for both, the lenders who wish to continue in the deal and the borrowers.

A facility agreement (e.g. cure periods, day count convention, Interest Periods, Quotation Day etc.) is rather related to market practice and commercials than law. A finance lawyer can pick up these exactly.

The main approximation of a lender is that he will get a particular rate of return on his capital during the term of the facility and at the end of the tenure get his principal back.

Due to this, in the loan agreement clauses relating to the usual repayment and interest and a number of ‘margin-protection’ provisions get a place.

Provisions meant to safeguard the returns of the lender from all kinds of eventualities- taxes including withholding tax (tax gross-up and indemnity), regulatory charges or costs that result in less return on capital or reduction in amount payable for example due to reserving requirements or changes in Basel norms (mandatory cost and increased costs), currency fluctuations (currency indemnity), increase in cost of funding along the lines of ‘Japan Premium’ (market disruption clause) and costs and liabilities from documentation to enforcement (indemnity and expenses) are all these.

Many prepayment clauses also hitch on these provisions and the borrower is typically allowed to prepay in certain instances (such as increased cost).

Not so many margin protection clauses are required in Indian context as the cost of funds will be captured by fluctuation of base rate by the lender on account of base rate based lending in India.

The idea that a lender borrows from the inter-bank market to lend to the borrower i.e. the concept of ‘matched funding’ gets a drift from provisions in the facility agreement (prepayment premium, break costs, interest periods etc.)

Whatever be the economic reality (and lenders often do use their own deposits for funding) but the interbank rates do reflect the opportunity cost of lending.

Payments during an interest period will attract breakage costs (or prepayment premium) on the analogy that lender will have to pay the interest on inter-bank deposit.


Sanctions and the international (and to some extent US) regulations relating to money laundering, terrorism funding have also implications and influence in drafting and moulding of financing documents.

That’s why alluding to (or to clauses modelled on the basis of) Patriot Act (in case US obligors are involved), Office of Foreign Assets Control and UN 1267 resolutions in cross-border financing documents are not considered as uncommon.

International treaties and national legislations have correspondingly changed with respect to the size and shape of covenants relating to the related situation.

Many jurisdictions do not recognise TRUST AND RETENTION MECHANISM and we have parallel debt structures when dealing with it.




A loan covenant is a stipulation in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.

Covenants can be financial, information, ownership, affirmative, negative or positive covenants.

Often, the breach of any covenant gives the lender the right to call the loan or collect interest at a higher rate.

Covenants can potentially have negative consequences as well. As the creditor is imposing restrictions on how the debtor should conduct business, the debtor’s economic freedom is restricted. This may lead to decreased efficiency. When a covenant is broken and additional equity should be contributed, the debtor might not be able to provide it or at least not adequately. This results in making the whole loan due; a resulting fire sale may lead to high write offs on the debtor’s books.


A term in a loan agreement that requires the borrower to pay off the loan immediately under certain conditions of non-payment of interests or repayment installments.

For example, a borrower who fails to make a payment or who breaks a covenant may be required to pay the lender the balance on a loan. In this case, the borrower is considered in breach of contract.

Most of the litigated problems coming up under acceleration clauses fall into a few broad categories. Attempted exercise of the option by the mortgagee raises the question whether he has elected in time or not, and under what circumstances he must notify the mortgagor that he intends to accelerate the entire debt.

Then there are the problems arising out of the possible defenses of the mortgagor

o Whether the conduct of the mortgagee amounts to a waiver of his right to accelerate;

o Under what circumstances the mortgagor can use tender of payment after default as a defense;

o Other equitable defenses such as fraud, accident, hardship and mistake.

There is also the important matter of the time of the running of the statute of limitations, some aspects of which are a steady source of litigation.

Acceleration clauses are most commonly found in mortgage and real estate loans. Since these loans tend to be so large, the clause helps protect the lender from the risk of borrower default.


Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

Warranty means “to promise or guarantee”.

Representation is presentation of fact – either by words or by conduct – made to induce someone to act, especially to enter into a contract. A Representation looks at the present or the past, presenting what the status is or was.

Warranty is generally regarded as being forward looking and providing assurance about the future.


Renegotiated loans, also called loan modifications, when borrowers are unable to pay their mortgages. A bank will not always agree to renegotiate a loan. Sometimes the bank will see a greater financial benefit from letting the loan default and getting the nonperforming loan off its books than from modifying the loan.


Debt restructuring is a process used by companies to avoid default on existing debt or to take advantage of a lower interest rate and lower repayment installment. The process is carried out by reducing the interest rates on the loans and/or extending the date when the company’s liabilities are due to be paid in order to improve the firm’s chances of paying back its loan. Creditors are made to understand that restructuring a company’s debt is in their best interest if they would receive less in a bankruptcy and liquidation event than what they would receive under a debt restructured package. Restructuring debt, therefore, could be a win-win for both entities as the business avoids bankruptcy and the lender gets something better than a bankruptcy court would give it.



A credit provider must provide a consumer with a credit guide as soon as practicable after it becomes apparent to the credit provider that it is likely to enter into a credit contract with the consumer. The credit guide must:

O be in writing;

O specify the credit provider’s name, contact details and credit license number;

O include details regarding complaint handling, including contact details of internal and external dispute resolution processes;

O disclose the credit provider’s obligations to provide upon request a written copy of an assessment of the suitability of any proposed credit contract; and

O advise that the credit provider is prohibited from entering, or increasing the credit limit under, a credit contract that is unsuitable for the consumer.


a. make reasonable enquiries about the consumer’s requirements and objectives in relation to the credit contract;

b. make reasonable enquiries about the consumer’s financial situation; and

c. take reasonable steps to verify the consumer’s financial situation.


It requires a lender to provide to a consumer, upon request, a written copy of the assessment:

O where the request is made prior to entering a credit contract or increasing a credit limit, prior to entering a credit contract or increasing a credit limit;

O where the request is made within two years of entering a credit contract or increasing a credit limit, within seven business days of the request;

O where the request is made more than two years but less than seven years after entering a credit contract or increasing a credit limit, within 21 business days of the request. A lender is prohibited from requesting or demanding payment for providing a copy of the assessment.

If a lender does not provide credit to the consumer, the lender is not obligated to provide the consumer with the unsuitability assessment. However, the Credit Reporting Privacy Code may provide a consumer with some access to reasons for refusal.


Every business faces risks that could present threats to its success.

Risk is defined as the probability of an event and its consequences. Risk management is the practice of using processes, methods and tools for managing these risks.

Risk management focuses on identifying what could go wrong, evaluating which risks should be dealt with and implementing strategies to deal with those risks. Businesses that have identified the risks will be better prepared and have a more cost-effective way of dealing with them.

It also looks at how to implement an effective risk management policy and program which can increase your business’ chances of success and reduce the possibility of failure.

The challenge is to manage risk, not eliminate it. Risk can be managed across a portfolio of projects that span the high return / high risk end as well as medium and low return agendas. A balanced view of risk is vital – some innovations spread too slowly but others spread too fast, without adequate evaluation and assessment, particularly when they win the backing of leaders. A commitment to evaluation and evidence, and staged development of new approaches, helps reduce risk.


Lending institution’s statement of its philosophy, standards, and guidelines that its employees must observe in granting or refusing a loan request. These policies determine which sector of the industry or business will be approved loans and which will be avoided, and must be based on the country’s relevant laws and regulations.


The term Information Memorandum has been defined under the Companies Act of 2013 in Section 31(2). It includes within its ambit

o All material facts relating to new charges being created,

o Charges in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities or the succeeding offer of securities, and

o Such other changes as may be prescribed,

o which the company has to file with the Registrar within the prescribed time before the issue of a second or subsequent offer of securities under the shelf prospectus.

Also known as an Info. Memo. This term has a number of meanings depending on the context in which it is used.

In a syndicated loan, it is a document put together by the arranger who circulates it to potential lenders to provide information on the borrower and the proposed loan. The borrower provides much of the information for the document. The document typically includes:

O A sample term sheet.

O General information and forecasts about the borrower.

O Details of the borrower’s business and related markets.

O A statement from the arranger limiting, as far as possible, its liability for the content of the information contained in the document.

In the context of a bond issue, it is also known as a “prospectus” or “offering circular”. It is a legal and regulatory disclosure document designed to prevent investors from claiming that they were not given all material information or that they were misled by the issuer. The document typically includes:

O A description of the bonds and their terms and conditions.

O A negative pledge and events of default in the terms and conditions.

O A description of the issuer’s (and, if applicable, the guarantor’s) business and operations.

O Financial information about the issuer (and guarantor).

O A summary of the selling restrictions and tax provisions relating to the bonds.

If the issue is listed, the content of the information memorandum will need to conform to the rules of the relevant stock exchange or listing authority and, if applicable, the requirements of the Prospectus Directive.

In the context of a Euro commercial paper (ECP) programme, the information memorandum is the legal and regulatory document and is the equivalent of the prospectus in a bond issue. It looks like a short-form version of a standard bond prospectus but also contains the forms of notes to be issued (that contain the terms and conditions). The document typically includes:

O A summary of the terms and conditions of the ECP.

O A brief description of the issuer’s (and if applicable, the guarantor’s) business and operations.

O A summary of the selling restrictions.

O The form of the notes.

In the context of a private company acquisition where there is a controlled auction process (that is, the sale of a company or business where the seller seeks competing bids for the target), a selling document which give bidders a reasonable amount of information about the target in order to elicit meaningful bids. It will usually contain:

O A description of the target’s business and its history.

O Its principal assets.

O Up-to-date and historical financial information.

O Projections for the future.

O Information about employees and, depending on sensitivity, about major customers and contracts.

Formal verification of the information memorandum may be undertaken. The information memorandum will invariably contain a disclaimer. In some cases, bidders may be asked to pay a fee to receive the information memorandum to defray the costs of the process and to discourage bidders who are not serious.


Syndicated loans are loans, offered by a banking group, that are organized by one or more banks. Several banks and financial institutions participate in the program on the terms and conditions of the same loan agreement from the same lender. Since they were initiated in the 1960s, syndicated loans have demonstrated the obvious advantages of large financing amounts, long financing terms, a large number of participating banks and low financing thresholds.



There are several parties in a project financing depending on the type and the scale of a project. The most usual parties to a project financing are;




There are several parties in a project financing depending on the type and the scale of a project. The most usual parties to a project financing are;



Syndicated loan is a form of loan business in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and with different duties and sign the same loan agreement. Usually, one bank is appointed as the agency bank to manage the loan business on behalf of the syndicate members.


The project sponsor is the entity, or group of entities, interested in the development of the project and which will benefit, economically or otherwise, from the overall development, construction and operation of the project. It is sometimes called the developer. The project sponsor can be one company, or a group of companies.

Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as ‘SPONSORS’, a ‘syndicate’ of banks or other lending institutions that provide loans to the operation.

SPONSOR is a person who is involved (often with others) in originating and structuring a project and who will (usually) be a shareholder or owner of all or a part of the facility or project

They are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling.

The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.


The sheer scale of many projects dictates that they cannot be financed by a single lender and, therefore, syndicates of lenders are formed in a great many of the cases for the purpose of financing projects. In a project with an international dimension, the group of lenders may come from a wide variety of countries, perhaps following their customers who are involved in some way in the project. It will almost certainly be the case that there will be banks from the host country participating in the financing. This is as much for the benefit of the foreign lenders as from a desire to be involved on the part of the local lenders. As with the involvement of local sponsors, the foreign lenders will usually take some comfort from the involvement of local lenders.

As is usually the case in large syndicated loans, the project loan will be arranged by a smaller group of arranging banks (which may also underwrite all or a portion of the loan). Often the arranging banks are the original signatories to the loan agreement with the syndication of the loan taking place at a later date. In such cases the arranging banks implicitly take the risk that they will be able to sell down the loan at a later stage.

However, participating in project financings is a very specialised area of international finance and the actual participants tend to be restricted to those banks that have the capability of assessing and measuring project risks.

This is not to say that banks not having these skills do not participate in project financings, but for these banks the risks are greater as they must also rely on the judgement of the more experienced banks.



The most common project finance construction contract is the engineering, procurement and construction (EPC) contract. An EPC contract generally provides for the obligation of the contractor to build and deliver the project facilities on a fixed price, turnkey basis, i.e., at a certain pre-determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties. The EPC contract is quite complicated in terms of legal issue, therefore the project company and the EPC contractor need sufficient experience and knowledge of the nature of project to avoid their faults and minimize the risks during contract execution.

The terms EPC contract and turnkey contract are interchangeable. EPC stands for engineering (design), procurement and construction. Turnkey is based on the idea that when the owner takes responsibility for the facility all it will need to do is turn the key and the facility will function as intended. Alternative forms of construction contract are a project management approach and alliance contracting. Basic contents of an EPC contract are:


o Price

o Payment (typically by milestones)

o Completion date

o Completion guarantee and Liquidated Damages (LDs):

o Performance guarantee and LDs

o Cap under LDs


An agreement that takes place between a producer and a buyer before the construction of a facility, that guarantees a market for the future production of a facility.

An off-take agreement is an agreement between the project company and the offtaker (the party who is buying the product / service the project produces / delivers).

In a project financing the revenue is often contracted (rather to the sold on a merchant basis). The off-take agreement governs mechanism of price and volume which make up revenue. The intention of this agreement is to provide the project company with stable and sufficient revenue to pay its project debt obligation, cover the operating costs and provide certain required return to the sponsors.

The main off-take agreements are:

Take-or-pay contract: under this contract the off-taker – on an agreed price basis – is obligated to pay for product on a regular basis whether or not the off-taker actually takes the product.

POWER PURCHASE AGREEMENT: commonly used in power projects in emerging markets. The purchasing entity is usually a government entity.

TAKE-AND-PAY CONTRACT: the off-taker only pays for the product taken on an agreed price basis.

LONG-TERM SALES CONTRACT: the off-taker agrees to take agreed-upon quantities of the product from the project. The price is however paid based on market prices at the time of purchase or an agreed market index, subject to certain floor (minimum) price. Commonly used in mining, oil and gas, and petrochemical projects where the project company wants to ensure that its product can easily be sold in international markets, but off-takers not willing to take the price risk

HEDGING CONTRACT: found in the commodity markets such as in an oilfield project.

CONTRACT FOR DIFFERENCES: the project company sells its product into the market and not to the off-taker or hedging counterpart. If however the market price is below an agreed level, the offtaker pays the difference to the project company, and vice versa if it is above an agreed level.

THROUGHPUT CONTRACT: a user of the pipeline agrees to use it to carry not less than a certain volume of product and to pay a minimum price for this.


A supply agreement is between the project company and the supplier of the required feedstock/ fuel.

If a project company has an off-take contract, the supply contract is usually structured to match the general terms of the off-take contract such as the length of the contract, force majeure provisions, etc. The volume of input supplies required by the project company is usually linked to the project’s output. Example under a PPA the power purchaser who does not require power can ask the project to shut down the power plant and continue to pay the capacity payment – in such case the project company needs to ensure its obligations to buy fuel can be reduced in parallel. The degree of commitment by the supplier can vary.

The main supply agreements are:

1. FIXED OR VARIABLE SUPPLY: the supplier agrees to provide a fixed quantity of supplies to the project company on an agreed schedule, or a variable supply between an agreed maximum and minimum. The supply may be under a take-or-pay or take-and-pay.

2. OUTPUT/ RESERVE DEDICATION: the supplier dedicates the entire output from a specific source, e.g., a coal mine, its own plant. However the supplier may have no obligation to produce any output unless agreed otherwise. The supply can also be under a take-or-pay or take-and-pay

3. INTERRUPTIBLE SUPPLY: some supplies such as gas are offered on a lower-cost interruptible basis – often via a pipeline also supplying other users.

4. TOLLING CONTRACT: the supplier has no commitment to supply at all, and may choose not to do so if the supplies can be used more profitably elsewhere. However the availability charge must be paid to the project company.



An operation and maintenance (O&M) agreement is an agreement between the project company and the operator. The project company delegates the operation, maintenance and often performance management of the project to a reputable operator with expertise in the industry under the terms of the O&M agreement. The operator could be one of the sponsors of the project company or third-party operator. In other cases the project company may carry out by itself the operation and maintenance of the project and may eventually arrange for the technical assistance of an experienced company under a technical assistance agreement. Basic contents of an O&M contract are:

o Definition of the service

o Operator responsibility

o Provision regarding the services rendered

o Liquidated damages

o Fee provisions




Project Finance Advisors are a technical and financial consulting advisors specializing in advising clients about how best to structure projects for commercial bank debt, multilateral and bilateral institutional support, equity fund investment and credit enhancement.

Project Finance Advisors works directly with multilateral lending institutions and private equity funds, and provides financial diligence and economic consulting to the lending institutions.

Project Finance Advisors’ core competencies include economic and financial modeling, project research, due diligence analysis, and negotiating terms for debt and equity financing.

The typical project finance transaction can be split into four broad stages:





Their work is

o To define of the financial needs and of the optimal financial structure of the project;

o To arrive at the Financial Business plan definition;

o To test and do Sensitivity analysis in order to validate the robustness of the debt service coverage ratios at the change of the main assumptions;

o To draw up of Information Memorandum in order to describe the initiative to be financed and the main involved actors;

o To get in touch with the lenders to propose the initiative and to provide assistance in the definition of the pool of banks with which to sign the mandate of lead arranging;

o To assist in the negotiation and definition of the term-sheet;

o To Coordinate with the other involved advisors in the due diligence process;

o To assist in the financial documentation definition and negotiation in relation to the financial matters.


A financial model is constructed by the sponsor as a tool to conduct negotiations with the investor and prepare a project appraisal report. It is usually a computer spreadsheet designed to process a comprehensive list of input assumptions and to provide outputs that reflect the anticipated real life interaction between data and calculated values for a particular project.

Properly designed, the financial model is capable of sensitivity analysis, i.e. calculating new outputs based on a range of data variations.


A technical advisor is an individual who is an expert in a particular field of knowledge, hired to provide detailed information and advice to people working in that field regarding:





a. Quality of construction work, O&M plan and man-power availability.

b. Review and opine on all Project investment costs.

c. Review and opinion on design, including review of macro and micro siting, wake effects, and potential upwind development effects;

d. Review and opinion on foundation design and its suitability for the site (taking into account the seismic characteristics of the area)

e. Weather conditions at the Project site (which could impact the construction phase)





Usually the first “Advisors” to be appointed by both SPONSORS & LENDERS

For addressing specifics of International Legal Systems i.e. Civil Vs Common Law

For addressing activities involved in, include:

O Incorporation of the Project Company

O Due Diligence

O Legal Opinions


Project finance lawyers represent clients by combining experience with nonrecourse and limited recourse financial structures, experience with the underlying industry and knowledge of project contracts, debt and equity documents, credit enhancement and international transactions.

These lawyers provide specialized assistance to project sponsors, host governments, lenders, investors, and the other project participants in risk identification and risk mitigation techniques.

Project finance lawyers provide advice on all aspects of a project, including laws and regulations; permits; organization of project entities; negotiating and drafting of project construction, operation, sale and supply contracts, negotiating and drafting of debt and equity documents; bankruptcy; tax; and similar matters.

Opinions on various legal matters are issued by these lawyers in connection with the financial closing process.


Local lawyers in the host country of the project are typically needed by all participants. These lawyers assist in local legal and political matters, which are often coordinated by the project finance lawyers.

Local lawyers also issue opinions on various local legal matters in connection with the financial closing process.


The different categories of funds (DEBT AND EQUITY) and the subcategories or instruments that are typically seen in a PPP project. The potential fund providers for each category, and the role of MDBs (Multilateral Development Bank) and ECAs (Export Credit Agency known in trade finance as an ECA or investment insurance agency) in financing projects;

Project finance is a non-recourse financing technique in which project lenders can be paid only from the SPV’s revenues without recourse to the equity investors. The project´s company obligations are ring-fenced from those of the equity investors, and debt is secured on the cash flows of the project.

A special purpose vehicle (SPV) is a subsidiary of a company which is protected from the parent company’s financial risk. It is a legal entity created for a limited business acquisition or transaction, or it can be used as a funding structure. It is sometimes called a special purpose entity (SPE).


EQUITY is usually provided by the project sponsors but may also be provided by the contractors who will build and operate the project as well as by financial institutions. A large part of THE EQUITY (often referred to as “quasi-equity”) may actually be in the form of shareholder subordinated debt, for tax and accounting benefits. Since EQUITY HOLDERS bear primary risks under a PPP project, they will seek a higher return on the funding they provide.



The Guidelines on Policies and Procedures for External Commercial Borrowings (the ECB Guidelines) have also been liberalized. The ECB Guidelines now provide that Indian corporates may incur debt of up to $50 million and developers of infrastructure projects may access foreign exchange funds of up to $200 million for the purpose of equity investments in downstream infrastructure projects, without any approvals being required for the same.


Each industry sector needs special regulation. Independent regulators have been and continue to be established for each sector, to provide the industry and technical expertise. Teething troubles have obviously arisen, and turf wars are not uncommon. However, as with some of the earlier experiments with tribunalization, the system gets mature with time and familiarity


THE MULTILATERAL CREDIT AGENCIES, also known as MULTILATERAL DEVELOPMENT BANKS (MDB), are autonomous international agencies that finance economic and social development programs in developing countries, using money borrowed in world capital markets or contributed by governments of richer countries. They are called Development partners.

Development partners are trying to mobilise private finance for infrastructure in three ways.

First, they help developing country governments improve the enabling environment, both for the general investment climate and in the specific infrastructure sectors.

Second, they fund various initiatives such as Project Preparation Facilities, Project Facilitation Platforms and Blended Finance mechanisms.

And third, development finance institutions provide equity, loans, guarantees and technical assistance directly to private companies to reduce their risk of investing in infrastructure.

The OECD, DEVELOPMENT ASSISTANCE COMMITTEE (DAC) captures the flows of Official Development Finance (ODF) for infrastructure, which include OFFICIAL DEVELOPMENT ASSISTANCE (ODA) and OTHER OFFICIAL FLOWS (OOF). The ODF for infrastructure data is disaggregated into four sectors and 45 sub-sectors. In this context, quantitative and qualitative research is conducted to analyse strategies and activities of development partners in supporting projects and in mobilising private sector resources for infrastructure in developing countries.


Export Credit Agencies, commonly known as ECAs, are public agencies and entities that provide government-backed loans, guarantees and insurance to corporations from their home country that seek to do business overseas in developing countries and emerging markets.

An export credit agency (known in trade finance as an ECA) or investment insurance agency is a private or quasi-governmental institution that acts as an intermediary between national governments and exporters to issue export financing. The financing can take the form of CREDITS (FINANCIAL SUPPORT) OR CREDIT INSURANCE AND GUARANTEES (PURE COVER) OR BOTH, depending on the mandate the ECA has been given by its government. ECAs can also offer credit or cover on their own account. This does not differ from normal banking activities. Some agencies are government-sponsored, others private, and others a combination of the two.

Export credit agencies use three methods to provide funds to an importing entity:

o DIRECT LENDING: This is the simplest structure whereby the loan is conditioned upon the purchase of goods or services from businesses in the organizing country.

o FINANCIAL INTERMEDIARY LOANS: Here, the export–import bank lends funds to a financial intermediary, such as a commercial bank, that in turn loans the funds to the importing entity.

o INTEREST RATE EQUALIZATION: Under an interest rate equalization, a commercial lender provides a loan to the importing entity at below market interest rates, and in turn receives compensation from the export–import bank for the difference between the below-market rate and the commercial rate.


Insurance providers improve the risks inherent in project financings, whether casualty or political. Insurers typically work closely with the project sponsors and lenders to produce an insurance package that limits risks at an economical price. The acceptability of the insurance package is often confirmed by an insurance consultant, retained by the project sponsor and lenders.


“Hedge Provider” means any “Lender Counterparty” as such term is defined in the First Lien Credit Agreement or, after the Discharge of First Lien Obligations, the Second Lien Credit Agreement.

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.


• Hedging is a risk management strategy;

• It is used in alleviating loss from fluctuations in prices of commodities, currencies or securities;

• It is similar to an insurance policy;

• It transfers risks to a hedge counterparty


o •To achieve global growth, the world will need to invest about $57Trillion between now and 2030 in developing countries;

•IFIs often invest in project finance in developing countries;

•Risk in exchange rate fluctuations;

•Limited control by government;

•Political risk; expropriation or non-renewal


• Natural Hedge;

• Currency Swap;

• Fixed price hedging;

• Futures Contracts;

• Non-renewal insurance;


•Due diligence; who? what? when?

•Ensure insurance and possible due diligence on insurance counter- party, especially for fixed price hedging

•Competitive terms

•Experience with commodity

•Experienced Financial Advisers


• Very expensive

• Difficult to obtain locally

• Sector-specific restrictions

• Likelihood of Political risk;

o Hedging is advantageous to both;

•The investor

•The borrower/project sponsor


An agent bank is a bank that performs services in some capacity on behalf of an entity. Agent bank services can encompass a wide range of duties. Agent banks may also be known as agency banks.

Agency securities lending

Agency lending enables customers to maximise the use of their securities through strategic lending. Lenders are in full control of the risk – they are free to select their counterparties and impose tailored credit limits. They also set collateral eligibility criteria as well as haircuts and concentration limits.

The agency lending service gives lenders the opportunity to carry out more structured trades compared to principal lending services which are subject to certain concentration and duration limits. For example, all types of term and equity trades are eligible under the agency lending service. This means that lenders can maximise their revenue opportunities by reacting quickly to evolving market demand.

The risk for lenders is further reduced as all loans are fully collateralised with a transfer of title on the collateral to the lenders. Clearstream handles all collateral management aspects, both the loans and the collateral are marked to market daily. In addition, lenders benefit from a more attractive fee split for agency lending compared to principal lending.


Agency lending enables customers to maximise the use of their securities through strategic lending. Lenders are in full control of the risk – they are free to select their counterparties and impose tailored credit limits. They also set collateral eligibility criteria as well as haircuts and concentration limits.

The agency lending service gives lenders the opportunity to carry out more structured trades compared to principal lending services which are subject to certain concentration and duration limits. For example, all types of term and equity trades are eligible under the agency lending service. This means that lenders can maximise their revenue opportunities by reacting quickly to evolving market demand.

The risk for lenders is further reduced as all loans are fully collateralised with a transfer of title on the collateral to the lenders. It handles all collateral management aspects, both the loans and the collateral are marked to market daily. In addition, lenders benefit from a more attractive fee split for agency lending compared to principal lending.



An exculpatory clause is a contract provision that relieves one party of liability if damages are caused during the execution of the contract. The party that issues the exculpatory clause is typically the one seeking to be relieved of the potential liability.


Also known as a loan or credit facility agreement or facility letter. An agreement or letter in which a lender (usually a bank or other financial institution) sets out the terms and conditions (including the conditions precedent) on which it is prepared to make a loan facility available to a borrower.


A time frame of 30 to 90 days during which a company that has gone into technical DEFAULT on a contractual payment is permitted to submit payment without further prejudice, and without being considered to have defaulted. Also known as GRACEPERIOD.


The day count convention determines how interest accrues over time in a variety of transactions, including bonds, swaps, bills and loans. Interest is usually expressed to accrue at a rate per annum (the reference period).


Period of time chosen by a borrower under a loan agreement during which a floating rate of interest, such as LIBOR, is fixed for certain of the borrower’s loans. Interest periods for LIBOR loans are typically one, two, three or six months in duration, although shorter or longer periods are available from certain lenders. When an interest period expires, the borrower can usually choose to reset the interest rate on the loans that were covered by the expired interest period by selecting a new interest period. If it does so, the current interest rate is used to fix the rate that will apply to the loans for the new interest period. If the borrower chooses not to renew an expired interest period, the loan will become a floating rate loan when the interest period expires.



The costs associated with banks complying with certain regulatory funding requirements (as opposed to capital adequacy costs which will be within the margin). Central banks in many jurisdictions, requires banks to place non-interest bearing deposits with it; the income from investing these deposits is used to help fund the Bank’s supervisory role. The amount of the deposit is calculated as a percentage of a bank’s “eligible liabilities”. Instead of this many Jurisdiction a paying periodic fees is charged

Basel III (or the Third Basel Accord) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.

o The Increased Cost clause is a ‘risk allocation’ provision designed to protect lenders in the event regulatory changes result in the rise of the cost of a loan or the reduction in receivables under a loan after a borrower has signed his loan agreement.

o The lender which invokes the clause has to decide how much of a cost (which arises from changes to the capital adequacy requirement) is attributable to a particular loan.

o The clause can be subjective because it tends to look at the financial state of the lending bank as a whole and not just the loan in question which the lender is funding.

The main costs that a lender incurs in providing its loan are its funding costs – for example, EIBOR and the cost of complying with capital adequacy and liquidity requirements applicable to that loan.

Originally set in 1974, the most recent set of norms, called BASEL III, is likely to be implemented in India from 2019. This affects a lot of banks. If you are an investor, you may need to know about the BASEL III norms.

Why need BASEL norms?

It is not for nothing that banks are considered important for an economy, especially if it is a developing country like India. Go back to 2008, the crisis in the US banking sector wreaked havoc throughout the world. The US is still trying to limp back to economic growth. A banking collapse is one of the worst crises a country can face. The BASEL norms have three aims: Make the banking sector strong enough to withstand economic and financial stress; reduce risk in the system, and improve transparency in banks.


After the 2008 financial crisis, there was a need to update the BASEL norms to reduce the risk in the banking system further. Until BASEL III, the norms had only considered some of the risks related to credit, the market, and operations. To meet these risks, banks were asked to maintain a certain minimum level of capital and not lend all the money they receive from deposits. This acts as a buffer during hard times. The BASEL III norms also consider liquidity risks.

Capital needs

When you are exposed to more risk, you need a larger safety buffer. The BASEL III norms account for more risk in the system than earlier. As a result, it increases banks’ minimum capital requirements. Tier 1 capital – the main portion of the banks’ capital, usually in the form of equity shares – should amount to 7% of the banks’ risks. So, if the bank has risky assets worth Rs 100, it needs to have Tier 1 capital worth Rs 7. This capital can be easily used to raise funds in times of troubles. Plus, banks also have to hold an additional buffer of 2.5% of risky assets.

Leverage risk

Banks can also pile on debt like other companies. This increases the risk in the system. The Basel III norms limit the amount of debt a bank can owe even further. This is called the Leverage Ratio. This is especially applicable for banks that trade in high-risk assets like derivatives.


Capital is money that is invested in assets like equity or government bonds. This money, therefore, is not readily available for day-to-day activities. Moreover, during a crisis, the value of investments can fall suddenly like the 2008 financial crisis. This means, the capital a bank holds can fall during times of need. This is why the BASEL III norms ask banks to hold liquid money. This is measured by the Liquidity Coverage Ratio (LCR), a ratio of the liquid money to total assets. This should equal the banks’ net outflows during a 30-day stress period.

Implementation in India

The Reserve Bank of India (RBI) introduced the norms in India in 2003. It now aims to get all commercial banks BASEL III-compliant by March 2019. So far, India’s banks are compliant with the capital needs. On average, India’s banks have around 8% capital adequacy. This is lower than the capital needs of 10.5% (after taking into account the additional 2.5% buffer). In fact, the BASEL committee credited the RBI for its efforts.

Challenges for Indian banks

Complying with BASEL III norms is not an easy task for India’s banks, which have to increase capital, liquidity and also reduce leverage. This could affect profit margins for Indian banks. Plus, when banks keep aside more money as capital or liquidity, it reduces their capacity to lend money. Loans are the biggest source of profits from banks. Plus, India banks have to meet both LCR as well as the RBI’s Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) norms. This means more money would have to be set aside, further stressing balance sheets.


A provision in a contract under which one party (or both parties) commit to indemnify the other (or each other) for any harm, liability, or loss arising out of foreign exchange fluctuations. If we have taken some loan in dollars in should repaid with in the same currency irrespective of exchange rate fluctuations.


The Market Disruption clause requires the borrower to compensate the lender for its actual cost of funds if a ‘Market Disruption’ event occurs. If invoked, the Market Disruption clause will impose an agreed ‘substitute’ rate on the borrower. This rate will be binding on all the lenders, if all the lenders agree. Lenders should ensure that the Market Disruption clause is included in the facility agreement. Without any contractual right to invoke Market Disruption, a bank will have no effective remedy for such compensation from the borrower.


The Market Disruption clause requires the borrower to compensate the lender for its actual cost of funds if a ‘Market Disruption’ event occurs.

Market disruption is usually invoked if either:

o a Screen Rate is not available and only one or none of the reference banks is able to supply or determine EIBOR; or

o more likely in the current economic climate, a lending bank is unable to fund a loan or participation in a loan at EIBOR – in other words, it can only fund in excess of the prevailing Interbank Market rate (the difference between the screen rate and its actual cost of funds).

During the term of a loan facility, things may change:

o new banks may enter into a syndicate as transferees (with different credit ratings to the transferor) and, therefore, different abilities to borrow cheaply

o the original bank’s ability to borrow at EIBOR may change – for example, credit rating changes or because of real or perceived problems associated with their nationality

o the market generally may change – for example, the premium which ‘second tier’ banks currently pay above ‘prime’ banks for their cost of borrowing in the UAE Interbank market may increase.

If invoked, the Market Disruption clause will impose an agreed ‘substitute’ rate on the borrower. This rate will be binding on all the lenders, if all the lenders agree.

Under a syndicated facility, the loan agreement will typically provide that if one or more banks (holding participations in at least, say, 1/3 of the aggregate amount outstanding under the facility) object, then they can require interest rate for all banks to be replaced by a more representative rate. A different percentage figure may be more appropriate, depending on the constitution of the syndicate.


Before imposing a substitute rate of interest, the borrower usually (or at least should) be required to enter into negotiations to agree a new substitute rate of interest. If this occurs and a new rate can’t be agreed, then the loan may become repayable. However, no equivalent right is usually given to the borrower to require the banks to enter into negotiations to agree a new rate.


Also known as indemnify and indemnification. Generally, an undertaking by one party to reimburse the other party or pay them directly for certain costs and expenses. In a financing context, a bank commitment letter and loan agreement often provide that the borrower will indemnify the agent banks and lenders for losses, liabilities and related expenses they incur from litigation or other claims related to the loan or the borrower (such as environmental liabilities).


A loan provision allowing the borrower to pay the loan in full before the maturity date without penalty, or to make principal reductions faster than originally envisioned by the parties. Consumer mortgages all have prepayment clauses. Large, commercial loans typically prohibit prepayment.


Marginal Cost of funds based Lending rate (MCLR), The MCLR methodology for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016. This new methodology replaces the base rate system introduced in July 2010.

This is all for interbank transactions

Base rate was based on Marginal cost of funds depending upon

1. Bank rate interest (charged by banks from consumers)

2. Repo Rate (charged by RBI from banks)

3. Rate of Return on the capital

weights are assigned to it with a 92% weight to the sum of (1) and (2) and 8% to (3)


MCLR, the calculation of interest rates (though a bit complicated) is be based upon

1. Marginal cost of funds

2. Operation expense of bank

3. Cost of carry in the CRR

4. Tenor premium


Unless a bank lends at a variable or base rate, committed lending generally assumes the bank runs a ‘matched book’ – ie; the bank funds its advance to the borrower for a defined interest period by taking a deposit in the relevant interbank market which precisely matches, in terms of the amount and maturity, that bank’s advance for the given interest period. Where the lending is undertaken by a UAE bank (or syndicate of UAE banks) in Dirhams, that rate would be the Emirates Interbank Offered Rate (EIBOR). The rate of interest charged to the borrower will include a margin (or profit element) which is added to the prevailing EIBOR rate.

In a single bank deal, the definition of EIBOR will effectively be the bank’s cost of funds. However, in a syndicated loan, for administrative reasons, EIBOR is defined as an average figure compiled from the rate at which defined reference banks offer to supply funds to prime banks in the Interbank market as determined at the relevant fixing day or by reference to a screen rate (which quotes an ‘inbuilt’ average rate for a range of different currencies)


The interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow and lend money in the interbank lending market in order to manage liquidity and satisfy regulations such as reserve requirements.


A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is prepaid within a certain time period. The penalty is based on a percentage of the remaining mortgage balance or a certain number of months’ worth of interest.



An escrow account is a bank account in which escrow funds are deposited by an escrow agent. An escrow agent is an independent and impartial third party who holds money, documents and other property for parties involved in a transaction pursuant to an escrow agreement. The escrow agent will only release money from an escrow account pursuant to the terms and conditions of the escrow instructions. Escrow accounts are ubiquitous in real estate transactions.


Sometimes money is given to a third party to hold “in trust” without the existence of a formal trust. A common example is a retainer paid to a lawyer (or agent) that has not been earned or an account opened by a mortgage company to pay expenses like homeowner’s insurance and property tax on a homeowner’s behalf. Since the lawyer hasn’t earned the money, he holds it in trust for the client until such time as it is either earned or returned to the client.



TRA mechanism has been a common feature in financing of infrastructure projects. It seeks to protect the project lenders against the credit risk (the risk of debt service default) by insulating the cash flows of the project company. This is done through shifting the control over future cash flows from the hands of the borrowers (Project Company) to an independent agent, called TRA agent, duly mandated by the lender


Trust Vs. Escrow

In acting as a non-biased third party protecting the interests of all parties involved, the escrow agent is often considered a trustee in the transaction.

Despite the terms trust and escrow being used interchangeably, there is actually quite an important difference between the two.

The escrow agent is an impartial and independent party from both the buyer and the seller.

The agent simply holds money, documents and other property based on terms outlined in a contract.

In essence, the agent works as a proctor on behalf of the contract itself, making sure everything is followed before allowing the deal to proceed.

A trust account works in quite a different way.

These types of accounts are usually used for one of two purposes.

The first being an account that is opened by a trustee to hold trust funds payable on the occasion of certain contingent expenses to be met.

Sometimes trust funds are also created to hold “in trust” a sum of money that is payable when services are to be rendered in the future. A popular example of this is an attorney who is held on retainer. The funds used to pay the attorney are usually held in trust until the attorney completes a service to warrant that payment.

While trust and escrow operate similarly in terms of banking, the key difference between the two lies in the way responsibilities are outlined for the third party “trustee” in each case.

An escrow agent serves as a fiduciary for both the buyer and seller, with duties assigned as outlined by the agreement between the two. A very narrow, limited relationship.

In a trust, the agent’s role is broader and more flexible. The trustee’s duty is to take care of the assets for the benefit of its beneficiary above all else, which can entail a number of different tasks.



–A special purpose account

–Used for tracking and control of project revenues / cash flow

–Has to be in place before attaining financial closure (where escrow is through a State agency such as SEB (STATE ELECTRICITY BOARD)).

–In other cases, creation of escrow is part of financing documentation.


•Escrow accounts are used to capture cash flows during project implementation and / or in the operative stage.

•The escrow account is used under a Trust and Retention (TRA) mechanism with a ‘Waterfall’ approach.

•The amount that goes into escrow could be the receivable itself or the free cash flow.

•If receivables are to be escrowed, these are identified and pooled.

•The working capital bankers issue ‘Letter of Ceding’ first charge on the designated receivables.

•The off-taker bears the servicing cost of the escrow banker.

•The number of escrow accounts would depend on the size and complexity of the project.


The Waterfall Model was first Process Model to be introduced. It is very simple to understand and use. In a Waterfall model, each phase must be completed before the next phase can begin and there is no overlapping in the phases.



In a true Waterfall development project, each of these represents a distinct stage of development, and each stage generally finishes before the next one can begin. There is also typically a stage gap between each; for example, requirements must be reviewed and approved by the customer before next phase can begin.

o Developers and customers agree on what will be delivered early in the development lifecycle. This makes planning and designing more straightforward.

o Progress is more easily measured, as the full scope of the work is known in advance.

o Throughout the development effort, it’s possible for various members of the team to be involved or to continue with other work, depending on the active phase of the project. For example, business analysts can learn about and document what needs to be done, while the Engineers are working on other projects.

o Except for reviews, approvals, status meetings, etc., a customer presence is not strictly required after the requirements phase.

o Because design is completed early in the development lifecycle, this approach lends itself to projects where multiple components must be designed (sometimes in parallel) for integration with external systems.

o Finally, the project can be designed completely and more carefully, based upon a more complete understanding of all project deliverables.

This provides a better project design with less likelihood of the “piecemeal effect,” a development phenomenon that can occur as pieces of work are defined and subsequently added to a phase where they may or may not fit well.


Trust and Retention Account Agreement —-> The Waterfall

Fuels Operation & Maintenance, Insurance Expenses, Distribution Account

1. Debt Payments

2. Debt Service Reserve

4. Fuel Reserve

5. O&M Reserve

6. Insurance Reserve

7. Tax Reserve

8. Major Maintenance Reserve

[This article was Published on December 12, 2017 in linkedin by me]