Conditions precedent in Project Finance

Project finance is a method of funding large-scale projects (often energy and infrastructure projects like power stations) where the project’s cash flows and assets serve as collateral for the loan, with limited recourse to the project sponsors. There is a huge amount of scrutiny over the project in the lending and legal process, which results in many conditions precedent, a very popular and successful Legatics use case.

The challenge

To prevent risks from materialising, Lenders have ‘conditions precedent’. They will often sign the loan in principle, but on the condition that between 100-1000 different things are in place, which are specific to the project. Many of these are legal documents. The legal process to complete a project financing usually follows this process:

1. Negotiate and agree the project documents
2. Negotiate the main finance document (often called the Common Terms Agreement), including a conditions precedent (CP) schedule
3. Turn the CP schedule into a CP checklist
4. Use the CP checklist to project manage the collection of the 100-1,000 CP documents. Some just need collecting (e.g. a government licence to operate), others need drafting and agreeing between the lawyers (e.g. security document between the project company and Lenders)
5. Get lender sign off

Pain points in the traditional process

Creating a CP checklist from a CP schedule is slow, and updating the status of CPs is time consuming. It’s traditionally done as a massive (30 page) continuous table in MS Word. On a really big deal, just running the CP checklist can almost be a full time job for a junior lawyer. Every time a file or approval comes in, the checklist needs manually updating.

Calls are then held to run through the 100-1,000 CPs line by line and discuss the status. This takes hours and is very expensive as so many parties and their lawyers are on them and are usually weekly.

The next step is deleting the lender approvals column before circulating the Word checklist – these need to stay confidential so cannot be shared with the Borrower/Sponsor side. Given that the Word CP checklist table is only circulated once a week, people often don’t know what they need to do next unless they hunt through the CP checklist table themselves. The table is frequently sent out after one law firm has circulated a multitude of documents, making the other side look bad (everything is waiting on them!). This can create a fractious atmosphere on calls. Sometimes a firm will send this on a Friday night, forcing the other parties to work all weekend to make it look like they’ve also made progress by the following Monday.

At the end of the process a closing set, binder or ‘bible’ is created from all the CP documents. It is time-consuming to compile all the latest versions of the documents, index them, hyperlink them from the index and rename/renumber them.

Legatics helps this process by:

• Generating the CP checklist from the CP schedule automatically and providing helpful tools to speed up the process like splitting line items out by definition, or keeping leading non-CP text as subheading introductory text
• Automatically updating statuses. This saves a junior having to do it in the Word table, which can take hours
• Showing everyone, live online, what they need to do next. This means that people can take action on the next item without having to wait for the checklist to be circulated
• Not having to send multiple emails asking for CP sign off. It also makes chasing up CPs much quicker and easier
• The transaction binder/bible is automatically generated by Legatics, which saves many hours of finding the latest of documents and indexing them

Benefits of streamlining your project finance transaction process

Time Saved
Deals finish faster – cutting out downtime between actions and better project management means that borrowers can get their $500m in funds earlier. The time value of money here can be huge and the project can get built faster.

This keeps deal momentum going. Project finance deals are complex and often abandoned. Good CP management can mean a deal actually happens. Banks only get paid (and bankers only get bonused) if a deal happens.

Errors Reduced
If you allow a loan to be drawn on without a CP actually in place, you risk a $500m loan being made with something critical to the project not in place! This is easily done with hundreds of emails about approvals on different versions of documents flying around.

How it works in Legatics

For more information about how Legatics can transform your project finance management, book a demo with our team.