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Jeantet is an international law firm headquartered in Paris, France, with
a network of European offices. Proudly independent, we were established over a hundred years ago, and have diligently served our clients since.
Jeantet Ukraine provides clients with services covering all aspects of business life and is one of the few firms in Ukraine to offer banking and finance expertise in collaboration with specialist teams in other offices of the Firm as well as partner firms around the world.
Please contact our Managing Partner Bertrand Barrier at email@example.com with any enquiries
Project Finance for Renewable Energy
Since last year we have been observing an amazing number of renewable energy projects in Ukraine, from small and medium size solar and biomass-fired plants to large wind parks. In many cases, the projects were driven by international companies with a large renewable asset base in unison with smaller local players. These foreign sponsors invested equity, experience, know-how and provided tremendous technical support and secured financing for the projects, while their local partners dealt in the main with the local authorities and regulatory issues. This combination of international strength and specific local knowledge has proven to be the key to success for many projects.
Many local lawyers received a unique opportunity to provide advice on structuring and financing of renewable energy projects and gain invaluable experience from big international law firms leading these projects. However, implementing the project finance structures and technology, which are essential for the lenders to provide financing appeared to be a challenging task in practice. We will discuss below the difficulties that sponsors and lenders may encounter.
In renewable project financing, the lenders typically base their credit appraisals on the projected cash flow from the operation of the solar or wind plant rather than on the value of the project company’s assets or sponsor’s credit support. Therefore, the majority of projects are financed on a limited recourse basis. That is, the project sponsor has no direct legal obligation to repay the project debt but undertakes to inject pre-agreed additional equity to support the project company’s ability to repay debts.
The financing of a project typically consists of equity investments provided by sponsors and debt financing, either in the form of senior or mezzanine loans, from commercial lenders or international finance institutions.
Equity Investment/Development Costs
The sponsors are expected to provide equity in the form of a subordinated loan or capital contribution. In addition, the historic costs and expenses incurred by the sponsors in connection with the acquisition and development of the project also counts as equity. It is, therefore, a customary practice for the project company to reimburse the sponsors for such development costs from the revenues generated by the project. However, the transfer of the development costs to the books of the project company and, most importantly, the reimbursement of the costs, appears to be problematic. In particular, with effect from 7 February 2019, when a new currency control law came into effect, the project company is prohibited from paying any such costs in excess of a general limit of EUR 2 million per year. By contrast, in the past, such payments required a license from the National Bank of Ukraine, which could be granted for significantly higher amounts. As a result, sponsors are exploring alternative structures which are not necessarily tax advantageous and the entire project becomes less commercially viable.
Debt Financing/Cash Waterfall
The cash waterfall is one of the key structural components of project financing, especially where financing is composed of the senior loan, that ranks in priority to other unsecured and unsubordinated debt, and a mezzanine loan, that ranks in priority behind a senior debt. A typical waterfall structure is a scheme by which a monthly cash flow generated by the project is deposited onto specially designated accounts and is used to repay lenders in the established order of priority, make operational and capital expenditures associated with the project and make capital distributions between sponsors.
The lenders take security over the accounts of the project company and designate an account bank which services the accounts and effects the necessary periodic payments to lenders and sponsors as per the terms of the inter-creditor and security sharing agreement between the senior and mezzanine lenders. In addition, the account bank, after debt service payments are made, releases funds to pay the contractors for the supply of equipment and services and to cover costs and expenses associated with the construction of solar or wind park pursuant to the terms of the financing documents.
It is implied in such structures that the account bank, acting in the name of the lenders, is given full control over the cash flow and may direct and affect all and any payments from the accounts of the project company. Given that the lenders rely fully on the revenues rather than assets of the project company, an effective cash waterfall is of great importance to lenders and is an essential component of the financing.
As things stand, the project companies established in Ukraine are limited in their ability to build a cash waterfall and the required account structure for the reason that the applicable regulations do not allow banks to exercise necessary control and direct the payments and transfers from the accounts of the project company. A solution to this would be for the project company to build the accounts structure offshore and Ukrainian companies have been given the right to freely establish and maintain the accounts in foreign banks. However, the right of companies to purchase foreign currency on the Ukrainian interbank market and place such currency in foreign accounts as collateral for lenders is strictly limited by a general limit of EUR 2 million. Thus, the project company is unable to convert the local currency revenues into foreign currency and deposit it into foreign accounts to build up a cash waterfall and provide required collateral to the lenders. The inability to establish a classical cash waterfall structure can put a project at risk and prevent lenders from providing necessary financing.
In addition, lenders commonly require the sponsors to make equity injections into an escrow account opened for the sole benefit of lenders. The idea behind such account is that the lenders acquire the right to withdraw or direct the payments from the account as they may deem necessary pursuant to the terms of the financing agreements and the underlying escrow agreement. However, at present, many local banks take the view that escrow accounts may solely be used for the purpose of squeeze-out transactions or in the context of shareholder agreements, and simply do not render such service and refuse to open classic escrow accounts for another general purpose.
However, by virtue of new capital/exchange controls, Ukrainian companies may purchase and allocate amounts in foreign currency onto a local debt service account with the purpose of repaying the cross-border loans when due. It is, however, not crystal clear if the company is allowed to deposit only the amounts payable under the loan agreements at the nearest repayment dates or the sums that correspond to the entire principal, interests and other payments required to be made under the loan agreement.
To achieve a typical collateral package crucial for cross-border project financing, the lenders require the assignment or pledge over the power generation licenses and power purchase agreements between the project company and the offtaker. This is an essential condition for the bankability of the project and most important component of the collateral. It implies that the rights of the project company under the power purchase agreement should be freely transferrable without the consent of the offtaker or any other third persons. It’s crucial for the lenders to have an effective right to step into the power purchase agreement or to replace the project company under a power purchase agreement with another person if an event of default occurs under the financing agreements.
Unfortunately, at present the pledge over rights or assignment under power purchase agreements is not permitted without the express consent of the offtaker, which is extremely difficult, if not impossible, to obtain in practice. Instead, lenders can only rely on the pledge over the bank account of the project company where the payments are made by the offtaker under the power purchase agreement. Similarly, the power generation license is not transferrable. This significantly reduces the bankability of renewable energy projects in Ukraine and limits the ability of project companies to raise financing from international lenders and financial institutions.
The above-mentioned shortcomings are, amongst other things, the biggest obstacle in the way of Ukrainian project companies attracting financing for new projects in renewable energy, and should be tackled by lawmakers so as to make projects in Ukraine sufficiently bankable for lenders and sponsors to have an appetite for risk to invest in Ukrainian projects.