United States: The Multiplicity Factor: Challenges To Executing Transactions In The Project Finance Market And The Techniques Used To Address Them

More than five years after the Lehman Brothers crisis, and despite gradual improvement, bank liquidity within the project finance market remains constrained. As a result, since the Lehman Brothers' collapse in September 2008, sponsors and lenders have developed various techniques to bridge the liquidity gap. Broadly speaking, the result has almost inevitably led projects to use multi-source financing plans, in which funding is provided from different types of lenders often using different types of financial instruments. As a consequence, project financings have become more complex. This added complexity results in a number of challenges to executing transactions; in this article, we examine some of these challenges and the techniques that can be used to address them.


Since 2008, efforts to bridge the project finance funding gap have been concentrated on, firstly, identifying new sources of liquidity, and secondly, unlocking such sources by developing new financial instruments, which will entice these as well as traditional sources to enter or increase their participation in this sector. The focus on unlocking as much liquidity as possible results from the fact that funding from commercial banks, traditionally the largest source of project financing, remains dramatically contracted, with many pre-Lehman banks either severely reducing their lending or exiting the market. Thus, whereas prior to 2008 the trend had been for ever-increasing amounts of project debt to be raised solely in the commercial bank market under vanilla lending structures, often fully underwritten by one or a small number of banks, today most large project funding plans use multi-source structures.

Multiple providers

The mega-fully underwritten commercial bank syndicates of yesteryear have been replaced by financings, which combine multiple lending sources, often with different objectives and therefore very different approaches to analysing, conducting due diligence, structuring and negotiating financing.

The potential mix of lending sources include:

  • multilateral or regional institutions such as the International Finance Corporation, the Asian Development Bank, the African Development Bank, the European Investment Bank, the Inter-American Development Bank and the Islamic Development Bank;
  • export credit agencies (ECAs) such as the Export-Import Bank of the United States, the Japan Bank for International Cooperation and Export Development Canada, along with a host of European ECAs;
  • domestic development institutions such as the Brazilian Development Bank (BNDES), a behemoth of Latin America;
  • international, regional and local banks and Islamic financial institutions; and " the international or local capital markets.

In certain jurisdictions/sectors, pension funds and insurance companies are active project lenders. Private equity as well as hedge and sovereign wealth funds are also now active participants in the project finance debt market. Finally, there has been a resurgence of funding from industry sources such as equipment manufacturers, commodity purchasers and construction contractors.

This is not to say that projects are no longer financed solely by commercial bank syndicates. This does still happen where circumstances permit – for example, high liquidity in the relevant market (such as the Saudi Arabian bank market or in certain Latin American countries), or where the size of the project debt is small enough to be funded from bank liquidity. However, it happens in much more limited circumstances than was the case before 2008.

Innovating with instruments

Along with the entrance of a number of new sources of financing, the resurgence of vendor finance and general efforts to increase participation in the market by all potential sources of funding, we have also seen the development of new financing instruments. In some cases, these instruments have evolved to better address the financial objectives of the new sources, thus enabling their entrance into the market. In other cases, the new instruments reflect the sources developing new techniques to address the needs of sponsors arising from constrained overall market conditions, not only for debt but also equity.

One of the more popular new instruments is streaming/royalty financing, which has developed to address the persistent liquidity gap for funding both equity and debt in the mining sector. One of the major attractions of this type of financing (which is akin to a prepaid (or partially prepaid) forward) is its hybrid nature which results in it providing certain benefits of equity financing without some of the downsides (such as dilution). There are also the debt/equity hybrid instruments favoured by many private equity and hedge funds, which often take the form of mezzanine debt or preferred/quasi-preferred equity.

Another instrument currently in vogue (though not new) is the project bond. Very popular in the late 1980s/early 1990s, there has been a resurgence of project bonds, in particular for renewable projects and projects in Latin America and the EMEA region. In addition, other instruments in the capital markets are being retooled for use to fund projects including high yield bonds and – in the US – various municipal bond structures.

Finally, with the increased role of domestic governmental institutions in many countries focused on encouraging the development or refurbishment of basic infrastructure, we are seeing a variety of direct lending instruments and credit support facilities from these institutions designed to mobilise funding from other sources. These instruments have a wide range of structures, including tax credit structures and long-term, semi-subordinated debt arrangements (such as under the US Department of Transportation's TIFIA programme).


Faced with a terrain that is more complex than prior to the financial crisis, what are some of the key challenges presented in executing a financing plan today? How can parties seek to manage these challenges and avoid the pitfalls?

The key challenges arise from the diversity of the current financing plans. The different objectives of the sources lead naturally to different approaches to due diligence, the credit analysis and approval process, and the desired terms. The different objectives also potentially lead to concerns across different lenders regarding the administration of the financing in the ordinary course and in the context of restructuring. Below, we have set out a few tactical and strategic actions that may help in efficiently executing multi-sourced financing.

Managing the process

Increasing the number of funding sources (by including multiple tranches of lenders and/or multiple types of financing instruments) typically complicates the negotiation of the financing phase of a project. However, the challenge comes not just from managing a larger or more diverse group of lenders, but from the specific requirements that each brings to the process. For example, as public institutions, ECAs and multilaterals often have prescribed board and stakeholder approval processes that include infrequent meetings and long pre-meeting notice periods once the documentation is agreed. Debt capital market issuances typically involve set procedures required by relevant rating and listing agencies, as well as satisfaction of applicable statutory requirements. Islamic financing structures are subject to approval of the shariah committees of each of the participating financial institutions. "New" lender classes such as pension funds and private equity may not be familiar with project finance principles and need a high degree of discussion through the process.

To address the management issue, sponsors and financial advisers must be highly forensic and proactive in planning the financing process, so that the various issues are considered in accordance with the relevant timeline (working backwards from the target financial close date).

The increased number of participant groups and the issues that this brings often means that the process benefits from a higher number of face-to-face meetings to achieve timely financial closing, though finding a mutually agreeable time to meet can be a challenge if not planned well in advance. Such meetings should be incorporated into the timeline.

Seeking alignment

With more diversity in the lender groups and types of instruments involved, it is important that one seeks, to the fullest extent possible, to use lenders with a common approach who have previously worked together. Using lending sources and structures that have been previously combined, and thus have previously negotiated common covenant packages and intercreditor arrangements, can avoid the extended negotiation process which comes from being a pioneer in structuring such arrangements. It can also prove beneficial in avoiding the "lowest common denominator" effect of multisource negotiations. And it increases the likelihood of a successful closing as there is precedent for success.

Regarding the "lowest common denominator" effect, though it may be possible to negotiate an arrangement under which certain lenders receive different treatment from others, this outcome is not guaranteed outside certain historically agreed market practices such as in bank/bond financings, where bondholders have a much lighter covenant and event of default package than the ECA and commercial lender tranches.

By combining sources and structures with care, sponsors can consider the benefits thereof and avoid inadvertently losing such benefits due to inconsistent requirements of other sources/structures within the financing plan.

For example, if a covenant-lite arrangement is the goal, combining project bonds with ECA or multilateral financing might not be appropriate, whereas a project bond/Term B financing may be more effective. Alternatively, if maximum refinancing flexibility is sought, combining structures which require pro rata repayment in all circumstances or have high prepayment premium would not be optimal.

Pushing the envelope?

Given the process issues in multisource financing, sponsors need to be mindful of the parameters in which they are operating. The general rule of thumb is: the more liquidity that is needed, the less room sponsors have to be aggressive. In other words, where relatively large quantities of debt are needed, the terms and conditions tend to be more conservative (especially where one or more MLAs or ECAs are anchor lenders). Therefore, any bankability analysis needs to take into account the likely requirements of the participating institutions and any sponsor-proposed term sheet should be crafted with this constraint in mind. In addition, alternative sources such as royalty/streaming or private equity arrangements, which tend to be entered into in advance of other elements of the financing plan, need to have terms that anticipate the needs of the balance of the lending group.

The pricing/tenor balance

With multiple classes of lenders and financing instruments, it is critical for sponsors to avoid the "lowest common denominator" effect, particularly on financial terms (ie, funding costs/average life/maturity at the level of the worst offer). Many lenders, though not all, will accept pricing differentials between different lending sources. In fact, multiple debt sourcing can be useful in creating pricing tension amongst different lender groups. There remains a risk of crosspollution, however, so sponsors need to be mindful of managing lenders' expectations. Differentials in average life and maturity of debt can be more difficult to achieve, especially outside the bond context. In crafting the financing plan, knowledge of the internal lender policies on acceptable mismatches in this regard is very important.

Made-to-measure intercreditor

Multiple lender groups and financial instruments mean more complex intercreditor arrangements, as the various interests and objectives often compete. While certain decisions can be made based on customary pool majority-voting principles, others may need to be on the basis of tranche voting or individual lender sign off. For example, ECAs often require veto/control rights regarding policy matters irrespective of the size of their participation.

There are a number of customary considerations to be addressed in any intercreditor structure, such as consent/ waiver voting, control over enforcement in a default scenario and consultation arrangements. However, it is important to recognise that many intercreditor arrangements are highly bespoke, based on, among other things, the specific composition of the lender group and the exposure of each group. Thus, precedent is more relevant for process considerations and evidence a particular group's ability to agree an arrangement, rather than the ability to replicate exact structures.


The multiplicity of funding sources and financial instruments is expected to continue for the foreseeable future. It is therefore critical to achieving successful financing that the complexities and challenges arising from such multiplicity be recognised and pro-actively managed. This will often require a combination of multilateral and bilateral negotiations, finely balanced to manage the expectations of all. Finally, it needs to be recognised by both sponsors and lenders that highly bespoke financing plans mean that a one-size-fits-all approach based on precedent cannot be followed; flexibility and creativity will need to be employed.

Originally published in The International Who's Who of Project Finance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions