That uniquely calming warmth that comes from the sun's aspect in sub-Saharan Africa, lent its gentle warmth to the professionally upbeat streets of Johannesburg's northern suburbs in October, where inside plush air conditioned board rooms, a small cadre of the most sophisticated banks in the SSA market met with one of Africa's largest private equity houses and management team for an old school in person week-long negotiation to thrash out the most sophisticated debt issuance the continent has seen to date.
While the market has seen the increasing use of fixed pool portfolio financing, these structures have been limited to pre-determined lists of projects with limitations on additional debt being raised without the need to come back for lender consent.
For this collaborative group of creative and willing financiers and sponsors however, innovation was the name of the game and a desire not just to imitate the structures rolled out for renewable infrastructure in European markets over recent years, but to go beyond them and adapt them for the unique requirements of the emerging markets.
The financing in question would establish an open ended multi-billion dollar debt platform capable of financing myriad projects across the continent with an easy plug and play structure for the sponsors to roll out for new acquisitions, financing greenfield projects or increasing leverage on existing projects with project finance.
A debt platform
A debt platform is a flexible contractual arrangement that can be built into a holdco financing structure, in which finance is made available to a holdco special purpose vehicle (SPV) instead of, or in addition to, financing at asset level.
Using the debt platform, a borrower may raise permitted additional debt (PAD) and permitted acquisition debt on an ongoing basis from different groups of acceding creditors, each of whom rank pari passu with other lenders in the platform.
Debt platforms are historically associated with large European infrastructure projects such as airports and seaports, because they enable borrowers to raise additional debt quickly as and when required for project expansion, without the need for expansion phases to be individually project financed – a time-consuming and cost-intensive process.
However, the concept is becoming more and more relevant in the power sector, where the acquisition and control by single sponsors of large portfolios of small power projects makes financing those portfolios at holdco level a more attractive proposition than implementing multiple asset level project financings.
Structure and platform documentation
All initial and all permitted additional lenders will be bound by certain common platform documents, being a common terms agreement (CTA) containing a common cash waterfall, and an intercreditor agreement (ICA) governing, among other things, the voting rights of senior financiers and their security sharing arrangements.
All current and future debt platform lenders will benefit from and share in first-ranking common security granted on day one, typically over borrower bank accounts (in order to capture the amount of any distributions accruing to the borrower that flow upwards from its portfolio) and shares.
Subject to carve-outs and eligibility criteria for PAD, the CTA will contain customary covenants restricting the incurrence of financial indebtedness and a negative pledge preventing non-platform lenders from benefiting from any other security granted at borrower level.
Because different groups of creditors may provide PAD, a debt platform will require all additional creditors to accede to an intercreditor arrangement, which will place them on the necessary pari passu footing with the initial creditors. By the terms of the ICA the borrower must ensure that all other debt is subordinated and that it carries no right to vote.
A pre-existing intercreditor arrangement would not typically be necessary in a non-PAD structure, though the terms of such a financing may require the subordination of permitted financial indebtedness.
The facility-specific terms of the platform's facilities – ie those terms that do not need to be common to all senior creditors, which might for example concern the accrual and calculation of interest – will be governed by separate facility agreements.
Common documents such as a CTA and ICA are a feature of debt platforms – if there is no need for operational flexibility to accede future facilities, then a holdco financing can be documented by way of a standalone facility agreement.
In those arrangements, lenders will have no contractual nexus with lenders in other facilities, nor any rights to any security granted to support them (though they may of course benefit from their own facility-specific security, negotiated on a case-by-case basis).
Borrowing base eligibility criteria
Subject to satisfying relevant additional debt conditions, PAD can be raised by the borrower in respect of existing portfolio projects, or by way of acquisition finance in respect of new projects. In the power context, PAD will be sized against existing projects or newly acquired projects in the borrower's portfolio.
Because platform indebtedness will ultimately be discharged by way of cashflows moving up the corporate structure towards the borrower from portfolio group companies, the initial holdco lenders will be particularly focused on the operational history of the underlying projects, and the basis on which those projects are able to make – or would be prevented from making – distributions.
Since all platform lenders will be reliant on cashflows to recover their investment, the CTA will impose conditions on the types of project that are eligible to be included in the platform's borrowing base.
The borrowing headroom available at any given time for new PAD facilities will be calculated by running these eligibility parameters through a debt sizing model, which may form part of the borrower's base case financial modelling. The eligibility criteria will typically cover:
- The jurisdiction of the relevant project;
- The type of project – in particular in the power sector and energy transition context whether gas power generation would be regarded as eligible, which it may need to be in an emerging market jurisdiction, and the technology employed by the project – the initial lenders may agree a white list of original equipment manufacturers (OEMs) to create a pre-determined pool of eligible technologies;
- The creditworthiness of the relevant offtaker or O&M provider and the availability of additional offtaker support – for example sovereign guarantees – that would be available to project holding companies to recoup amounts invested at project level in the event of project document termination;
- The availability of PRI cover, for example, MIGA political risk insurance or currency convertibility and transferability policies – of particular relevance in emerging market economies;
- The involvement of multilateral or development finance institutions at project level – their regulating presence can improve the bankability of the project;
- In a power context, the tenor of the PPA, since a shorter PPA tenor will produce lower headroom on debt sizing;
- The currency in which distributions are made – which can be a challenge in emerging markets. As mentioned above, PAD regimes are historically associated with European infrastructure projects, which tend to be co-located with the relevant holdco borrower, meaning that upstreaming of distributions from the portfolio is a relatively seamless process. This is not always the case in emerging markets where a project's ultimate parent may be located offshore. By way of example, it may be difficult for a project company or an intermediate holding company in certain African jurisdictions to pay US dollars offshore into the borrower's jurisdiction if that is the case.
The CTA may also set conditions on which portfolio cashflows are eligible to be counted for debt sizing purposes, but financings of this type are typically designed so that all portfolio cashflows will flow through the debt platform structure.
A financing structure that does not include a PAD regime will not typically be so prescriptive, since different lenders are free to determine, on a case-by-base basis, what asset-level criteria they consider to be sufficient for their own risk appetite.
Additional PAD conditions
As another level of protection for initial lenders, certain common conditions will apply to any PAD that the borrower later wishes to be “plugged in” to the platform. These conditions will be designed to ensure that the initial lenders are not prejudiced vis-à-vis incoming creditors – typically by:
- Building out the requirement that incurrence of PAD does not adversely affect the holdco borrower's ability to comply with certain financial covenants tested at the level of the holdco borrower or disrupt its cashflows;
- Prescribing restrictions on the currency, governing law and the tenor of the additional debt; and/or
- Ensuring that new creditors have no better entrenched rights (including that they do not benefit from additional acceleration or mandatory prepayment rights) and that they rank pari passu with the initial lenders both pre- and post-enforcement.
The borrower and the initial lenders might also agree an overall cap on the total amount of PAD, in order to prevent the initial lenders from being diluted over time, and to limit the voting rights of additional creditors (subject to gradual repayment of the initial facilities).
Additional conditionality around senior creditor rights and ranking are typical of debt platform structures, which from day one must also accommodate the rights of different groups of initial and PAD creditors.
While non-PAD structures will often try to prevent over-leverage by imposing limitations on the size of any given third-party indebtedness, the same intercreditor pressures do not apply, and relevant facility documentation will not include an aggregate cap of this type.
Advantages and disadvantages
The unique characteristics of debt platforms carry both benefits and drawbacks (which may be more pronounced in certain markets):
- Flexibility – A sponsor might raise holdco finance to invest in or to acquire a portfolio that is – in whole or in part – already subject to finance at project company level. In these circumstances, a holdco finance structure does not require the involvement or consent of existing asset level creditors. Additionally, because the terms of the debt platform will have been pre-agreed by the borrower and the initial holdco lenders in the terms of the platform's common documents, the accession of additional PAD lenders will not require the prior consent of existing holdco lenders – the platform offers borrowers and financiers the opportunity to transact on a plug and play basis;
- Ranking – Where no finance is in place lower in the corporate structure, holdco debt can rank as senior secured debt. Otherwise, it will be structurally subordinated to any indebtedness that is closer to the portfolio's assets;
- Security – While holdco lenders may wish to take upstream credit support from portfolio group companies, that may be restricted by the terms of pre-existing indebtedness. If that is the case, then the borrower's structural separation from portfolio assets means that holdco lenders can nonetheless benefit from security granted over borrower and sponsor assets (including the borrower's own shares) that do not form part of any other creditors' security net. Note that in these circumstances debt platform lenders are unlikely to have recourse to project assets, only to distributions and shares, and that they will all share – on an increasingly fractional basis – in that same limited security pool;
- Concentration risk – By lending at parent level and sizing the amount of available PAD against the aggregate creditworthiness of a portfolio of projects, platform lenders reduce their concentration risk – the underperformance of an individual project in the portfolio should not have a disproportionate adverse impact;
- Liquidity – Debt platforms represent an important additional source of liquidity for borrowers and sponsors who may already benefit from, and be restricted by, more traditional asset level financing arrangements. When combined with a PAD regime built around a debt platform framework, a holdco financing can offer significant operational flexibility to borrowers, by enabling them to downstream loan proceeds to provide support and investment to portfolio projects, or to make distributions upwards to sponsors.
Article originally published by Project Finance International on December 4, 2024.
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.
