Purchasing a debt-financed project - a due diligence checklist
Published on 24th Mar 2022
Diligencing an energy project can be a time-consuming and daunting task, particularly if a project already has debt financing in place and you are served up with a suite of long and complex finance documents to review.
We’ve put together this short due diligence checklist to pinpoint the key provisions of the finance documents to be aware of, and help you identify whether and how you need to engage with the project's lender prior to completion.
1. Change of Control and Asset Manager changes
Most facility agreements contain restrictions on "Change of Control" – a change in ownership of the project company or its direct or even indirect shareholder. It's also common to see controls on who may be the asset manager of a project, either via an outright prohibition on changing the asset manager, or a set of criteria for any replacement asset manager.
Top tip: Review the Change of Control and asset manager provisions carefully to check if they would be tripped, looking particularly at the level in the project structure of the entity you plan to acquire, whether that is the project company itself or a holding company.
If restrictions apply, you will need to work with the vendor to obtain the lender's consent as a condition precedent to completion of the acquisition.
2. Share security
Check what security package has been granted to the lender. Unless you are acquiring all the current security providers (such that the full security package can and will remain in place post-completion), it is likely that security granted by non-transferring entities will need to be released and replaced simultaneously with completion of the acquisition. This is particularly likely if you are acquiring the project company directly.
Top tip: If any security release and replacement is necessary, early engagement with the lender will help smooth the transaction process. Where replacement security is required the lender will very likely instruct external lawyers to advise it through the process, so bear in mind that there will be an additional legal cost.
3. Lender "KYC"
Whether or not you need the lender's consent to the acquisition, the lender will need (for its own regulatory and compliance purposes) to collect "know your customer" information from you relating to the borrower's new ownership structure.
Top tip: Contact the lender as early as possible so it doesn't create any delays to your transaction timetable – lender "KYC" processes can often take a surprising amount of time.
Most often, the finance documents will only allow distributions (including repayment of shareholder debt) to be made at specific times of the year, after financial covenant testing (generally quarterly or semi-annually).
They will also almost certainly not permit any distributions to be made whilst any Event of Default is continuing, and may have a list of other circumstances in which the project is "in lock-up" (meaning no distributions can be made).
Top tip: Make sure you know how and when (and under what conditions) distributions can be made to ensure you can manage shareholder expectations.
5. Reporting requirements
Take a little time to review the sections of the facility agreement dealing with reporting (often called "information undertakings"). The lender will require periodic financial information, as well as ongoing construction or operating reports and budgets outlining project costs and revenues.
Top tip: Ask if there are any prescribed forms of reports and/or the format in which the vendor currently reports to the lender to make sure you are set up to report in an equivalent way.
6. Undertakings and Events of Default
Most facility agreements will have a suite of undertakings and "Events of Default" which set parameters around how you can manage the debt-financed asset, and the circumstances in which you'll need lender approval before you can take action.
This is market standard and should not interfere too greatly with how you run the project (after all, you and the lender share a common goal – a profitable asset), but it is important to be familiar with these provisions, both to check there are no true deal-breakers and also to ensure you continue to comply with these obligations once you own the asset.
Top tip: Before you take any material action in relation to the project – for example, replacing or amending a key project document, or agreeing fixed power prices – check the provisions of the facility agreement to see if lender consent is required, or you need to follow a prescribed approvals process.
7. Prepayment fees and refinancing process
Whilst repayment won't be immediately relevant, you will likely need to refinance the debt in the future and may choose to do this before the debt's final maturity if better pricing terms are available, so it is worth checking the prepayment provisions in the facility agreement.
Top tip: Keep a particular eye out for any long notice periods or fees (often called "make-whole") which would be payable on early repayment.
Feel free to get in touch with one of our experts who will be happy to provide further guidance.