Law & Practice

1. Project Finance Panorama

   1.1 Recent History and Expected Developments

   The USA has long welcomed private debt and equity capital to fund large infrastructure projects and remains one of the world's oldest and largest markets for project financings. Various long, medium and short-term financing structures may be deployed, allowing for great flexibility in accommodating and balancing competing interests among the tranches of debt providers and equity investors. Non-recourse senior secured financing is prevalent for the development and construction of a wide range of capital-intensive investments, particular in the energy and infrastructure sectors. Energy projects (such as power plants, high-voltage transmission lines, and midstream oil and gas assets) are frequently financed by private developers using non-recourse debt. The goal of sponsors and equity investors is frequently to maximise after-tax returns through increased leverage, requiring contractual allocation of risk so as to maximise debt capacity. Of particular interest is the advancement of renewable energy technology coupled with favourable regulatory and tax-incentives that have served as a catalyst for growing investment in the US market. In the renewable energy space, so-called "tax equity" investors inject capital for operating projects so that developers can take advantage of production tax credits or investment tax credits, and other tax attributes of projects. Large infrastructure projects in the transportation sector (such as roads, bridges, airport and rail facilities) also attract project financing, often through public-private partnerships.

   1.2 Institutions Typically Acting as Sponsors and Lenders

   Funding for US projects is available from a wide range of sources: private sponsors; strategic investors; financial investors; institutional investors; commercial or investment banks; foreign development banks; large corporates; private equity funds; and specialised infrastructure funds. Equity sponsors include a wide range of project developers, from large corporate investors (many of whom are affiliated with larger energy companies) to smaller independent developers. Experienced developers lacking a large balance sheet, or seeking to reduce risk, often partner with financial investors such as infrastructure funds. Debt for construction of new projects is typically sourced from large commercial banks, many of which are based outside the USA. Long-term debt for projects, once built, may be provided by banks, institutional investors (such as pension funds or insurance companies), or private funds. It is possible for a project to be financed through equity (including "tax equity" for renewable energy projects) plus either construction or term bank debt or institutional debt (either as term loans or through the private placement of notes or bonds) or, if the project is large enough, a combination. These debt facilities are typically secured.

   Many projects also benefit from smaller working capital lines of credit (which constitute revolving debt) and from letter of credit facilities to meet credit support requirements from off-takers or other counter-parties. Lastly, some projects enter into hedging arrangements, which are often secured, to mitigate interest rate risk or commodity risk. These hedges are often provided by banks that are also part of the syndicate providing long-term debt while the project is in commercial operation.

   1.3 Public-private Partnership Transactions

   Public-private partnerships (PPPs or P3s) are permitted in some but not all US states as a device for government agencies to transfer risk and responsibility to private operators of infrastructure facilities. The US market has long been characterised by a series of very large projects undertaken in states that have enabling P3 statutes (such as Texas, California, Florida and Virginia, to name a few), combined with an absence of a single model or federal umbrella agency to standardise project structures and terms. As such, many procurements undertaken as P3s in the USA rely on newly educating granting authorities and then negotiating bespoke concession terms, greatly increasing transaction costs, reducing deal flow, and concentrating the market on a handful of mega-projects. Nonetheless, given the potential benefits of lower life cycle costs, greater "value for money", access to private capital, and risk sharing, the P3 model continues to be an important way for some significant US infrastructure projects to be built, especially for roads and bridges and, more recently, airport facilities. Rail projects, parking concessions, and water supply and treatment facilities have also provided recent P3 successes, as have social infrastructure projects such as courthouses, public universities and military housing. It remains to be seen whether promised federal initiatives to boost infrastructure investment will foster new P3s alongside more traditional public procurements of new or rehabilitated facilities.

   1.4 Main Issues Considered When Structuring the Deal

   As is always the case in a project financing structure, the main issues include securing a long-term, stable revenue source and allocating risks to the parties best situated to bear the risks. Additionally, project sponsors seek to maintain flexibility to realise future equity returns either by selling projects, once placed in service, to third parties...