WEST ACADEMIC PUBLISHING’S LAW SCHOOL ADVISORY BOARD JESSE H CHOPER Professor of Law and Dean Emeritus, University of California, Berkeley JOSHUA DRESSLER Professor of Law, Michael E Moritz College of Law, The Ohio State University YALE KAMISAR Professor of Law Emeritus, University of San Diego Professor of Law Emeritus, University of Michigan MARY KAY KANE Professor of Law, Chancellor and Dean Emeritus, University of California, Hastings College of the Law LARRY D KRAMER President, William and Flora Hewlett Foundation JONATHAN R MACEY Professor of Law, Yale Law School ARTHUR R MILLER University Professor, New York University Formerly Bruce Bromley Professor of Law, Harvard University GRANT S NELSON Professor of Law, Pepperdine University Professor of Law Emeritus, University of California, Los Angeles A BENJAMIN SPENCER Professor of Law, University of Virginia School of Law JAMES J WHITE Robert A Sullivan Professor of Law Emeritus, University of Michigan I INTERNATIONAL PROJECT FINANCE IN A NUTSHELL® SECOND EDITION by JOHN M NIEHUSS Adjunct Professor University of Michigan Law School Mat #41654610 II The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney If you require legal or other expert advice, you should seek the services of a competent attorney or other professional Nutshell Series, In a Nutshell and the Nutshell Logo are trademarks registered in the U.S Patent and Trademark Office © 2010 Thomson Reuters © 2015 LEG, Inc d/b/a West Academic 444 Cedar Street, Suite 700 St Paul, MN 55101 1-877-888-1330 West, West Academic Publishing, and West Academic are trademarks of West Publishing Corporation, used under license Printed in the United States of America ISBN: 978-1-62810-134-8 III This book is dedicated to, and was inspired by, the memory of my father, Marvin L Niehuss (1903–2003) He was an educator associated with the University of Michigan for over sixty years as a student, faculty member, and administrator serving as Vice President, Dean of Faculties, and Executive Vice President When he retired from active service in 1973 and became a Professor Emeritus of Law, the Regents of the University noted that his “commitment and service to the University have rarely been equaled” and that “few men in the history of the University have come to know it so well or done more to shape its destiny.” V PREFACE This is a book about the legal aspects of a very practical subject: how to raise funds for the construction and operation of major projects using a financing technique known as “project finance” One of the major challenges of the early twenty first century will be financing the massive investment required to expand the infrastructure needed for economic growth in both developed and emerging market economies The expected global demand for energy, minerals, and other commodities suggests that major new investment will also be required in these sectors Project finance will be one of the main methods used to raise funds for projects designed to meet these investment needs The book introduces the concept of project finance and then focuses on the main legal issues that arise during each phase of a typical international project finance transaction It is intended as a basic introduction for law students and lawyers who have had no previous exposure to the field and emphasizes basic principles and concepts while leaving details to more in-depth books and articles The focus is primarily legal in nature as the specific topics and issues covered are designed to provide a foundation for a young lawyer embarking on a career in project finance However, the book includes extensive coverage of financial and credit support issues and may be of interest to bankers VI and other non-lawyers looking for an overview of an international project finance transaction The content is based on materials used in a course taught at the University of Michigan Law School and is designed as a supplement to law school courses and other seminars on project finance that rely heavily on the analysis of sample documents and case studies of major projects This Second Edition has been revised and expanded to cover the use of project finance to fund PPP’s and infrastructure, the impact of the 2008 financial crisis and the resulting Basel III regulations on project finance, and other major developments over the past few years New chapters have been added to illustrate the practical application of project finance principles and techniques to projects in the infrastructure sector and the oil, gas and mining sectors The chapters on operating agreements have been substantially revised, and the discussion of syndicated loans has been expanded Additional appendices have been added to provide checklists and summary information on taxation and financial issues It is divided into eight main sections as follows: Part I—Introductory This section provides an explanation of the concept of project finance and outlines the role of the lawyer in an international project financing transaction Part II—Basic Project Preparation Part II describes the extensive preparatory work that must be done for each project to assess risks, conduct due VII diligence, plan for procurement, and create the basic legal structure of the project Part III—Project Documents This part of the book deals with the agreements that: establish the basic relationship between the host government and the SPV; allocate risk among the key project participants; govern the actual construction and operation of the project; and work together in an integrated way to create the revenue stream that serves as the foundation for raising finance for the project Part IV—Arranging Finance This section describes the main sources of finance and their characteristics and the process of developing a finance plan and arranging finance Part V—Credit Support This part covers the various forms of credit support commonly used in project financing including insurance, guarantees and bonding, security over project assets, and derivatives Part VI—Financial Documentation This section describes the various loan agreements and the other ancillary documents that govern the provision and administration of funding for projects, including analysis of loan agreement clauses and relations among the various creditors Part VII—When Problems Arise This part deals with the fact that the long term, complex nature of most project financings means that problems inevitably arise and need to be dealt with through VIII renegotiation and restructuring or various dispute settlement mechanisms Part VIII—Application of Project Finance to Specific Economic Sectors The final section discusses the application of project finance principles and techniques to specific economic sectors with an emphasis on infrastructure, oil and gas, and mining JOHN M NIEHUSS November 2014 IX ACKNOWLEDGMENTS I would like to thank Ned Neaher, an experienced project finance partner at the law firm of White & Case, for his significant contribution to this edition of the book As he did for the First Edition, he reviewed a draft of the manuscript, spent time answering my questions about current practices in the project finance field, and provided many valuable suggestions that led to changes that improved the final product Any errors or omissions are, of course, my own I would also like to acknowledge the contribution of W Joseph Wilson, a mentor for several years while I was working as an investment banker at Merrill Lynch White Weld Capital Markets in the 1980’s Joe was one of the best of the old school investment bankers who put client interests first He has an incredibly creative and innovative mind; and, in 1982, he created, developed and introduced to the US financial markets a form of U.S government zero coupon bonds This led him to, inter alia, pioneer the use of zero coupon government bonds as an institutional and retail investment vehicle and as collateral for various sovereign bond issues (e.g Brady Bonds) He supported my interest in international project finance advisory work and enabled me to gain valuable experience in the field XI ABBREVIATIONS XII ... of the main legal issues that arise at various stages of a financing A WHAT IS INTERNATIONAL PROJECT FINANCE? Project finance is a special method of raising funds for projects—primarily in the... PART I INTRODUCTORY Chapter Overview of International Project Finance A What Is International Project Finance? A Type of Structured Finance Comparison with Corporate and Sovereign Finance B Basic... INTERNATIONAL PROJECT FINANCE IN A NUTSHELL SECOND EDITION PART I INTRODUCTORY CHAPTER OVERVIEW OF INTERNATIONAL PROJECT FINANCE This chapter provides an overview of an international project finance transaction