PROJECT FUNDING - Extent of Recourse

The expressions “non-recourse finance” and “limited recourse finance” are often used interchangeably with the term “project finance”. In strict terms, non-recourse finance is extremely rare and in most project finance transactions there is some (limited) recourse back to the borrower/sponsor beyond the assets that are being financed. As explained this security may amount to full or partial completion guarantees, undertakings to cover cost overruns or other degrees of support (or comfort) made available by the sponsors/ shareholders or others to the lenders. It may even be that the only tangible form of support that a lender receives over and above the project assets is a right to rescind the project loan agreement with the borrower and/or to claim damages for breach of any undertakings, representations or warranties given by the borrower in the project loan agreement.

Of course, where the borrower is a special purpose vehicle with no assets other than the project assets being financed by the lenders, then a right to claim damages from the borrower is likely to add little to a claim by the lenders for recovery of the project loan from the borrower. Further, the right to rescind the project loan agreement is likely merely to duplicate the acceleration rights of the lenders following the occurrence of an event of default contained in the project loan agreement.

However, in those cases where the borrower does have other assets or the sponsors are prepared to underwrite any claims by the project lenders for damages against the borrower, then a claim for damages for breach of any undertakings, representations or warranties may afford the lenders some additional recourse. A claim for damages, however, from a lender’s perspective is not the same under English law (and for that matter most common law-based jurisdictions) as a claim for recovery of a debt under, say, a financial guarantee. This is because a claim for damages is subject to certain common law rules; for example:

? The lender must show that the loss was caused by the breach in question

? This loss must have been reasonably foreseeable at the time the undertaking or warranty was given

? The lender is in any event under a duty to mitigate its loss.

In other words, a claim for damages against the borrower is an unliquidated claim as opposed to a claim for a debt, which would be a liquidated claim. All that a lender has to show in the case of a liquidated claim is that the debt was incurred or assumed by the borrower and that it has become due. This is clearly considerably easier than having to satisfy the common law rules and, consequently, lenders and their advisers, wherever possible, will seek to structure arrangements with a view to acquiring liquidated claims against borrowers and others supporting the borrower’s obligations.

One of the key differences, therefore, between project financing and corporate financing lies in the recourse that the lender has to the assets of the borrower. As the earlier definitions demonstrate, in project financing, this recourse is limited to an identifiable pool of assets, whereas in corporate financing the lender will have recourse to all the assets of the borrower (to the extent that these assets have not been charged to other lenders). Indeed, should the borrower fail to pay a debt when due, then, subject to the terms of the loan documentation, the lender would be entitled to petition to wind up the borrower and prove in the liquidation of the borrower on a pari passu basis with all the other unsecured creditors of the borrower.

In the context of a project financing, however, a lender would only be entitled to this ultimate sanction if the project vehicle is a special purpose vehicle set up specially for the project being financed. In those cases where the project vehicle undertook other activities, then it would look to ring-fence the assets associated with these activities and in these cases, the lender would not ordinarily be entitled to petition to wind up the borrower for non-payment of the project debt. To allow otherwise would be to allow the lender to have recourse to non-project assets, which would defeat the purpose of structuring the loan on limited or non-recourse terms in the first place.

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