NECESSITY FOR OFF-TAKE CONTRACTS

Off-take agreements are the agreements that provide the revenue flow to a project. They are the agreements by which the project company sells its product or service. Truly, they are the linchpins of project finance transactions.

Long-term contracts in which a creditworthy purchaser agrees to purchase the output of a facility are not always necessary for a nonrecourse or limited recourse project financing. Instead of this arrangement, the project company and the project lenders rely on the demand produced by the market for the credit support. This type of structure works effectively where the need for the project is well established and the price for the project output will remain generally stable throughout the term of the project debt. Nonetheless, the project company and project lender assume risks related to output price fluctuations, obsolescence, competition, and other market risks.

TYPES OF OFF-TAKE CONTRACTS

Great Confusion

There is confusion over the definitions of two terms: take-or-pay and take-and-pay. Yet, the difference between the two terms is straightforward: take-and-pay requires a payment only if the product is produced, whereas take-or-pay requires a payment unconditionally.

Take-or-Pay

A take-or-pay contract, in general, refers to a contractual obligation between a purchaser of a facility's output and a project company in which the purchaser agrees to make payments to the project company for the good or service producible at the facility in return for maintaining the capacity to produce and deliver the good or service.