THE ROLE OF COLLATERAL IN A PROJECT FINANCING

Generally

The project finance structure, like most asset-based transactions, is centered on the assets of the borrower. Like all lenders, project finance lenders take collateral from a borrower so that if the loan cannot be repaid the collateral can be sold and the proceeds applied to loan repayment. In a project financing, the collateral documentation cannot be overlooked or its value minimized. Yet, the unlikelihood of disposition of a troubled project in a liquidation sale that recovers the full loan amount must be clearly understood.

Collateral as a Defensive Tool

The project lender desires the right to take control of the assets necessary to finish construction, operate the project, or sell the entire project in a liquidation so that another entity can operate the project and apply the proceeds ahead of all other creditors to repayment of its loan. Preserving all the elements of a project is usually necessary to achieve this goal.

Project lenders have additional goals in taking a security interest in all of the project company's assets. The lender desires that the project assets not be sold or otherwise disposed of without its consent, thereby ensuring that important assets are available to operate the facility or are sold for a price that allows replacement. In addition, for the same reason, the lender does not want any third party to have rights to any of the project's assets.