Contributed By Winston & Strawn London LLP
The first issue to be considered when structuring a project is the bankability of the project and the related contractual arrangement. As part of the assessment of the bankability of the project, a comprehensive risk analysis will be conducted and the various risks, once identified, should be appropriately allocated in the transaction documents to the parties best placed to bear such risks.
The equity investor(s) and owner(s) of the Project Company can be a single party but are more commonly a consortium of sponsors. Project Companies in the UK are commonly an SPV incorporated as a limited liability company.
Funding sources available to Project Companies include commercial lenders, export credit agencies, international institutions such as the European Investment Bank and project bonds investors. Project bonds have become increasingly popular in recent years for infrastructure projects in the UK, such as motorways, and attract greater investment from institutional investors. The financing is provided on a limited recourse basis which means that the lenders’ only recourse in case of default is to the assets and cash flows of the Project Company. It is, however, not unusual for lenders to require contingent equity and/or some form of completion guarantees from the sponsors. Project financing in the UK is typically highly leveraged with a gearing ratio in the range of 80/20, but it is not uncommon for the gearing ratio to be as high as 90/10.
Restrictions may apply to foreign investors in relation to certain regulated business sectors in the UK, such as energy and defence. For example, the EU Third Energy Package, which aims to separate generation and transmission of gas and electricity, requires Ofgem to certify as independent the holder of electricity transmission and interconnection licences. If the certification application is made by an entity controlled by a person outside the EEA, Ofgem is required to notify the secretary of state of the UK government and the EC of such an application. The secretary of state and the EC may make a recommendation against the grant of such certification if the security of electricity supply in the UK or any EEA state would be put at risk by the certification, in which case Ofgem may follow the recommendation and decline to grant the certification. Ofgem also enforces the Competition Act 1998 and Articles 81 and 82 of the EC Treaty in the electricity and gas sector, which prohibits any prevention, restriction or distortion of competition within the common market.
Investors from outside the EU may also be affected by EU sanctions, which may be autonomous or reflect measures imposed by resolutions adopted by the UN Security Council. These restrictive measures may prohibit such foreign investors from being involved in project financing in the UK.