Project Finance 2019 Comparisons

Last Updated November 22, 2018

Law and Practice

Authors



Krispin, Rubinstein, Blecher & Partners is one of Israel's leading law firms in the Energy and Infrastructure area, including Project Finance. In addition, the firm’s Commercial and Corporate Law department advises clients on all commercial aspects of their projects, from the drafting of documents, various agreements and tenders, through representation before the regulator and lenders such as financial entities and banks, and, finally, throughout the financial closing and signing of major projects in Israel and globally.

Project finance is a method of financing large infrastructure and industrial projects, planned to operate for a relatively prolonged period, mostly for public-private partnerships (PPP), based on the projected cash flow of the operated project rather than an investor’s own finances. Project finance is generally used to refer to a non-recourse or limited recourse financing structure, in which debt and equity are combined for the construction and operation, or the refinancing of a project. Project finance structures usually involve several equity investors as well as a syndicate of banks and/or other constitutional entities (such as insurance companies and other financial institutions) who will provide loans to a project. This method of financing first appeared in Israel approximately 20 years ago, with the construction and establishment of Highway 6, and has become well established. Project finance is usually used in large-scale projects in the sectors of infrastructure, energy (including gas and oil exploration projects) and generally in major construction undertakings. In the next few years, several major projects are expected to be performed in the energy and infrastructure areas such as the light rail in Tel Aviv, expected to commence operation by 2020. In the energy sector, several power plants (PV and Co-generation) as well as fields for the generation of electricity based on wind, are expected to be established soon.

Israeli banks are involved in project finance transactions, with two of the largest banks in Israel, Bank Hapoalim and Bank Leumi, as the main players in this field. Recently, bank Mizrahi, which is one of the top five banks in Israel, has become a more substantial player in several project financing transactions as well. Over the last few years, there has been an increase in the scope of participation by Israeli non-bank institutions, such as insurance companies and pension funds, who have also become part of the project finance sector. In addition, foreign banks such as Deutsche Bank and others take part in project finance transactions in Israel.

Although Israel is a relatively small country in terms of its size, the number of project finance transactions currently constructed, and the potential transactions planned for the next decade and in the more distant future, is relatively high. In the energy sector, the Israeli electricity authority has recently published a road map which summarises the main needs of the electricity generation segment in the electricity sector by 2030. According to this document, until 2030 the construction of natural gas power plants with an aggregate capacity of 6,700 MW is required; and in the renewable energy segment, approximately 7,500 MW of solar systems is to be installed to meet the 2030 targets. The total investment required by the private market by the end of the next decade, for the construction of gas production facilities and renewable energy facilities, is estimated at about USD15 billion. In addition, the reform in the electricity market was recently approved. This includes the sale of four Israel Electric Corporation (IEC) sites with old power plants to private investors. In the infrastructure sector, the Ministry of Defence has published several tenders regarding the relocation and consolidation of multiple army bases with a guaranteed budget and set timetable. This challenging project has been in the works for several years; several transportation tenders are also currently at various stages of development and construction including, inter alia, the light rails in Tel Aviv and Jerusalem. In addition, at least two further tenders for the construction of desalination projects are expected in the near future.

The risks applicable to a project vary from sector to sector and project to project but depend on the nature of the project; regulations applicable; location; regulatory risks; and construction risks (in project finance the primary, and typically sole, source of income for the repayment of a debt provided by lenders is the revenue generated by the project). In projects included as part of the energy sector, for example, financing is divided into the construction and operation phases. The lenders and project company frequently address the risks associated with the construction of a project by entering into a turnkey construction contract with the EPC contractor, under which, in exchange for a fixed contract price, the contractor agrees to construct the project by a specific date and in accordance with the agreed specifications. Moreover, the contractor assumes the liability (through the payment of liquidated damages and indemnities) for construction and performance defects and delays. Additional tools for mitigating the risks of the financing parties may be different bonds, contingency funds, wide insurance policies and other warranties included as part of a project agreement. Since the relevant market for project finance in Israel is made of a limited number of actors, the financing entities are usually familiar with the different borrowers, which allows them to have a wider picture of their experience, previous investments, debts, equity and financial history.

The assets typically available as collateral to lenders are the assets of a company or the project including, inter alia, the stocks and shares of the project company; the income and revenues of the financed project (through pledged bank accounts); the land rights involved in the project (lease or ownership rights); the project's agreements and guarantees; equipment; properties; licence rights and so forth.

The Companies Ordinance details a list of liens that must be registered as a perfection requirement; however, common practice is that all liens are registered in the Companies Registry. A lien on land rights (lease or ownership rights) must be registered in the Land Registry. If the collateral involves any licence rights (such as the rights of electricity production or oil drilling), an approval of the relevant regulator (such as the Public Utilities Authority or the oil commissioner) must be granted before registry. In some cases, registration in the Pledge Registry is required as well.

Israel permits floating charges. The Companies Law 5759-1999 refers to the definition of a floating charge in the Companies Ordinance. The legal definition is: “A lien on all or part of the Company's assets and operations at the time, as they are from time to time, but subject to the Company's authority to create special liens on its assets or on part of them”. As defined in the law, a floating charge shall have an effect on the current and future assets and possessions of a company.

Collateral security interests of companies are registered in the Registry of Companies. The service of registration is free of charge; however, the request for registration must be submitted to the registrar within 21 days from creation of the lien. Otherwise, an official request for an extension which details the reasons for the delay must be submitted. As previously mentioned, land rights must be registered in the Land Registry, and a payment of fees is required.

Each item of collateral must be described in registry forms and in the collateral bond attached to the registry forms.

The registration of security or guarantees must be done in accordance with the formalities required, such as submission within 21 days from the creation of a lien. A lien will not be registered to the benefit of a company that is in violation of the law. As mentioned previously, an approval must be granted from the relevant regulator, and they might ask for additional requirements.

Lenders usually specify in loan agreements that every action with collateral must be subject to their prior written approval. These terms and conditions are also written in the Registry, and no lien is to be registered on the same collateral, unless a prior approval of the lender is granted. As previously mentioned, collateral security interests of companies are registered in the Registry of Companies. The registry is open to the public. Project finance agreements usually include a collateral trustee clause, according to which all liens and guarantees will be assigned to a trustee who acts as the agent of the lenders. The trustee is authorised to perform the duties and exercise the rights, powers and discretions under the collaterals and the relevant agreements.

An official request to release a security is submitted to the Registrar of Companies and to the Land Registry (if there is a lien on the land rights). The request will include the description and details of the security, as well as the explicit and formal order of the lender to release the security.

One of the basic features of project finance transactions is the set of securities available to financing entities. As secured creditors, the lenders have priority over unsecured creditors, which allows them a better chance of recovering their money in an insolvency scenario and provides them with a way of controlling the borrower’s assets. A secured lender may enforce its security in various ways, depending on the nature of the security granted, the secured assets and the severity of the breach of fault. Under Israeli law, a lender can enforce a security interest if the loan is not repaid on time. Usually the loan agreement or the security interest agreement specifies certain events which, if they occur, will trigger the creditor’s right to accelerate the loan and enforce the security. These events typically include failure to repay; material breaches of a loan agreement or other specified agreements; insolvency events; changes of control; a decrease in a debtor’s credit rating; and other material adverse changes. The lender is required to apply a reasonable level of decisiveness in accordance with the severity of the breach and the borrower's collaboration with the lender. The method used in cases of lighter breaches is deduction of money which was accepted from ongoing releases and was not deposited into the project account. In more severe cases, a suspension of financial services may occur or even a demand from the lenders for an immediate and full repayment of the loan. In cases of deviation from a business plan, such as an overdraft in the project budget, banks may enforce some of the collaterals.

In project finance, lenders reserve their right to “step in” and appoint a substitute entity. According to such a mechanism, in the event of default by the borrower, the rights and obligations of the borrower are assigned to the substitute entity appointed by the lenders. Such a substitute entity undertakes the borrower's role to operate and make decisions with respect to the project.

Israeli law has drawn upon the choice-of-law principles of English common law. Apart from certain specific subjects (such as inheritance, marriage and divorce), choice of law is regulated by judicial precedent. According to a common law approach, parties may choose the law to govern their transaction as part of their general freedom of contract. If the parties fail to do so expressly or impliedly, the law with the closest relations and links to a transaction will govern a contract. Israeli courts will not apply law which is contrary to Israeli public policy, such as discriminatory law. If foreign law needs to be applied in an Israeli court, the relevant details must be proven as any other factual matter.

The Israeli law relating to the enforcement of foreign judgments is the Foreign Judgments Enforcement Law, 1958 (the Law). For an Israeli court to enforce a foreign judgment, several cumulative conditions must be met:

(i) the judgment was given by a court which – under the laws of the state of the court – was authorised to give the judgment; (ii) the judgment is no longer appealable; (iii) the obligation imposed by the judgment is enforceable according to the laws regarding the enforcement of judgments in Israel, and the tenor of the judgment is not repugnant to public policy; (iv) the judgment is executory in the state in which it was given; and (v) a foreign judgment shall not be declared enforceable if it was given in a state the laws of which do not provide for the enforcement of judgments of Israeli courts (the existence of a bilateral enforcement convention between Israel and the foreign country satisfies this requirement; however, foreign judgments from countries which do not maintain bilateral conventions with Israel are regularly enforced in Israel).

The Law also refers to a statute of limitations, according to which the courts shall not entertain an application for the enforcement of a foreign judgment if such an application is filed more than five years after the day on which the judgment was given, unless a different period has been agreed upon between Israel and the state in which the judgment was given, or unless the court considers that there are exceptional circumstances justifying the delay. With respect to arbitral awards, Israel ratified, in  full  and unconditionally, the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) on 10 June 1958,  which  came into force in Israel on 7 June 1959. Accordingly, since then, the Israeli courts have recognised and enforced foreign arbitral awards with no restrictions, but ruled exceptions when public welfare considerations take place.

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Due to Israeli legislation, foreign lenders are subject to certain restrictions when financing projects in Israel. The Financial Services Supervision Law (the Law), which entered into effect on 1 June 2017, is relatively broad; it prohibits the provision of credit without holding a licence, as well as setting additional requirements for a control permit. Due to its relatively broad nature, the Law covers activities going beyond the initial objective of the Law, with respect to several financial services and market participants, including foreign lenders conducting business in Israel (prior to the introduction of this regime the provision of credit in Israel was regulated only with respect to banks and institutional lenders). The Law authorises the Minister of Finance to exempt a specific lender or type of lender from licensing requirements. In addition, during October 2017, an updated version of the Law was published, which provides several exemptions from licensing requirements. These include, among others, foreign banks, business lenders and others.

The Prohibition on Money Laundering Law, 5760-2000 imposes various obligations on financial services providers, with respect to identification, reporting and maintenance of records. Aside from the legislation regarding money laundering and terror financing, there are no restrictions with respect to the granting of security or guarantees to foreign lenders. No material changes have been performed in any applicable laws with respect to finance structuring, guarantee and security regimes in the past year.

The Foreign Investment and Industrial Co-operation Authority, at the Ministry of Economy and Industry, is responsible for initiating, tracking, monitoring and co-ordinating industrial co-operation with foreign companies to encourage foreign activity domestically. The Foreign Investment and Industrial Co-operation Authority creates collaborations and connections, and co-ordinates opportunities between Israeli and foreign companies. Israel encourages foreign investments by offering grants, reduced tax rates and other tax-related benefits. After years of participation in the Organisation for Economic Co-operation and Development’s (OECD) committees, Israel officially joined the OECD in 2010. Israel has entered into free-trade agreements with Bulgaria, Canada, the European Free Trade Association, the EU, Mexico, Romania, Turkey and the United States. The Ministry of Economy and Industry makes constant efforts to promote the Israeli market and to encourage innovation and growth. According to the Ministry of Economy and Industry’s goals and objectives report for 2017-18, one of the main objectives of the Ministry of Economy and Industry is to attract foreign investors and create international co-operations. Therefore, the ministry has established the Foreign Investment and Industrial Co-operation Authority to serve as a one-stop shop for foreign investors and multinational companies to facilitate their operations in Israel, providing them with a wide variety of services. The scope of foreign investments in Israel in 2017 is considered a record achievement, worth approximately ILS19 billion. The Bank of Israel handles, inter alia, the foreign currency market, monitoring and analysing foreign exchange activity.

In Israel there are no restrictions on payments abroad or repatriation of capital by foreign investors. Additionally, there are no exchange controls on inward or outward investments. Foreign currencies can be purchased and sold with no limitations. A foreign resident may repatriate profit from investments in Israel and transfer all proceeds resulting from the sale of such an investment subject to certification by the tax authorities that the relevant Israeli taxes have been paid. A foreign resident may invest in shares of Israeli companies and may grant loans to Israeli companies or individuals.

Israel does not prohibit offshore accounts and maintenance of foreign currency bank accounts.

Projects controlled by government authorities, such as infrastructure ones conducted through tenders, usually require approval from the relevant authority and permits throughout the undertaking’s establishment. Projects of such kind are subject to regulations which include milestones and provisions for the aforesaid approvals and permits, which usually include submitting the finance agreements of a project. In projects which are constructed and operated through partnerships, the registration of the partnership requires the submission of the partnership agreement to the relevant registry.

In most cases, the ownership of land or natural resources requires registration of the rights at the Land Registration Office. Undertaking ownership or operation of such assets, usually requires a business licence, as well as registration of the land rights. Certain sectors have specific regulations which require specific licences, for example, projects in the energy sector. Most licences are granted by government authorities to Israeli entities.

The concepts of agent and trust are recognised in the Israeli jurisdiction and are commonly used in project finance transactions. The agent, who is appointed by lenders, serves as their representative with a borrower. The authorisations of an agent are determined by the lenders.

The priority of competing security interests is set out in the Bankruptcy Ordinance [New Version], 1980, the Companies Law 5759-1999, and the Pledge Law, 1967. First priority is granted to tax charges on the real estate property of a debtor, which is a first and statutory lien, according to the Tax Ordinance (Collection)-1929. Recently, the new Insolvency Law was approved by the Knesset (the Israeli parliament) and is yet to come into force.

Subordination provides a creditor with property rights in the debtor’s assets, and such rights are prior to the debtor’s rights as well as to other unsecured creditors. There are various types of subordination:

  • mortgages, under which the ownership of an asset is transferred on the explicit or implied condition that it will be returned when the loan is repaid;
  • floating charges, which hover above a shifting pool of assets, some or all assets of a company, and allow the company to continue its business operations with respect to such assets, so long as the charge has not been consolidated;
  • a specific charge for the purchase of an asset, which is made when funds from a lender are used to purchase an asset and the encumbrance of the asset creates security for the repayment of the funds.

The priority of the different types of subordination may vary according to whether they were registered or not, and according to their type, and all in accordance with the obligatory provisions of applicable laws.

Contractual subordination provisions do not protect a creditor in case of insolvency. If the company breaches the contractual subordination provision before entering into the liquidation process, the creditor will have to file a debt claim. In such a case, the creditor loses its special rights and becomes an unsecured creditor.

Usually, project companies or partnerships are incorporated under the laws of the State of Israel, depending on the project’s type. For example, concession agreements made according to a tender usually require that the project company is incorporated in Israel, as well as projects in the electricity market, where the law requires obtaining a licence, such as a production licence. The incorporation of a project company in Israel requires registration at the Registrar of Companies or partnerships, as applicable. The typical legal form often used for project companies is a limited liability company, incorporated as a separate legal entity; or a limited partnership, and the correct form of incorporation is usually determined, based on different considerations, such as tax considerations.

Insolvency proceedings are governed by three main sources in Israeli legislation: the Bankruptcy Ordinance; the Companies Ordinance; and the Companies Law. One of the key elements of insolvency under Israeli law is the public nature of the procedure, and the other is parity among same-class creditors. The Israeli parliament is in the process of making a substantial legislative change to the insolvency legislation, with a new statute (the Insolvency and Financial Recovery Law) which is designed to replace all previous legislation mentioned above. The principles underlying the new law are basically the same as the ones on which the existing statutes are based. The new law is intended to integrate the rules governing the insolvency of individuals and corporate entities, with a focus on the debtor’s financial recovery and on the rights of unsecured creditors.

Once insolvency procedures start, the priority of competing security interests becomes relevant. The priority of competing security interests is set in the Bankruptcy Ordinance [New Version], 1980, the Companies Law 5759-1999, and the Pledge Law, 1967. First priority is granted to tax charges on the real estate property of a debtor, which is a first and statutory lien, according to the Tax Ordinance (Collection)-1929. Recently, the new Insolvency Law was approved by the Knesset (the Israeli parliament) but is yet to come into force.

Subordination provides a creditor with property rights in the debtor’s assets, and such rights are prior to the debtor’s rights as well as to other unsecured creditors. There are various types of subordination, please refer to 5.4 Rules Governing the Priority of Competing Security Interests.

The priority of competing security interests is set in the Bankruptcy Ordinance [New Version], 1980, the Companies Law 5759-1999, and the Pledge Law, 1967. First priority is granted to tax charges on the real estate property of a debtor, which is a first and statutory lien, according to the Tax Ordinance (Collection)-1929. Recently, the new Insolvency Law was approved by the Knesset (the Israeli parliament) but is yet to come into force.

Subordination provides a creditor with property rights in the debtor’s assets, and such rights are prior to the debtor’s rights as well as to other unsecured creditors. There are various types of subordination, please refer to 5.4 Rules Governing the Priority of Competing Security Interests.

In case of insolvency, a borrower may not be able to continue the operation of a project as a going concern. In addition, the project may not be able to obtain sufficient profit for debt coverage. If a going concern alert cannot be made, the asset value of the project might not allow the lender to recover the debt by realising the assets.

The new Law of Insolvency and Economic Rehabilitation states that as part of insolvency procedures, a company is entitled to a stay of proceedings including, inter alia, halting further legal processes in a trial or other legal proceeding, the creation of liens on the company’s assets, confiscation of assets and so forth. However, if the legal proceedings are derived from criminal or administrative proceedings, this privilege will not be granted to the company.

There is no taxation over insurance policies. There are no specific restrictions, controls or fees in this regard; however, there may be certain restrictions as applicable from time to time, depending on the project, the nature of the policy and the different commercial terms in each case. There are general restrictions in insurance policies which cover project assets, such as limitations of liability of the insurance company in case of fraud, criminal negligence, etc.

There is no restriction on paying foreign creditors. Such amounts will, in most cases, be subject to withholding tax.

In the absence of an exemption, interest payments paid by Israeli borrowers are subject to withholding tax at the source. This is also relevant for foreign lenders to Israeli borrowers. Interest payments may also be subject to value added tax (VAT), which in Israel currently equals to a rate of 17%.

In the past, there was a stamp duty in Israel; however, this was cancelled. Registration of security interests is subject to nominal registration fees, as applicable. Notary services are required for certain types of filings and translations.

The Non-Bank Loans Arrangement Law, 5753-1993 (the Law) is the main legislation in the State of Israel, which regulates non-bank lending in the non-institutional market. It was enacted to protect borrowers in this market. One of the mechanisms in the law is a limit on the maximum interest rate that can be charged on non-bank loans. The maximum interest rate is determined by linking its value to the average total cost of unlinked credit granted to the public. The fifth amendment to the Law, a part of which has already come into force at the beginning of October 2017, extends the application of the Law also to institutional lenders, including banking and non-banking corporations, and sets a ceiling for the interest on loans. It also sets a series of sanctions imposed on a violator who charged higher interest than permitted by law, or when the duty of proper disclosure to the borrower is breached for the characteristics of the undertaking.

In Israel, the governing law will usually be Israeli law. In rare cases other jurisdictions such as UK or US law may be seen. For example, if one of the shareholders in one of the substantial project agreements is a foreign entity, a mechanism for dispute resolution could be seen which may include ICC arbitration or foreign jurisdiction, depending on the different projects. In addition, in specific kinds of transactions, such as in offshore natural gas projects, the governing law will typically be a foreign law.

With respect to projects that require a licence or entering into a concession agreement, such actions will always be governed by Israeli law.

Krispin, Rubinstein, Blecher & Partners

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Bnei Brak
5126112
Israel

+972-73-3202021

+972-73-3202031

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Law and Practice

Authors



Krispin, Rubinstein, Blecher & Partners is one of Israel's leading law firms in the Energy and Infrastructure area, including Project Finance. In addition, the firm’s Commercial and Corporate Law department advises clients on all commercial aspects of their projects, from the drafting of documents, various agreements and tenders, through representation before the regulator and lenders such as financial entities and banks, and, finally, throughout the financial closing and signing of major projects in Israel and globally.

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