The pros and cons of credit support instruments in security package

This is a paper that focuses on the explanation of the pros and cons of credit support instruments in security package. The company is focus in this assignment is International Energy Bank.

The pros and cons of credit support instruments in security package

Part A
You are legal counsel of the International Energy Bank (the “Bank”). The Bank was approached by the QED Fund LLP (the “Sponsor”), a fund incorporated in Mega State, in connection with providing project financing with a volume of $ 240,000,000 for the construction of a solar-wind hybrid power plant in the island state of the Ariel Isles. The Sponsor has been successfully operating wind turbines for more than two decades and has in the past five years begun building a reputation in solar energy. Additionally, the Sponsor intends to build and operate the solar-wind power station through a newly established project company, Green Hybrid Power (the “SPV”), which is a wholly owned subsidiary of the Sponsor.

For this project, capital of $ 400,000,000 composition is as follows:
Equity of the Sponsor $ 80,000,000
Mezzanine capital of the Sponsor $ 80,000,000
Debt capital (made available by the Bank) $ 240,000,000
Before the Bank finally decides on the granting of the loan, your advice is on the following issues:
Firstly, prepare an appropriate security package, with an explanation the pro and cons of each of the credit support instruments in the security package. (40 marks)

Secondly, what is the difference between mezzanine financing versus equity and debt financing? How could the Bank ensure that it is the only senior lender? (10 marks)
Thirdly, the SPV‘s revenues will be in the local currency. Also, what issues will the Bank need to consider? (10 marks)

Fourthly, where have been increase political tensions, including violent riots, to overthrow the Ariel Isles’s current government. The opposition party supported by some of the rioters has threatened to nationalise all projects of foreign investors if it were to come into power. Also, what will the Bank need to consider in this scenario? (10 marks)

Part B

“Limited or no recourse is a cornerstone concept of project finance transactions.” Discuss by giving examples of provisions from project loan documentation. (30 marks)

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