Risk Identification, Mitigation and Key Documents in Infrastructure Projects. Presentation by Mohit Saraf Partner Luthra

1. Risk Identification, Mitigation and Key Documents in Infrastructure Projects. Presentation by Mohit Saraf Partner Luthra & Luthra Law Offices May 01, 2002

2. Overview • Financing • Risk Identification • Risk Identification & Mitigation • Financing Documents • Risk Allocation in the Credit Agreement • Security Documents • Insurance • Conclusion L&L/HUDCO Luthra & Luthra

3. Financing • Project Financing vs. Balance Sheet Financing vs. Asset Financing • Project Financing • Source of Finance • Commercial Banks • Financial Institutions • ECAs & Multilaterals • Capital Market L&L/HUDCO Luthra & Luthra

4. Finance Risks MarketRisks Lenders Promoters Supplier – Credit Agreement – Security Documents SupplyAgreement Shareholder’s Agreements Offtaker OfftakeAgreement Project company Insurances Insurers – Concession Agreement – Consents Operating and MaintenanceAgreement ConstructionContract Government Contractor Operator Construction & Operation Risks L&L/HUDCO Luthra & Luthra

5. Risk Identification • Completion Risk • Technological Risk • Supply Risk • Market Risk • Financial Risk • Political Risk • Environmental Risk • Force Majeure Risk L&L/HUDCO Luthra & Luthra

6. Risk Identification & Mitigation - General • Hate surprises; will not accept risks which are either incapable of proper assessment or which are potentially open-ended in their effect • No change in law risk • No discriminatory taxation • Minimise “risk-dumping” on project company • No liability for consequential loss • Contracts must survive enforcement of Banks’ security • Application of pre-completion revenues to capital expenditure L&L/HUDCO Luthra & Luthra

7. Risk Identification & Mitigation - Consents • Consents must last for duration of project • Regulators should not be able to vary the terms of consents unduly • Consents should inure to project and not just to project company • Government Support Agreements L&L/HUDCO Luthra & Luthra

8. Risk Identification & Mitigation -Promoters • All equity contributions to be provided up-front • Promoters to provide cover for cost overruns • Promoters to provide cover for gaps in undertakings including insurance. L&L/HUDCO Luthra & Luthra

9. Risk Identification & Mitigation -Concession Agreement • Terms of concession fixed for life of project • No unduly onerous terms on project company • Extension of term for force majeure • Compensation for termination must repay debt • Concession should survive enforcement of security • Transferability of concession on security enforcement L&L/HUDCO Luthra & Luthra

10. Risk Identification & Mitigation -Construction Contract • Turnkey fixed price contract • Fixed completion date • Force majeure, price increases and completion must back to back with concession agreement • Adequate liquidated damages for late completion • Performance Guarantees L&L/HUDCO Luthra & Luthra

11. Risk Identification & Mitigation -Operation & Maintenance Contract • Proper incentives to run project properly and profitably - including penalties for failure to meet targets • Ability to remove operator for poor performance L&L/HUDCO Luthra & Luthra

12. Risk Identification & Mitigation - Supply Contract • Security of supply and remedy for interruptions • Take or Pay obligation L&L/HUDCO Luthra & Luthra

13. Risk Identification & Mitigation - Offtake Agreement • Full pass-through of capital and variable costs • Foreign exchange protection • Take or Pay obligation • Credit enhancement including Government Guarantees L&L/HUDCO Luthra & Luthra

14. Financing Documents • Loan Agreement • Inter-Creditor Agreement amongst the Lenders • Indenture of Mortgage • Deed of Hypothecation • Agreement for Pledge of Shares • Security Agency Agreement • Trust and Retention Account Agreement • Sponsor Support Agreement L&L/HUDCO Luthra & Luthra

15. Financing Documents(Contd…) • Equity & Subordinate Debt Agreement • Undertakings for Overrun/shortfall/non-disposal of shareholdings • Loan Agreements/Subscription Agreement • Declaration and Undertaking • Consents and Agreements • Any such other documents as the Lenders may feel it necessary L&L/HUDCO Luthra & Luthra

16. Risk allocation in the Credit Agreement 1 • Drawdown mechanism • Staged drawdown • Contingency reserve (Promoter Cost Over-Run Guarantee) • Currency risk • Repayment profile • Match repayments to anticipated income • Dedicated Percentage – linked to financial covenantse.g. repayment cover ratio • Margin • Increase on termination of construction phase • Reference to financial performance L&L/HUDCO Luthra & Luthra

17. Risk allocation in the Credit Agreement 2 • Undertakings • Comply with terms of project contracts • Project company will diligently pursue its rights under the project contracts • Not to amend the terms of the project documents • Carry out the project in accordance with good industry practice • Not to abandon the project • Restriction on the companies’ ability to pay dividends • Coverage Ratio L&L/HUDCO Luthra & Luthra

18. Risk Allocation in the Credit Agreement 3 • Events of Default • Usual events of default (non-payment, breach of covenants, insolvency events) • Failure to achieve completion by a long stop date • Cessation of production (e.g. force majeure) for a “sustained” period • Abandonment of the project • Nationalisation of project facilities • Change in law affecting project’s economics • Sponsors’ failure to provide equity • Non-availability of insurances • Purpose of Events of Default L&L/HUDCO Luthra & Luthra

19. Security Documents 1Purpose of Security Documents • Offensive nature • Defensive nature • Control the Operation of project assets to generate cash and repay project debt The Banks will want to be able to take control of and/or to sell the entire undertaking constituting the Project following an Event of Default. That means all the assets plus the ability of the Project to continue as a going concern. L&L/HUDCO Luthra & Luthra

20. Security Documents 2Assets to be secured Tangibles • Land • Plant and machinery • Stock and materials (floating charge) Intangibles • Shareholdings – useful (but take care) • Rights and contracts (debts and other rights) – especially important in Project Finance L&L/HUDCO Luthra & Luthra

21. Security Documents 3Alternative security arrangements • Collateral warranties from Project parties • Direct Agreements • Direct contractual relationship • Ability to step-in following Event of Default – plus a cure period to allow sponsors to cure • Ability to step-in prior to termination of the agreement following default by the project company • Very heavily negotiated L&L/HUDCO Luthra & Luthra

22. Security Documents 4Some things to look out for • Lender liability • Shadow directorship • Must sell assets at a “proper” price • Environmental liability • Possibility of high costs of security in some jurisdictions L&L/HUDCO Luthra & Luthra

23. Insurance • Bank’s interest • Ensure adequate insurance • Ensure its interest in insurances is adequately protected • Adequate insurance • Undertaking to provide required coverage, specified risks, limits and deductions (Also a condition precedent) • Undertaking relating to quality of insurances (identity of insurer and terms to be approved by the Bank) • Self help remedy • Adequate protection of Bank’s interest in insurances • Assignment of proceeds and notice of assignment • Loss payable clause • Banks receive their own insurance contract (co-assured • “Cut-through” clauses for re-insurers L&L/HUDCO Luthra & Luthra

24. Conclusion • A risk is any event or circumstance which may adversely affect the project company’s ability to pay interest and to repay principal on the contractual payment dates • Bank will accept risk so long as it is quantified and understood • The “margin” is not high compared to what the other parties are receiving L&L/HUDCO Luthra & Luthra