An Overview of Project Finance Debt Restructurings

An Overview of Project Finance Debt Restructurings

Project finance is a method of funding large infrastructure and industrial projects that relies on the future cashflows of the project rather than the balance sheets of the project sponsors. This type of financing is commonly used for public-private partnerships, independent power projects, mines, pipelines, and other capital-intensive projects.

Sometimes, a project that was initially financed on a project finance basis runs into financial difficulties and is unable to service its debt obligations. This can be due to cost overruns, lower than expected revenues, technical problems, changes in market conditions, or other issues. When this happens, the project may need to undergo a debt restructuring.

What is a Project Finance Debt Restructuring?

A project finance debt restructuring involves changing the terms of the project’s debts in order to make them more manageable. The goals are usually to:

• Provide short-term liquidity and cashflow relief
• Reduce debt service costs to sustainable levels
• Extend debt maturities
• Improve the project’s financial viability

Restructurings often involve a combination of:

• Debt write-offs – Lenders agree to write off a portion of the amount owed to them
• Debt rescheduling – Repayment schedules are changed to reduce near-term payments
• Lower interest rates – Interest rates may be reduced to cut borrowing costs
• Payment holidays – Periods where no principal repayments are required
• Additional financing – New money may be injected, often on a priority basis

By rebalancing the capital structure and easing the debt burden, the intention is to put the project back on a stable financial footing so it can meet its obligations.

Why Do Project Finance Restructurings Occur?

There are a variety of reasons why a project finance deal may require restructuring, including:

Construction Issues

• Cost overruns
• Delays in completion
• Technical problems or defects

This can leave the project with much higher debt than was originally forecast, reducing cashflows available for debt service.

Operating Setbacks

• Lower than expected production or demand
• Input cost increases
• Technical problems or accidents
• Changes in government policy

Such issues reduce revenues and cashflows, making the existing debt unsustainable.

Market Changes

• Falling commodity prices
• Rising interest rates
• Unfavorable exchange rate movements

Adverse market shifts can quickly make a project unprofitable.

Over-Optimistic Forecasts

Sometimes original traffic, revenue or pricing assumptions turn out to have been over-optimistic. This leaves the project unable to service debts sized on inflated forecasts.

The Restructuring Process

Restructuring a distressed project finance deal is often a lengthy and complex process involving many parties and interrelated issues.

1. Identify Problems Early

The sooner financial difficulties are recognized, the more options available. Ignoring problems allows them to escalate.

2. Gather Information

Detailed financial and operating data analysis is required to understand the drivers and depth of the problems.

3. Model Solutions

Financial models help quantify alternative solutions and their impact on cashflows and valuations.

4. Negotiate with Stakeholders

Debt restructurings require agreement between the project company, sponsors and lenders. Other parties like governments may also be involved. Reaching consensus can be difficult.

5. Formal Restructuring

Once agreed, new contracts, financing documents and corporate approvals formalize the restructuring.

6. Implement Changes

Operational improvements, capital investments, management changes or other agreed actions must be actively implemented for long term success.

Key Players in a Restructuring

Multiple parties are involved in negotiating a project finance restructuring:

The Project Company itself which requires continued operations to service restructured debts.

Sponsors & Shareholders who stand to lose equity value and may need to inject new cash.

Lenders & Bondholders who face potential debt write-offs. Different classes of creditors may be in conflict over outcomes.

Governments may need to renegotiate contracts, approve tariff changes or provide transition financing.

Buyers may emerge who are willing to purchase the distressed asset.

Advisors like lawyers, consultants and accountants play an important role negotiating solutions and documentation.

Regulators may need to approve certain changes.

Getting alignment between these diverse parties on a mutually acceptable restructuring plan is often demanding. It may require multiple rounds of negotiation, complex intercreditor arrangements, and phased performance milestones before agreement can be reached.

Restructuring Outcomes

There are several potential outcomes from a project finance debt restructuring process:

1. Consensual Restructuring

This is the ideal outcome, achieved by agreement between the main parties without needing external intervention. This preserves value and flexibility.

2. Enforcement & Forced Sale

If negotiations fail, lenders may enforce security rights over the project through processes like foreclosure. This can lead to distressed asset sales.

3. Insolvency Proceedings

As a last resort, the project company may enter insolvency proceedings like administration or bankruptcy protection to help resolve debts. These curtail sponsor rights.

The optimal approach is to identify and address financial problems early, before positions become overly entrenched leading to adversarial negotiations that destroy value.

Constructive dialogue focused on restoring sustainable cashflows and profitability tends to produce better economic outcomes for all stakeholders. Patience and creativity is required on all sides.

Critical Success Factors

Based on long experience advising clients through project finance restructurings globally, we have identified several key success factors:

• Timely identification and analysis of problems
• Securing good quality advisors early
• Accurate financial projections & models
• Cross-creditor coordination mechanisms
• Incentivizing management continuity
• Staged performance milestones
• Prioritizing operational improvements
• Allowing adequate time for complex negotiations
• Willingness to compromise on all sides

Careful attention to these areas helps maximize the chances of achieving a consensual, value-preserving restructuring.

Conclusion

Project finance debt restructurings are complex but sometimes unavoidable processes. When large, highly-leveraged projects experience operating or financial difficulties, amending debt contracts may be necessary to ensure continued viability.

A successful restructuring requires in-depth analysis of problems, constructive negotiation between sponsors, lenders and other stakeholders, and implementation of agreed changes. With goodwill and foresight, mutually acceptable solutions can normally be crafted allowing projects to overcome temporary setbacks.

The key is to recognize issues early, gather detailed data, model alternatives, and communicate openly with creditors so win-win solutions can be identified. This helps preserve value, minimize disruption and avoid adversarial outcomes.

While challenging, most project finance restructurings can be completed successfully given adequate time, resources, flexibility and engagement by the parties involved. The rewards, in terms of restoring the profitability and positive economic impacts of important infrastructure assets, makes the effort worthwhile.

I have aimed to provide an informative overview of project finance debt restructurings, outlining key processes, participants, and outcomes. Please let me know if you need any clarification or have additional questions on this topic. I would be happy to discuss further.