PPP Step In

Debt funders in PPP projects will generally require a direct agreement with the project company’s key counterparts to enable to step it in the event of the deferral or distress.

Following an event of default  the lender will typically be in a position to appoint a receiver over the assets of the borrower company.  They should be in a position to obtain control of the company’s assets to the exclusion of the company’s controllers and its creditors.  This will enable the receiver to run the business and use the assets or sell them or restructure et cetera.

The all assets fixed, and floating charge is likely to include fixed charges over bank accounts and book debts, assignments over contractual rights including the main project agreement, the consortium contract, construction and operating contracts and insurance policies.

The consortium members will generally charge their interest in the shares in the project company.  This will facilitate a sale by the funder of the company to a third party and enforcement in the event of default.

Security over contractual rights will usually be sought in the agreement.  This should be over the main project agreement, construction contract and operating contract.  The enforcement of the debenture may be in event of default  under the contract.  It may entitle the awarding authority and other counterparties to terminate the agreement.

It is vital to the funder that the project is not disrupted, and that the income stream is preserved.  The funder will generally require more than a mere charge over the contract.  It will require positive direct agreements which will include the right to step in.  This will put a break on the right of the awarding authority or contractor et cetera to terminate on a count of insolvency.

A period will be allowed in which the debt funder has the right to have a third party entity assume the project company’s rights and obligations.  Direct agreements are in addition to the conventional security package.

The direct agreements will be between the funder or the representative of the  syndicate, the project company and the counterparty project authority, construction contractor et cetera.  The assumption of rights by the  third party will take place by way of novation.    The entity will be jointly and severally liable to the original company so that it is not relieved and discharged by the step in.

The purpose of the step in right is to allow a space in which the funder may  consider its options with a view to saving the projects revenues et cetera. In its absence the parties would terminate their contracts and the right against the project company would be valueless.

The project company and other counterparts will understand the requirements of the debt funder and its legitimate interest in this regard.  It may be most likely in their interest to have the counterpart replace the project company with an alternative. It  may be a better solution that the termination of the contracts given the absence of effective recourse against the project company.

The awarding authority will generally be required to give notice for proposing to terminate the project agreement to the debt funders at the same time or as soon as possible.  The debt funders may seek to broaden the obligation so that they have notices of any breaches short of termination so as to monitor compliance and have advance warnings of potential problems. This is in addition to the obligation by the project company to furnish the notices etc.

The agreement will provide that before any termination that the debt funders will be given notice and have the opportunity to serve a notice of their intention to step in.  The service of notice of will not oblige the debt\ funder to step in. The debt funders may take over the project by appointing a receiver or equivalent or procure that a substitute entity controlled by it takes over the obligation.

The authority will require evidence that the substituted entity has the technical and financial capability to run the project.  On the other hand the funders are unlikely to provide a step-in entity which does not deal with the problem.

Step-in notice will usually specify the date on which is intended to take effect.  The period between the notice and it becoming effective should be a realistic time to assess problems with the project and to come up with the necessary solution.  The maximum period will be specified in the direct agreement. This will be a matter for negotiation.

The step-in period is a matter of a negotiation.  This may be for the entire of the contract term or the date when the funders have been repaid in full.  The authority however  may take the view that this should only be permitted to step in long  enough to remedy the project and get it back on track.

If the original project company is unsuitable it is likely to be obliged to find a third party to whom the project is transferred.  The consortium members may require that the project goes back to the project company once problems are resolved.

The terms agreed and length of step in completed will depend on the nature of the project.  The debt funders may argue that in the case of step in during the construction period , that it should be longer than required during the operating period due to the complexity of arrangements and resolving problems.

Some agreements may allow for a step in if there is a default under the funding agreement which does not constitute an event of default under the project agreement, as it is not especially serious.  The awarding authority will not generally find this desirable.

The debt funder is unlikely to wish to be mortgagee in possession. Apart from the fact that this is not the mortgagee’s core area, legal risks attach to the mortgagee in possession regime that do not apply to receivership or a substitution of a third party entity.  See separate provisions in relation to receivership and mortgagee in possession.

The debt funders will have more direct control over a substitute entity than a receiver.  The appointment is usually a rights rather than an obligation.  If the step-in rights or receivership rights are not exercised then the awarding authority would be entitled to exercise its rights under the agreements including in particular termination of the project agreement.

The direct agreement may provide that following step in, they will be entitled to step out if it becomes apparent that it is not viable.

The awarding authority will require assurance of continued performance during the period.  It might be by way of an undertaking  by the direct funders.  It may be by a creditworthy third party who furnishes a bond which could be called on in default during the step-in period up to agreed maximum.  There  may be a counter indemnity from the debt funders.

The awarding authority may wish to preserve the same rights against the step-in entity that they would have had against the project company.  The funder will not wish to take on unknown and un-quantified liabilities which may subsequently emerge.

It may be provided that the awarding authority is obliged to notify all unperformed obligations and identify and quantify of all outstanding or unpaid financial liabilities up to that point.  The funders will then have the right to consider whether they should step in or not or the ability to revoke a step in, in light of the disclosure of the liability.

If the funder steps in, an issue is whether it is undertaken by themselves, a substituted entity or if they procure a bond. The authority may have to agree that the pre-step-in obligations are capped at the amounts notified.  Another possibility is that the amount of liabilities may not be capped but that the debt funders accept responsibility for them, subject to its cap.  Whether or not there is a cap on pre-existing liabilities, is a matter of negotiation.

The funders may wish to ensure that the project can be novated  to a third party purchaser during the step-in period.  The authority will wish to be satisfied in relation to its technical and financial ability to complete and proceed. The awarding authority will have a right to object to the new entity. The grounds of objection may be specified in the direct agreement.

There may be provision if the awarding authority rejects the third party, for a further window to restructure the arrangement or try an alternative to meet the authority’s reasonable retirements.

The transfer is likely to be subject to the debt funders having complied with their obligations under the step-in undertaken. The  step in undertaking will generally be released on novation to the third party.

There will be  provision in relation to whether outstanding defaults and liabilities are assumed by the  successor after transfer or novation. The awarding authority may wish to preserve its rights to the extent possible. The transferee will wish to have a clean slate.

There may be limitations on the number of steps in.  However, if the contract is long it may be reasonable to have multiple step-ins.

The direct agreement may also make provision for notification of defaults to the funder. It may provide for extension of remedial periods to allow the funders to step in to resolve the problem.

There may be provision with respect to penalty points accrued to date.  They may be suspended during the step in period

The agreement may provide that during the step-in period payments have to be made directly to the debt funders rather than to the project company.