USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
8. Project Finance 8.1 Recent Project Finance Activity
8.4 Foreign Ownership Various state and federal laws limit or prohibit non- resident foreign persons or entities controlled by such persons from acquiring US real property, or impose reporting requirements on foreign owners of US real estate. Many of these laws apply only to mineral resources or to agricultural property. Before acquir- ing real estate, a purchaser is advised to review the relevant federal laws that apply to the prospective pur- chaser and the type of property being acquired and to consult with counsel in the state in which the property is located for an understanding of the relevant state laws. 8.5 Structuring Deals The main issue is whether the transaction will be a limited recourse deal or whether there will be a com- pletion or other form of sponsor guaranty. This is particularly relevant in energy transition deals, such as hydrogen deals, where limited recourse financing may not be readily available. Another key issue when structuring the deal is to consider whether tax equity will be used to finance the project, as this will impact the terms of the project finance debt. The federal and state laws relevant to project companies vary depend- ing on the sector. In the case of the energy industry, key federal statutes include the Federal Power Act, the Public Utility Regulatory Policies Act of 1978 (PURPA) and the Public Utility Holding Company Act of 2005 (PUHCA). 8.6 Common Financing Sources and Typical Structures In their simplest form, project financings are provided by syndicates of commercial banks, often together with development financial institutions (DFIs) and export credit agencies (ECAs) for projects in emerg- ing markets. These financings are structured as sen- ior secured financings with a first lien on all project assets/equity with limited or no recourse to the project sponsors. However, project financings are becoming increas- ingly complex multisource financings in which com- mercial banks and DFIs/ECA facilities combine with private equity, commodity traders, strategic investors (OEMs), governmental entities, project bonds, ESG and streaming/royalty company funding in the form of
Project finance remains widely used in the USA, espe- cially in renewable energy, mining, and PPPs. However, there is growing use of “hybrid” project finance-cor- porate finance structures portfolios of projects, where multiple projects are grouped and secured together. In the renewables, portfolios of projects are frequently grouped into a single secured financing where all the assets of the group are pledged as collateral. In min- ing, alternative sources of funding such as streaming, royalty and/or prepay contracts are now common but a portion of the project funding typically is provided under a traditional project finance structure. 8.2 Public-Private Partnership Transactions More US projects have been successfully procured as P3s, relying on a “user fee” or an “availability pay- ment” model and utilised in transportation, social infrastructure, water/wastewater, energy (particularly at universities) and telecom/broadband sectors. While availability payment structures are most common, the influx of infrastructure funds and private equity are driving value creation through risk or commercialisa- tion. The Infrastructure Investment and Jobs Act is expect- ed to support P3s by authorising USD550 billion of new federal investments in infrastructure projects, renewing the TIFIA, RRIF and WIFIA loan programmes, doubling the cap on PAB issuance to surface transpor- tation projects and directing the Secretary of Trans- portation to establish a programme to enhance public entities’ technical capacity to facilitate/evaluate P3s. 8.3 Governing Law Project documents in US financings are often, but not required to be, governed by local law. Construction law is state-specific and therefore best practice often leads to the signature of construction contracts under local law. Project documents use a mix of submission to jurisdiction to local courts and arbitration to resolve disputes based on the characteristics of the project, bargaining power of the parties and other factors.
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