Project Finance Loan Documentation – Covenants & Security Structure

The Loan Agreement is the most critical legal document, running 100-200 pages with detailed terms, covenants, and security.

Loan Agreement Structure

Main Sections

1. Definitions (20-30 pages)
2. Loan Terms (amount, interest, repayment)
3. Conditions Precedent (before first disbursement)
4. Covenants (SPV's obligations)
5. Events of Default (triggers for acceleration)
6. Security (collateral)
7. Representations & Warranties

Financial Covenants

Ratios SPV must maintain:

1. Debt Service Coverage Ratio (DSCR)

Formula: Cash Available for Debt Service / Debt Service

Covenant: DSCR > 1.20 at all times

Example:

CADS: ₹150 crore
Debt Service: ₹120 crore
DSCR: 1.25 ✅ (above 1.20 threshold)

If violated: Lenders can demand additional equity or stop further disbursements

2. Debt-to-Equity Ratio

Covenant: Debt:Equity must not exceed 70:30

If sponsors want to withdraw equity: Not allowed if it violates ratio

3. Loan Life Coverage Ratio (LLCR)

Covenant: LLCR > 1.30

4. Interest Service Coverage Ratio (ISCR)

Formula: EBITDA / Interest

Covenant: ISCR > 2.0

Operational Covenants

Positive Covenants (Must Do)

1. Maintain Insurance: Property, CAR, BI insurance
2. Submit Reports: Monthly Progress Report, Annual Audited Financials
3. Maintain Assets: Proper O&M
4. Comply with Laws: Environmental, labor laws
5. Retain Advisors: Independent Engineer, Insurance Advisor

Negative Covenants (Must NOT Do)

1. No Dividend until minimum DSCR met
2. No Additional Debt without lender consent
3. No Asset Sale without lender consent
4. No Change in Shareholding without consent
5. No Related Party Transactions at non-market terms

Security Package

Components

1. Mortgage of Immovable Property

• First charge on land, buildings, civil works
• Registered with Sub-Registrar

2. Hypothecation of Movable Assets

• Machinery, equipment, vehicles
• Registered with ROC (Registrar of Companies)

3. Pledge of Shares

• Sponsors pledge their shares in SPV to lenders
• If default, lenders can sell shares

4. Assignment of Receivables

• All project revenues assigned to lenders
• Flow into Escrow Account

5. Assignment of Contracts

• EPC contract, O&M contract, insurance policies assigned

6. Escrow Account

• All revenues deposited here
• Lenders control disbursements (cash waterfall)

7. Debt Service Reserve Account (DSRA)

• 6-12 months debt service maintained
• First recourse if cash flow shortfall

Conditions Precedent (CP)

Before first disbursement, SPV must provide:

1. ✅ All clearances obtained (environmental, forest, etc.)
2. ✅ Land acquired and registered in SPV's name
3. ✅ EPC contract signed
4. ✅ All insurance policies in place
5. ✅ Sponsor equity funded (30% of total cost)
6. ✅ Security documents executed
7. ✅ Legal opinions from lawyers
8. ✅ Board resolutions approving loan

If any CP not met: Lenders will not disburse!

Events of Default

If any occurs, lenders can accelerate (demand immediate repayment):

1. Non-Payment: Failure to pay interest/principal for 30 days
2. Covenant Breach: DSCR < 1.20 for 2 consecutive quarters
3. Cross-Default: Default on other loans
4. Material Adverse Change: Project viability threatened
5. Insolvency: SPV files for bankruptcy
6. Misrepresentation: False information provided

Remedy:

• Cure Period: 30-90 days to fix the breach
• If not cured: Lenders invoke security, take over project

Disbursement Mechanism

Milestone-Based:

Certificate Required: Independent Engineer certifies milestone completion

Inter-Creditor Agreement (ICA)

If multiple lenders (syndication), they sign ICA:

Key Terms:

• Voting: 66% or 75% majority for major decisions
• Pari Passu: All lenders rank equally
• Pro Rata Sharing: Recoveries shared proportionately

Summary

• Loan Agreement = 100-200 pages covering all terms
• Financial Covenants: DSCR > 1.20, Debt:Equity ≤ 70:30
• Operational Covenants: Submit reports, maintain insurance, no dividends if DSCR low
• Security Package: Mortgage, hypothecation, pledge of shares, escrow, DSRA
• Conditions Precedent: All clearances, equity funded, before first disbursement
• Events of Default: Non-payment, covenant breach, insolvency
• Disbursement: Milestone-based, certified by Independent Engineer

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