Bankability in Contracts with EPC Contractors
The term is usually used to describe a lender’s view on the robustness of the project structure in terms of its ability to secure full repayment of outstanding debt, either through project delivery in accordance with Sponsor requirements or, in a default scenario, through appropriate recourse against the EPC contractor (or other stakeholders (as appropriate)) responsible for project delivery.
In the context of detailed engineering and construction delivery, lenders will prefer for one financially robust party to accept full responsibility for the delivery of the works on time, on budget and to meet the required technical and performance specification. The key candidates in this regard are typically large internationally recognised EPC contractors.
The identity of the EPC contractor can certainly have an impact on the lenders’ view on bankability.
The importance of achieving this single point of responsibility as an EPC contracotr relates to a desire by the lenders to see the party with the ‘deepest pockets’ bearing the entire risk of project delivery. To the extent that more than one party is responsible for delivery of the works (in terms of direct liability to the Sponsor), lenders will be concerned that either:
- there may be gaps in liability cover or
- that there may be interface issues when it comes to identifying the party responsible for a failure; or, perhaps worst of all
- that the party identified as being responsible for a failure can not be held to account either because its liability is limited in some way under the terms of its contract with either the Sponsor or the EPC contractor (as the case may be) or more generally because it does not have the balance sheet to meet the liabilities in question.
The contracts with an EPC contractor must have risk allocation that satisfies lenders. Lenders focus on ability (or more particularly the lack of) EPC contractor to claim:
- Additional costs; and/or
- Extensions of time
Lenders also look to EPC contractor's security (parent company guarantees/bank guarantees securing EPC contractor's performance). The less confortable lenders are with these, the more equity the sponsors will be required to contribute. lenders are also in a need of being satisfied with technical risk.
Price is a general bankability issue rather than a broader project issue.
Source: Norton Rose Fulbright