Investment Treaty Protections for Project Finance Lenders: An Important Development for Renewable and Traditional Energy Project Lenders | Vinson & Elkins LLP
Can project finance lenders file investment treaty claims? An arbitral tribunal established under the Energy Charter Treaty recently confirmed that they can, finding that loans and hedging instruments issued by a German financier relating to several Spanish renewable energy projects qualified as ‘investments for the purposes of the investment protections set out in the Energy Charter. Treaty and Convention of the International Center for Settlement of Investment Disputes (ICSID).
International investment treaties guarantee specific investment protection standards for foreign investors who invest in host states and generally provide a direct channel for arbitrating claims against the state. Such treaties can help protect investors from host state actions that adversely affect investment. These protections can be very useful if problems arise with large-scale and expensive projects in the renewable energy, infrastructure and traditional energy sectors.
Usually, however, an investment treaty claim would be filed by equity investors in a local project company. Complaints from financial third parties are rare.
Although lenders of a funded energy or infrastructure project try to insulate themselves from project risks, in reality, project finance lenders take significant investment-type risks when lending to projects. , especially when the use of project capital investors is limited. A joint project finance structure would see a special purpose project company owned (directly or indirectly) by offshore equity investors, with financiers lending the project company 50% to 80%, or more, of the cost of developing the project. project. Lenders may have to rely on the cash flow generated by the project company to service the debt, which means that if the project company is unable to repay the debt, the lenders will not have to pay the debt. use of equity investors. If the actions of a project’s host country government affect the project company’s ability to generate cash flow, its financiers could end up with a non-performing loan and limited remedies.
While the court’s decision in Portigon AG v. Spain is not yet publicly available, if the reports are correct, this is the first time that a court has confirmed that a third party financier providing this type of financing to a project company has made a protected investment. While the merits of the request remain to be discussed, this is a welcome move for investors in large-scale, complex projects, particularly in the renewable energy sector, where regulatory changes by states can have a significant impact on the viability of projects.
Actions for investors and lenders
In any large-scale project, equity investors and financial third parties should seek from the start of the project to maximize the protections offered to their investments. Along with other common protections against host government actions, such as political risk insurance and direct agreements between lenders and host governments, the availability of investment treaty protection should be considered. . To benefit from investment treaty protection, parties should ensure that they include the assessment of potentially applicable investment treaties in their due diligence. The structuring of investments often depends on tax considerations, but the availability of investment treaty protections is an important part of the structuring analysis that should be considered by both equity investors and lenders. It may also be possible to restructure existing investments to benefit from conventional protections, provided that a dispute has not yet arisen.
Lenders should also pay close attention to recording any host state commitments that the lender relies on when making their investment and they should consider investment protection issues when making any changes. existing financing agreements (such as syndication, securitization, sale or refinancing).