Principles of Project Finance

bond trustee holds the security on behalf of the investors and calls meetings of

bond holders to vote on waivers or amendments of the bond terms.

§5.3 LOANS VERSUS BONDS

Various factors affect whether a project should use commercial bank loans or

bonds (or a combination of the two) for its financing (Table 5.2).

Because of some of the uncertainties about the final availability or terms of

bond financing, Sponsors may arrange a bank loan as an insurance policy in case

the bond issue falls through, or put together a bank loan with the intention of

refinancing it rapidly with a bond. Obviously this involves extra costs.

In general, bonds are suitable for developed markets and “standard” projects.

They are also especially suitable if a project is being refinanced after it has been

built and has operated successfully for a period. Conversely, the greater flexibility

of bank loans tends to make them more suitable for the construction and early op-

eration phases of a project, projects where there are likely to be changes in the Off-

taker’s or end-user’s requirements, more complex projects, or projects in more

difficult markets.

§5.4 THE ROLES OF THE LENDERS’ ADVISERS

Lenders use their own external advisers, largely paralleling and checking the

work done by the Sponsors’ external advisers (cf. §4.3). The costs of all these ad-

visers are payable by the Sponsors, and can add considerably to the total develop-

ment costs—they are payable whether or not the financing is concluded. It follows

from this that the terms of reference and fees for these advisers must be approved

by the Sponsors.

Advisers appointed by the lenders may include legal advisers, lenders’ engi-

neers, insurance advisers, model auditors, and others.

§5.4.1 L

EGAL

A

DVISERS

The lenders’ legal advisers carry out due diligence on the project contracts, and

in due course they assist the banks in negotiating the financing documentation.

Both local and international lawyers may be engaged for this purpose.

§5.4.2 L

ENDERS

’ E

NGINEER

One of the major international engineering firms, which are now well used to

providing this type of advice, is appointed as lenders’ engineer (also known as the

Independent Engineer, or Technical Adviser (“TA”)). Their work is in two stages:

§5.4 The Roles of the Lenders’ Advisers 63