Principles of Project Finance

surance companies may have neither the credit standing nor the capacity to take

on the insurance requirements for a major project.

The local insurance companies therefore normally reinsure the risk on the inter-

national market: this reinsurance can provide the route to dealing with investors’

and lenders’ credit problems with the local insurers, by allowing a “cut-through” to

the reinsurance (i.e., the local insurer instructs the reinsurers to pay any claims di-

rectly to the Project Company or the lenders), hence reducing the local credit risk

issue (although there could still be a problem if the local insurance company, as the

person to whom the reinsurance payments are legally due, goes bankrupt).

§7.7 DIRECT AGREEMENTS

The EPC Contractor, O&M Contractor, Offtaker or Contracting Authority, In-

put Supplier, Host Government (if there is a Government Support Agreement),

and other key Project Contract counterparties are all normally required to sign Di-

rect Agreements with the lenders (to which the Project Company may also be a

party). These are also known as “acknowledgments and consents,” since they ac-

knowledge the position of the lenders, and consent to their taking an assignment

of the contracts as security.

Whether Direct Agreements should be classified as Project Contracts or financ-

ing documentation is a moot point, but they are usually negotiated at the same

time as the Project Contracts, and the form of Direct Agreement is set out as an

annex to the relevant Project Contract.

Under these Direct Agreements:

• The lenders’ security interests in the underlying Project Contracts are

acknowledged.

• If the Project Contract counterpart is making payments, these are to be made

to specific bank accounts (over which the lenders have security) or as notified

by the lenders.

• The Project Contract counterpart agrees that amendments will not be made

to the contract concerned without the lenders’ consent.

• The lenders are notified if the Project Company is in default under the un-

derlying contract and have the right to join in any discussions with the con-

tract counterpart at that time.

• The lenders are given “cure periods,” (i.e., extra time to take action to rem-

edy the Project Company’s default, in addition to that already given to the

Project Company) before the contract is terminated. These cure periods are

limited in length—perhaps only a week or two—where the Project Com-

pany has failed to pay money when due (except under the EPC Contract

where a suspension period applies—cf. §7.1.9), but substantially longer for

§7.7 Direct Agreements 133