Major Intercreditor Issues inMulti-tranche Project FinancingTransactionsJohn D. TaylorJune 9, 2005

2

Sample Financing Structure

ProjectCompanyBorrower

CommonAgreement

LoanAgreement

MultilateralFinancial Institution

NationalDevelopment Lender

Capital MarketsLenders

LoanAgreement

Indenture/NotePurchase

Agreement

LoanAgreement

Lead Commercial Banksas Agents/Underwriters

CollateralAgency/

TrustAgreement

CollateralAgent/Trustee

Syndicate ofCommercial Banks

ExportCredit Agency

PoliticalRisk

GuaranteeSecurity Agreements:

Cash Collateral AgreementPledge Agreement

Assignment AgreementMortgage

3

Elements of Intercreditor Agreement

• Appointment of Intercreditor Agent

• Sharing Provisions

• Voting/Decision-making

• Default/Remedial Action

4

Sharing Provisions

• General Rule: Pro Rata Sharing Payments Security

• Some Exceptions Separate Security (pledge of additional security,

additional reserve account, etc.) Political Risk Insurance Proceeds “Preferred Creditor” Status

5

Voting/Decision-Making I → Who Decides?

• Allocating Voting Power Purely Proportional Consensus 800-pound Gorilla

• Lender Goals Efficiency Minimize Hold-out Risk Protect Key Interests

6

Voting/Decision-Making II → How Are Decisions Made?

• Role of Agent Unilateral Action: Agent as decision-maker Group Action: Agent as decision-facilitator

• Voting Mechanics

7

Lender Decision-making Timeline

TriggeringEvent/

BorrowerRequest

AgentSolicitation

VotingDeadline

LenderDecision

Consultation/Voting Period

8

“Required” Lenders

Lender Voting Group

Unanimous Lenders

Supermajority Lenders

Majority Lenders

Single Lender (Veto Right)

Single Lender (“Interested” Lender)

Description/Comment

Fundamental matters for which each lender must consent/approve

Fundamental matters for which lenders seek a “heightened” voting threshold

A common “baseline” for decision-making relies on majority rule

Matters for which a lender requires a veto right due to its heightened sensitivity to matter

Matters that are only of interest to individual lender

Examples

Tenor/pricing of loans; release of collateral

Incurrence by Borrower of additional debt; amendments to security documents

Approval of budget; approval of insurance arrangements

Environmental matters; potentially matters identified in Credit Committee approval

Non-material changes to a lender’s facility agreement

Lender Voting Group

Unanimous Lenders

Supermajority Lenders

Majority Lenders

Single Lender (Veto Right)

Single Lender (“Interested” Lender)

Description/Comment

Fundamental matters for which each lender must consent/approve

Fundamental matters for which lenders seek a “heightened” voting threshold

A common “baseline” for decision-making relies on majority rule

Matters for which a lender requires a veto right due to its heightened sensitivity to matter

Matters that are only of interest to individual lender

Examples

Tenor/pricing of loans; release of collateral

Incurrence by Borrower of additional debt; amendments to security documents

Approval of budget; approval of insurance arrangements

Environmental matters; potentially matters identified in Credit Committee approval

Non-material changes to a lender’s facility agreement

Lender Voting Group

Unanimous Lenders

Supermajority Lenders

Majority Lenders

Single Lender (Veto Right)

Single Lender (“Interested” Lender)

Description/Comment

Fundamental matters for which each lender must consent/approve

Fundamental matters for which lenders seek a “heightened” voting threshold

A common “baseline” for decision-making relies on majority rule

Matters for which a lender requires a veto right due to its heightened sensitivity to matter

Matters that are only of interest to individual lender

Examples

Tenor/pricing of loans; release of collateral

Incurrence by Borrower of additional debt; amendments to security documents

Approval of budget; approval of insurance arrangements

Environmental matters; potentially matters identified in Credit Committee approval

Non-material changes to a lender’s facility agreement

Lender Voting Group

Unanimous Lenders

Supermajority Lenders

Majority Lenders

Single Lender (Veto Right)

Single Lender (“Interested” Lender)

Description/Comment

Fundamental matters for which each lender must consent/approve

Fundamental matters for which lenders seek a “heightened” voting threshold

A common “baseline” for decision-making relies on majority rule

Matters for which a lender requires a veto right due to its heightened sensitivity to matter

Matters that are only of interest to individual lender

Examples

Tenor/pricing of loans; release of collateral

Incurrence by Borrower of additional debt; amendments to security documents

Approval of budget; approval of insurance arrangements

Environmental matters; potentially matters identified in Credit Committee approval

Non-material changes to a lender’s facility agreement

Lender Voting Group

Unanimous Lenders

Supermajority Lenders

Majority Lenders

Single Lender (Veto Right)

Single Lender (“Interested” Lender)

Description/Comment

Fundamental matters for which each lender must consent/approve

Fundamental matters for which lenders seek a “heightened” voting threshold

A common “baseline” for decision-making relies on majority rule

Matters for which a lender requires a veto right due to its heightened sensitivity to matter

Matters that are only of interest to individual lender

Examples

Tenor/pricing of loans; release of collateral

Incurrence by Borrower of additional debt; amendments to security documents

Approval of budget; approval of insurance arrangements

Environmental matters; potentially matters identified in Credit Committee approval

Non-material changes to a lender’s facility agreement

9

Default/Remedial Action

• Goals - Requirements vs. Reality

• Procedures - Notice of Default/Consultation Period/Waiver or Exercise of Remedial Action

10

Remedial Action – Decision-making

Default

Agent Noticeto Lenders/Request forInstruction

If No LenderDecision/

Commencementof WAITING PERIOD

No Remedial Actionuntil requested by Required Lenders –

STEP DOWN–MECHANIC

If NecessaryLenders agree

to waiveWAIVER

If NecessaryLenders elect to

enforceremedies

RemedialAction

If NecessaryLenders

subsequentlyagree to waive

WAIVER

11

Remedial Action – “Step Down”

% ofLenders

30 Days 90 Days

Time

100

66⅔

51

60 Days 120 Days

Non-Fundamental Default

Fundamental Default

12

Swap Provider Issues

• Risks and Benefits of Swap Involvement

• Nature of Swap

• Coordination and Integration of Swaps Swap Voting Rights Swap Termination Rights Swap Termination Payments

13

Equity-related Intercreditor Issues

• Role of Borrower Borrower Interest in Intercreditor Matters Spectrum of Structures

• Sponsor Debt