Why The Project Vehicle Company A Legal Structure Over A Joint Venture ( Jv ) Structure

1428 Words Apr 14th, 2016 6 Pages
No. 2

1) Issue concerning why the project vehicle company (SPV) structure is prefer as a legal structure over a joint venture (JV) structure.

The first feature of the SPV that is more favourable is the ring fencing structure. Rather than including ring fencing contractual terms like in the structure of JV, the SPV structure is to insulate the project sponsors from the risk of the project. The default risk in the project is separated from the corporate risk of the sponsor engaging in the project and the debtor-creditor relationship is between the banks and the SPV. This means that the sponsor in the SPV can limit its exposure to individual equity investment in the SPV. The banks have no or limited recourse to the sponsors for loan
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Negative pledge covenants impose not only on the borrower but also its subsidiaries therefore any grant of assets security by a subsidiary is also caught by negative pledge covenants. In JV structure, the project assets are always subject to security interest payable to the banks so there might be breach of negative pledge clauses in other SLAs or bonds of the sponsors.

In conclusion, the structure of SPV is more preferable than the JV structure for many reasons. The main aspects are the risk and exposure of the sponsors, the achievement of off-balance sheet, the risk in insolvency and the negative pledge covenants.

2) Issue in relation to how these objectives might be achieved through contractual provisions in the SLA.

2.1) The objective to control the project’s fund flows since initial fund transfer until dividend payments

The objective to control the fund flows of the project is achieved through the series of covenants in relation to several types of control accounts that the SPV must act in compliance with at all time. Prior to the disbursement of funds, these control accounts must be set up as condition precedent to the SLA. The purpose of these control accounts is to control the flow of the funds in and out of the project. It is to say that these control accounts confer the ability to control the project’s fund flows to the syndicate banks because any breach of these control accounts rules will constitutes an event of default.

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