2017 Project Finance Report: US

During 2016, the US project finance market has been impacted by depressed commodity prices and a tighter bank market, but sponsors have been able to move forward with increased investment from private equity funds, legislative support for renewables projects and bespoke financing structures (for example merchant financings backed by revenue puts).

Legislative support for renewable energy at both the federal and state levels (in particular the extension of the Inland Revenue Service (IRS) production and investment tax credit programs) and an increasingly hostile attitude towards coal plants (the Clean Power Plan (CPP), together with historically low natural gas prices), have led to:

• Increase in renewable energy projects. We expect this trend to continue, particularly if the CPP survives current legal challenges. As this market matures, deal structures also are evolving. Increasingly, projects are contracting to sell power to large corporates instead of traditional utilities, resulting in offtake contracts with shorter tenors and some power pricing risk being left with project owners. A proliferation of products to hedge power price and volume have become more commonplace, particularly in the ERCOT (Texas), SPP (Southwest Power Pool) and PJM regional transmission organisation markets. Community solar projects are becoming a viable alternative to larger-scale industrial projects, warehouse facilities are being used increasingly for the development of renewables projects and sponsors are combining tax equity with a range of back-leverage financing structures. We also observe a significant pickup in renewable energy sponsors tapping the private placement markets in an effort to secure long-term fixed rate financing before anticipated rate increases.

• Gas buildout in the northeast, particularly in the PJM market, though there is speculation about how much additional capital is available for merchant gas power plants in PJM.

In those areas experiencing the most, and the most rapid, growth of renewable energy projects, grid operators are facing increasing intermittency challenges. Energy storage projects likely will increase in the near term as a means to address this challenge.

Public-private partnership (PPP) deal flow in the US has increased significantly in recent years and is widely expected to continue to increase, given infrastructure needs.

Historically, such institutions have not played a significant role in financing projects within the US. However, following the US shale gas revolution, export credit agencies, particularly those in Asia that are able to provide untied funding to advance strategic national interests, have recently become more active.

The US official export credit agency is the Export-Import Bank of the United States, which is focused on facilitating the export of US goods and services by providing various financial products to companies within the US that are exporting products abroad, or to projects around the world that support the growth of jobs within the US. The US also has established a development finance institution: the Overseas Private Investment Corporation (OPIC), which provides various financial products to projects that have a meaningful connection to the US private sector and meet the agency's ultimate goal of advancing US foreign policy and national security priorities.

Due to the federal system of development and implementation of transportation infrastructure maintenance and improvements in the US, there are dozens of different state statutes authorising PPPs. As of April 2016, it has been reported that 34 US states and the District of Columbia have authorised PPPs by statute. Such authorisations vary broadly from state to state and in some cases permit both greenfield and brownfield PPP projects. President-elect Donald Trump has been quoted as stating that he will use PPPs and private investments through tax-incentives to spur $1 trillion in infrastructure investment over the next ten years, with up to $550 billion focused on transportation. However, while Trump has indicated that he staunchly supports PPPs, there is a possibility of congressional resistance to major increases in infrastructure investment. This, coupled with the need for state action to implement PPP projects, makes it difficult to predict the timing or scope of any significant increases in PPPs.

While this depends on the terms of the relevant concession agreement, recent P3 concessions financed in the US have vested title to the physical assets comprising the project and all improvements with the contracting authority. The lenders have obtained a security interest only in the rights of the concessionaire under the applicable concession agreement, together with an express acknowledgment from the contracting authority of such assignment and certain rights to cure non-performance by the concessionaire.

The Committee on Foreign Investment in the United States (Cfius), a US federal interagency group, has jurisdiction over transactions in which a foreign investor acquires control over a US business. More specifically, Cfius reviews such transactions for their impact on US national security and can recommend that the US president block or suspend any transaction that impairs US national security (or negotiate mitigation conditions with the parties to avoid that result).

Foreign investment in a US business also may trigger federal agency review based on the particular industry in which the target US business operates. For example, the US Department of Defense has established procedures to review and mitigate potential foreign ownership, control, and influence over US businesses that hold security clearances issued by the US government. In addition, there are limitations on the ability of foreign persons to acquire rights in natural resources depending on the type and location of the resource (including, a federal law prohibition on direct foreign ownership of federal mineral leases).

The US tax consequences of a non-US person investing in a project within the US can be complex and would vary, depending on, among other things, the status of the investor, the entity status of the project entity, the assets and operations of the project entity and its capital structure.

To the extent that parties have not obtained Cfius clearance prior to closing, Cfius can initiate review of a covered transaction even after closing has occurred. That review can result in the US president's imposition of adverse conditions on the operation of the acquired US business or, in the extreme, an order that the foreign investor divest its interest in that business.

Other US agency review processes can also result in adverse post-closing consequences. For example, the Department of Defense can move to invalidate security clearances post-closing where it is not comfortable that foreign ownership, control, and influence has been appropriately mitigated.

A foreign investor may be subject to US federal withholding tax at a rate of 30% on dividends and interest, unless a lower income tax treaty rate applies. In the case of interest payments, the portfolio interest exemption may provide a complete exemption from US federal withholding tax on such interest payments to the foreign investor, provided that, inter alia, the foreign investor is not a bank making a loan in its ordinary course of business.

In addition, certain provisions of the US Internal Revenue Code of 1986, as amended (commonly known as Fatca) may impose a US federal withholding tax of 30% on withholdable payments to certain foreign financial institutions and non-financial foreign entities unless certain conditions are satisfied or exemptions are applicable. Under the US Department of the Treasury regulations, withholding under Fatca generally applies to: payments of US-source interest and dividend income made on or after July 1 2014; and gross proceeds from the disposition of assets producing US-source interest or dividend income on or after January 1 2019. However, under grandfathering rules, withholding under Fatca generally will not apply to any payment under, or to gross proceeds from the disposition of, a debt obligation outstanding on July 1 2014.

While there is no prohibition on a US person's ability to hold foreign currency accounts locally or in other jurisdictions, where such accounts are located outside the US, such persons may be subject to the IRS requirements to file a Report of Foreign Bank and Financial Accounts (FBAR) or a Statement of Specified Foreign Financial Assets (Form 8938).

Insurance companies and contracts primarily are regulated by individual state law and therefore any controls, restrictions, fees and taxes applicable to insurance policies provided by foreign insurers will vary from state to state. The National Association of Insurance Commissioners, which is a voluntary association composed of state insurance regulators for all 50 states, publishes model laws and rules for the insurance industry, which indicates in its text which states have adopted each law or regulation.

Foreign insurers are permitted to (and often do) provide insurance over project assets located in the US, subject to compliance with applicable state and federal laws. Foreign insurers may either establish a branch within the US, which will subject the foreign insurer to regulations much like those applicable to domestic insurers, including state guaranty fund requirements, or rely on state law exemptions allowing non-admitted foreign insurers to place insurance over assets within the US. There are three main ways in which non-admitted foreign insurers may place insurance within the US: on a surplus lines basis; through a direct placement; or pursuant to other exemptions available under the relevant state's insurer licensing laws.

Reinsurance in the international market is available but not commonly seen on US project financings. In US project financings, unlike in other jurisdictions, lenders typically do not require reinsurance because there are enough rated insurance companies in the US to provide the relevant cover and, where the US market does not have sufficient capacity, it may be possible to obtain direct insurance from foreign issuers. Although less relevant, given that reinsurance is not commonly used, we note that cut-through clauses generally are permitted under New York law, so long as the cut-through clause clearly manifests the parties' intent to allow a specific third-party (for example the original insured) to obtain an insurance recovery directly from the reinsurer. Such clauses may also be enforceable in other US jurisdictions, although there may be common law or statutory distinctions among such jurisdictions impacting their scope and enforceability.

US federal and state courts generally consider the parties' agreement to submit a dispute to a foreign jurisdiction effective and enforceable, unless it is the result of overreaching or unfair use of unequal bargaining power, or if the foreign jurisdiction would be extremely inconvenient.

Under the Foreign Sovereign Immunities Act, a waiver of sovereign immunity is generally effective and enforceable in the context of government project development contracts of a commercial nature.

Generally, US federal and state courts respect the parties' choice of law. Section 187 of the Restatement (Second) of the Conflicts of Laws is widely followed and provides that a court will follow the law of the state chosen by the parties "to govern their contractual rights and duties . . . unless either (a) the chosen state has no substantial relationship to the parties or to the transaction or there is no other reasonable basis for the parties' choice; or (b) application of the law of the chosen state would be contrary to fundamental policy of a state which has a materially greater interest than the chosen state in the determination of a particular issue and which . . . would be the state of applicable law in the absence of an effective choice of law by the parties."

Notably, however, the state of New York encourages the choice of New York law as the governing law of international commercial transactions by permitting parties to a transaction where the consideration or obligation is not less than $250,000 to choose New York law "whether or not such contract, agreement or undertaking bears a reasonable relation" to New York state.

The recognition of foreign court judgements in the US is governed by state law (including in federal courts). Thirty-two of the US states have adopted the Foreign-Country Money Judgments Recognition Act. The other states consider the recognition of foreign court judgments based on common law principles of comity. Money judgments from a non-US court will not be recognised if the non-US court was not impartial or did not offer due process or did not have personal jurisdiction over the defendant (and in certain circumstances based on judicial discretion).

The US is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which applies to arbitration awards of a commercial nature when either at least one party is not a citizen of the US or all parties are citizens of the US, but there is a reasonable nexus with one or more foreign states. The Federal Arbitration Act, which applies to awards involving maritime disputes or disputes involving interstate commerce, sets out the procedures for the enforcement of arbitration agreements and arbitral awards in the US.

It is customary in a project financing of a project or portfolio of projects located within the US that, on the date of financial closing, secured parties receive security interests in substantially all personal and real property of the owner of the financed project or portfolio of projects and its subsidiaries (if any) (including, for example accounts, equipment, inventory, intellectual property, contracts, capital stock and cash), as well as security interests in all of the equity interests in such owner and subsidiaries. Note, however, that there are frequently limited exclusions from the collateral (or example contracts, licences and permits that are not assignable by their terms or under applicable law and assets for which security interest perfection is unduly cumbersome or expensive relative to asset value).

Debt subordination is far less common in the US than lien subordination but both debt subordination and lien subordination would be recognised in bankruptcy if agreed pursuant to an otherwise valid agreement.

Perfection and priority of security interests in US project financings are primarily governed by, in the case of personal property, the Uniform Commercial Code in effect in the relevant US state (the UCC) and, in the case of real property, the law of the jurisdiction where the real property is located.

For personal property, Article 9 of the UCC permits several methods of perfection depending on the type of property, for example:

• Filing of UCC financing statements is available as a method of perfection for all personal property collateral that is subject to Article 9 of the UCC, other than deposit accounts, letter of credit rights and money. For most domestic debtors, financing statements are filed in the debtor's state of organisation and, for most non-US debtors, Washington DC.

• Possession is available as a method of perfection for certificated securities, instruments and tangible chattel paper (and also for goods and money, though uncommon) and is effected by the secured party taking physical possession of the collateral.

• Control is the only permitted method of perfection for deposit accounts and letter of credit rights and is the stronger method of perfection for securities accounts, commodity contracts, uncertificated securities and electronic chattel paper. It is typically effected by entering into an agreement that provides the secured party with control (for UCC purposes) over the collateral.

Perfection of security interests in certain types of personal property (for example insurance) is not addressed in the UCC, and other personal property (for example goods covered by certificates of title or intellectual property) may require compliance with other laws.

Security interests in real property are perfected by recording a mortgage or deed of trust in proper form in the jurisdiction where the real property is located.

Absent a contractual intercreditor arrangement to the contrary, the first to properly perfect a security interest generally has priority, with the caveat that certain methods of perfection (for example possession or control of investment property) will take priority over earlier security interests perfected solely by filing of UCC financing statements. Additionally certain types of creditors such as purchase money secured parties and certain lien creditors may be able to obtain priority over prior perfected security interests.

The taxes and fees payable to perfect a security interest vary depending on the type and location of collateral. Fees are commonly payable upon the filing or recording of security documentation, and in the case of personal property such fees are usually nominal. In the case of real property, while this also varies depending on the jurisdiction, substantial mortgage recording fees are not uncommon.

A corporate entity, as agent or trustee for secured parties, may be the grantee of security interests in collateral and, if necessary, hold physical collateral.

Chapters 7 and 11 of the United States Bankruptcy Code govern liquidation and reorganisation proceedings, respectively. Immediately upon the commencement of a bankruptcy proceeding by a project company, the Automatic Stay goes into effect, which prevents creditors and other parties in interest from taking most contractual enforcement, collection and foreclosure actions against a debtor or its property.

Creditors are able to protect their interests in a debtor project company through the US bankruptcy process. A creditor may request relief from the automatic stay to take limited specific action against a debtor or its property during bankruptcy, subject to court approval. The Bankruptcy Code also provides for a right of secured creditors to obtain adequate protection from diminution in value of collateral due to the conduct of a debtor, depreciation, dissipation or otherwise.

Secured creditors should be aware that the Bankruptcy Code also permits a debtor, under certain circumstances, to grant a security interest that has priority over pre-bankruptcy secured creditors to lenders that provide financing to the debtor during bankruptcy.

Security documents in US project financings commonly provide that, upon the occurrence of an event (often an event of default under the financing documents), the secured parties may exercise remedies specified therein (for example direct application of cash in accounts and foreclose on and sell collateral) and remedies available at law or in equity and under the UCC (coupled with the right to terminate outstanding financing commitments and accelerate outstanding indebtedness).

See 10.2 above.

About the author
		Amy Maloney Partner, Latham & Watkins New York, US T: +1 212 906 2994 E: amy.maloney@lw.com W: www.lw.com Amy Maloney is a partner in the New York office of Latham & Watkins where she is a member of the Project Finance Practice in the Finance Department. Maloney represents commercial and investment banks, insurance companies, investment firms and other financial institutions as well as sponsors and developers in connection with the development, construction, operation and financing of domestic and cross-border energy and infrastructure projects.

About the author
		Warren Lilien Partner, Latham & Watkins New York, US T: +1 212 906 1787 E: warren.lilien@lw.com W: www.lw.com Warren Lilien is a partner in the New York office of Latham & Watkins. Lilien represents financial institutions and private equity sponsors in connection with all phases of the development and financing of power projects (including gas, coal, wind, solar, biomass and geothermal-fired plants), refineries, roads, bridges tunnels and other infrastructure projects. Lilien's experience includes the structuring and negotiation of financing arrangements, project contracts, secured commodity hedge agreements, and extensive experience in acquisitions and dispositions of power projects.

About the author
		Kelann Stirling Associate, Latham & Watkins New York, US T: +1 212 906 1784 E: kelann.stirling@lw.com W: www.lw.com Kelann Stirling is an associate in the New York office of Latham & Watkins, practicing principally in the Project Development and Finance practice group. Stirling has represented sponsors, lenders and governmental entities in connection with financings of the following types of projects: oil and gas; LNG; wind energy; solar power; ethanol and infrastructure.