Direct agreement

A direct agreement is a contract among a project counterparty, the project company and the lenders (or their agent) that gives the lenders notice, standstill, cure and intervention rights if the underlying project contract is threatened with termination. In project finance the borrower is usually a special purpose vehicle (SPV) whose cash flows depend on that contract remaining in force.

The World Bank's report on recommended PPP contractual provisions describes the direct agreement as the instrument through which lenders regulate the contracting authority's right to terminate the PPP contract after a private partner default. EBRD explains that a direct agreement provides assurances that financiers can intervene when default threatens, including temporary step-in, novation to a substitute project company, payment diversion to secured accounts, and agreement of a rectification plan.

Direct agreement use on bank project finance desks

PF desks treat direct agreements as part of the bankability package alongside the security package. Typical counterparties include the contracting authority under a concession or PPP contract, the EPC contractor, the O&M contractor, and the offtake purchaser. World Bank materials list core lender rights under a direct agreement as information rights on default, a standstill period after notice of intended termination, appointment of an additional obligor to step in and cure, consent to assignment of the contract and receivables, and the right to novate to a substitute private partner. Signing is commonly a condition precedent to financial close or first drawdown.

Mechanics and institutional scope

EBRD frames the direct agreement as quasi-security rather than a security interest: it does not create a charge, but it supplies contractual tools to keep the project alive when limited-recourse lenders cannot rely on sponsor balance sheets or on seizing public infrastructure. Key mechanics include the public authority's obligation to give prior written notice before termination, a lender cure or standstill period, temporary step-in rights for an appointed representative, and permanent novation to a suitable substitute contractor approved against agreed criteria. The authority typically acknowledges and consents to security over the project company's rights under the project agreement. EBRD notes that step-in rights are rarely formally enforced, yet their presence shapes restructuring negotiations when a project is distressed.

Boundaries

A direct agreement is not itself the finance documents and is not a substitute for perfected security. Mandatory insolvency or public procurement rules in some jurisdictions can limit or block lender step-in, so enforceability is a legal diligence item rather than a drafting assumption alone.