Financial close
Financial close is the point at which all project documentation is signed, all pre-conditions attached to the project's financing have been met, and project funding becomes available. The World Bank PPP Certification Guide Glossary defines financial close in those terms. Model project documents use the same substance: the Zambia REFIT power purchase agreement defines Financial Close as the date on which all of the conditions to the first availability of debt under the Finance Documents have been satisfied or waived.
Financial close use on bank project finance desks
On project finance desks financial close is the transition from committed term sheets and near-final documents to an effective facility under which the SPV may draw. Conditions precedent typically cover executed finance and project documents, perfection of security, equity contributions or equity CP, key permits, insurance, legal opinions, and effectiveness of offtake, concession and EPC contract arrangements. Commercial close may precede financial close: the PPP glossary notes that a PPP contract is often signed at commercial close, while many of its provisions become effective only once financial close is reached.
Conditions precedent and effectiveness
Financial close is not mere signing. Funding availability requires satisfaction or waiver of conditions precedent, after which:
- debt commitments become drawable under the availability schedule
- interest and fees begin to accrue on drawn or committed amounts as documented
- construction drawdowns can fund EPC and other project costs
- sponsor completion guarantee and other support instruments typically become fully effective
Interest-rate and market-disruption allocations around financial close are a recurring PPP risk topic. GI Hub guidance notes that contracting authorities may take the risk of a change in the reference interest rate between bid submission and financial close, after which hedging and finance-document mechanics usually govern rate risk for the private partner.
Distinctions from commercial close and COD
Commercial close is agreement on commercial terms and often signing of the PPP or offtake contract. Financial close is funding effectiveness. The commercial operation date is later still: successful completion and commissioning of construction so the project can operate commercially. Desks therefore track three different clocks: document signing, money available, and operating start.