Step-in rights

Step-in rights are contractual rights allowing lenders, or a person nominated by them, to intervene temporarily in a project company's position under a key project contract in order to cure defaults and prevent termination. In project finance they are the operational core of the lender direct agreement with the contracting authority or other counterparties.

The World Bank report on recommended PPP contractual provisions lists appointment of an additional obligor to step in and become jointly liable with the private partner as one of the rights lenders typically require, alongside standstill, assignment consent and novation rights. EBRD defines step-in as a temporary arrangement under which a third party exercises the project company's rights and performs its obligations under the project agreement while the project company remains formally in place.

Step-in rights use on bank project finance desks

PF desks treat step-in rights as a bankability condition for limited-recourse lending to a special purpose vehicle (SPV). World Bank materials state that step-in rights and the corresponding direct agreement are generally required as a condition precedent to drawdown under the senior finance documents. Direct agreements with the EPC contractor and offtake counterparty extend the same logic to construction and revenue contracts that lenders cannot afford to lose.

IRENA's Open Solar financing term sheet requires direct agreements to include step-in rights for the security agent, subject to restrictions on the identity of any step-in party, together with substitution or novation rights and cure controls on counterparty termination. EBRD observes that although step-in rights are rarely formally used or enforced, their existence facilitates negotiation when a project runs into trouble.

Mechanics of step-in and novation

EBRD sets out the usual sequence. After a public authority notice of intended termination, lenders receive a standstill or cure period. They may then appoint an appointed representative to step in without fresh authority consent, because consent is already given in the direct agreement. During the step-in period the authority is generally required not to terminate unless lenders decline to step in or a repeated breach occurs.

Remedial programmes address antecedent breaches; inevitable consequential breaches are often excluded from fresh termination triggers. If rescue requires a permanent change of control, lenders novate to a suitable substitute contractor that meets agreed qualification criteria and authority approval mechanics. World Bank drafting also contemplates consent to assignment of the PPP contract and receivables to lenders. Step-out ends temporary intervention if lenders withdraw or if novation completes.

Boundaries

Step-in rights are not automatic ownership of the project and are not a security interest. Mandatory insolvency or public procurement rules can prevent or constrain enforcement in some jurisdictions, a caveat the World Bank report flags expressly. Novation is a distinct permanent transfer mechanic and should not be confused with temporary step-in.