Project finance security package guide

A security package in project finance is the collection of share pledges, asset charges, contract assignments, account controls and support undertakings that secure lenders' claims over a project company's cash flows, assets and key contracts when repayment is limited or non-recourse to sponsors. This guide is the long institutional reading beside the project finance hub and the glossary entry for security package.

Bank project finance desks underwrite construction and operating risk inside a ring-fenced special purpose vehicle (SPV). Debt is sized to forecast cash flow and secured on the project's own assets and contracts rather than on the consolidated corporate balance sheet of the sponsor. Export finance desks meet the same package when an export credit agency (ECA) covers capital goods delivered to that project company.

The OECD Arrangement defines a project-finance transaction for official-support purposes as an export of goods or services to an independent project company, legally and economically, whereby the cash flows and earnings of the project company are considered by the lender to be the source of funds from which a loan will be repaid, and the assets of the project company are considered by the lender to be collateral for the loan.

Security package purpose in limited-recourse lending

The security package exists because limited-recourse and non-recourse labels remove ordinary corporate recourse after completion, subject to agreed support. Lenders therefore need enforceable rights over the assets and revenues that generate debt service. Segregation of assets and financing through a security and covenant package enables lenders to control inflows and outflows, commonly via share pledges, direct asset security, a negative pledge, assignments of project contracts and insurance, account pledges, and restrictions on debt, dividends and activity.

Limited recourse structures retain defined sponsor support during construction or for specific contingencies. Non-recourse structures, after completion, look almost entirely to project cash flow and security. Corporate secured lending may take project assets as collateral while still relying on group cash flow. The Arrangement asset-backed and project-finance footnotes keep those categories distinct for official-support pricing and syndication tests. The comparison with corporate lending sits in corporate loan vs project finance and limited vs non-recourse.

The package allocates enforcement rights and bargaining power if performance fails. It does not, by itself, create cash flow. Desks still underwrite offtake quality, construction risk, operating cost and jurisdiction enforceability. Weak documentation, unperfected filings or conflicts with mandatory local law can leave lenders with paper rights that do not control the asset in practice.

Share security and control of the project company

Share pledges or charges over the shares in the project company are usually first among equals in the package. They give lenders a route to take ownership of the SPV and therefore of the contracts and assets sitting under it, subject to local company law, change-of-control clauses in project agreements, and regulatory consents.

Share retention undertakings bind sponsors to hold agreed percentages through construction and often through a defined operating period. Transfers without lender consent typically trigger default. Drag and tag mechanics, and any permitted IPO or farm-down paths, are negotiated against those retention covenants rather than left to general corporate practice.

Control also runs through reserved matters and board observer rights in shareholder and facility documents. Those governance rights sit beside security. They are not substitutes for perfected share pledges when enforcement is required. Where multiple shareholder classes or mezzanine equity exist, intercreditor and shareholders' agreement alignment determines whether senior lenders can force a sale of the SPV free of junior claims.

Asset charges, mortgages and perfection

Fixed security over land, buildings, plant and key equipment is the classic asset pillar. In many jurisdictions that takes the form of a mortgage or hypothec over immovable property and a fixed charge over major movable assets. A debenture under English-law documentation often combines fixed and floating security over the undertaking and assets of the company. Fixed and floating charge structures allow the company to deal with circulating assets in the ordinary course until crystallisation on default or other trigger events.

Perfection and priority are jurisdictional. Under English company law, Companies House guidance states that a charge is the security a company gives for a loan, and that if a charge is not registered within 21 days it may be difficult to recover the debt if the company becomes insolvent. The 21 days start the day after the charge is created.

Late registration requires a court order. Online registration of a charge costs £14; paper registration costs £24. A certified copy of the charge instrument is filed and appears on the company's public record, subject to permitted redaction of certain personal information, account identifiers and signatures. Satisfaction of a charge when paid off is filed so that the public record does not show stale security.

Offshore security over receivables, bank accounts, insurance proceeds and contract rights may require notice to counterparties, account-bank acknowledgements or registration in local movable-security registries. Desks treat perfection as a conditions-precedent workstream, not as a post-closing housekeeping item. Parallel local counsel opinions confirm that the package creates valid security ranking as intended against liquidators and competing creditors.

Contract assignments, direct agreements and step-in

Project cash flow is created by contracts. Assignment of the EPC contract, the offtake agreement or equivalent revenue contract, fuel or feedstock supply agreements, operation and maintenance agreements, and insurance policies is therefore central. Assignments may be expressed as security assignments, absolute assignments by way of security, or charges over rights, depending on governing law.

A direct agreement between lenders and a key counterparty records notice and cure periods, limits on termination that would otherwise strand the lenders' security, and step-in rights for the lenders or a substitute entity. Direct agreements with the EPC contractor, offtaker, host government concession counterparty and account bank are common. Without them, a termination right in the underlying contract can destroy the value of an assignment.

Insurance assignments cover physical damage, delay in start-up, business interruption and, where placed, political-risk covers. Loss-payee and notice endorsements align insurer payment with the security trustee rather than with the SPV alone. Completion guarantee or other sponsor support may bridge construction until commercial operation date (COD). Contingent equity and warranty packages sit beside, not inside, the core asset security.

Accounts, cash waterfall and reserves

Account security turns cash-flow theory into control. Project accounts typically include a proceeds or revenue account, operating accounts, a debt service reserve account (DSRA), major maintenance or cash-trap accounts, and sometimes insurance and expropriation proceeds accounts. Charges over those accounts, combined with account-bank agreements, restrict withdrawals to the agreed cash waterfall.

The waterfall usually pays operating costs and taxes, then fees and senior debt service, then reserve top-ups, then subordinated debt, then sponsor distributions, subject to lock-up tests. Distribution lock-ups typically require minimum debt service coverage ratio (DSCR), DSRA fullness and absence of default before dividends. Cash sweep provisions capture surplus cash for mandatory prepayment once lock-up tests are failed or as a structured deleveraging feature.

DSRA sizing is institutional. Lenders hold a defined number of months of debt service in reserve. Lockbox or controlled-account mechanics in some markets achieve a similar concentration of receipts before waterfall application.

Account control does not replace offtaker credit analysis. It ensures that money that arrives is applied in the agreed order. Currency accounts and hedging collateral accounts need the same security treatment as operating accounts, especially where revenues and debt are in different currencies.

Security trustee, intercreditor and ranking

A security trustee holds the package for a syndicate so that enforcement and releases are coordinated. Individual lenders do not each take separate first-ranking security that would conflict on enforcement. The trustee acts on instruction under the intercreditor agreement or security trust deed, subject to voting thresholds for acceleration, enforcement, waivers and releases.

An intercreditor agreement and, where used, a common terms agreement align voting, enforcement and payment priorities among senior creditors, hedge counterparties, mezzanine lenders and any official lenders. Senior lenders usually take first-ranking security. Junior or mezzanine creditors may take a subordinated package that ranks behind senior enforcement rights. Hedge counterparties may share senior security for marked-to-market exposures within defined caps.

Pari passu ranking among senior lenders is the default for commercial and ECA tranches that share one package. Where an Arrangement Participant provides official support inside a syndicated project-finance package subject to market-benchmark rules, the Arrangement requires that at least 25% of the syndicate be commercial market loans or guarantees without bilateral or multilateral official support, and that all parties stand on pari passu terms on financial terms and conditions, including the security package. Direct-lending all-in cost and pure-cover premium then reference commercial participant pricing subject to minimum actuarial floors and notification duties.

Facility agent roles administer notices, payments and waivers. They are distinct from the security trustee, though one institution may fill both roles under separate appointments. syndication and mandated lead arranger processes set the ticket structure before the trustee holds the perfected package at financial close.

Sponsor support, ECA cover and political-risk overlays

Sponsor support letters, completion support, contingent equity and guarantees address residual risks that pure asset security cannot. Construction cost overrun, delay liquidated damages shortfalls and technology performance can leave the package intact but the cash flow inadequate until completion. Those undertakings are documented as primary obligations or guarantees and are often secured or unsecured depending on sponsor credit.

Official export credit may sit inside the same capital structure. UKEF's Buyer Credit Facility expressly lists limited recourse project finance among structures it can support for overseas buyers of UK capital goods, services or intangibles, subject to the same 15% down payment and 85% maximum loan ceilings that apply to Arrangement-aligned buyer credit, and subject to foreign-content, anti-bribery and environmental, social and human rights due diligence. The ECA guarantee or insurance is credit enhancement for the covered tranche. It does not replace the need for a perfected project security package. Covered banks still take the package; the agency typically requires assignment of rights under the loan and security, or equivalent cut-through, as a condition of cover.

Political and non-commercial risk may be mitigated with political risk insurance (PRI) or multilateral guarantees. MIGA provides political risk guarantees covering perils such as expropriation, currency inconvertibility and transfer restriction, war and civil disturbance, and breach of contract, among other World Bank Group Guarantee Platform products. MIGA states that it issues guarantees for periods of up to 15 years, and occasionally 20 years, with a minimum length of three years, and that it is an insurer rather than a lender. PRI proceeds are usually assigned into the security package so that political-risk recoveries flow to lenders rather than to equity alone.

Environmental and social frameworks affect what projects can be financed and on what conditions, not the legal form of the charge. The Equator Principles provide a common baseline for identifying, assessing and managing environmental and social risks when financing projects. Equator Principles Financial Institutions apply the framework globally across defined products, including project finance with total project capital costs of USD 10 million or more. EP4 came into effect for all EPFIs on 1 October 2020.

Conditions precedent, releases and enforcement posture

Perfection of the security package is a conditions-precedent workstream to financial close and to each material drawdown. Typical CP lists include execution and registration of share pledges and asset charges; notices of assignment to contract counterparties; account-bank acknowledgements; insurance binders with loss-payee endorsements; equity injection evidence; effectiveness of material project agreements; technical due diligence sign-off by the independent engineer; and, where official support is present, ECA or multilateral commitments becoming unconditional. Subsequent construction drawdowns follow certified cost certificates and independent-engineer confirmation that works and budget remain consistent with the base case.

Releases are symmetrical. Partial releases for permitted asset disposals, title transfers under concession milestones, or refinancing require trustee instruction under intercreditor voting thresholds. Full release follows repayment, cash collateralisation or permitted refinancing. Companies House satisfaction filings update the English public record when a registered charge is paid off; leaving stale charges on the record can affect the company's apparent encumbrance profile even after economic discharge.

Enforcement posture is staged. Acceleration, enforcement and share-sale remedies sit behind default definitions, cure periods and, for direct agreements, counterparty cure rights. The security trustee's duty is to the secured creditors as a class under the trust and intercreditor documents. Individual lenders do not freeride separate enforcement that would prejudice pari passu ranking. Hedge close-out amounts and ECA subrogation claims need express ranking treatment so that enforcement proceeds are not ambiguously allocated.

CRE adjacency and package boundaries

Commercial real estate lending uses the same security logic on property mortgages, rental assignments, account charges and related guarantees, calibrated to asset type and jurisdiction. CRE packages often emphasise the mortgage and lease assignment over EPC and offtake architecture. Project finance packages emphasise contract bankability and completion support over a single income-producing title. Both may use a security trustee and intercreditor architecture when syndicated. CRE metrics such as debt yield and loan-to-value sit beside project DSCR and loan life cover ratio (LLCR) rather than replacing the need for perfected security.

The security package is not every covenant in the credit agreement. Financial covenants, information undertakings and material adverse change clauses allocate risk but are not collateral. The package is also not a substitute for independent-engineer sign-off, insurance diligence or offtaker credit assessment. Enforcement value tracks the quality of the underlying contracts and assets. Floating charges over circulating assets still depend on crystallisation triggers and priority rules against preferential creditors under applicable insolvency law.

Desks classify a file as project finance when the borrower is an independent project company, repayment is primarily from project cash flows, security is primarily over project assets and contracts, and sponsor support is limited to defined undertakings. Share pledges, asset charges, contract assignments, account control, trustee holding and intercreditor ranking are the operational markers of that classification.

Export credit into project finance remains Arrangement-scoped for Participants when the export contract and official support meet tenor and content tests. Arrangement market-benchmark syndication rules then read the security package as part of the pari passu test among commercial and official lenders. The repayment analysis follows project finance metrics; the collateral analysis follows this package. Institutional agency pages for UKEF and MIGA describe how official cover sits beside, rather than instead of, that package.