Major Intercreditor Issues in Multi-tranche Project Financing Transactions John D. Taylor June 9, 2005

2 Sample Financing Structure Project Company Borrower Common Agreement Loan Agreement Multilateral Financial Institution National Development Lender Capital Markets Lenders Loan Agreement Indenture/Note Purchase Agreement Loan Agreement Lead Commercial Banks as Agents/Underwriters Collateral Agency/ Trust Agreement Collateral Agent/ Trustee Syndicate of Commercial Banks Export Credit Agency Political Risk Guarantee Security Agreements: Cash Collateral Agreement Pledge Agreement Assignment Agreement Mortgage

3 Elements of Intercreditor Agreement Appointment of Intercreditor Agent Sharing Provisions Voting/Decision-making Default/Remedial Action

4 Sharing Provisions General Rule: Pro Rata Sharing  Payments  Security Some Exceptions  Separate Security (pledge of additional security, additional reserve account, etc.)  Political Risk Insurance Proceeds  “Preferred Creditor” Status

5 Voting/Decision-Making I → Who Decides? Allocating Voting Power  Purely Proportional  Consensus  800-pound Gorilla Lender Goals  Efficiency  Minimize Hold-out Risk  Protect Key Interests

6 Voting/Decision-Making II → How Are Decisions Made? Role of Agent  Unilateral Action: Agent as decision-maker  Group Action: Agent as decision-facilitator Voting Mechanics

7 Lender Decision-making Timeline Triggering Event/ Borrower Request Agent Solicitation Voting Deadline Lender Decision Consultation/Voting Period

8 “Required” Lenders Lender Voting Group Unanimous Lenders Supermajority Lenders Majority Lenders Single Lender (Veto Right) Single Lender (“Interested” Lender) Description/Comment Fundamental matters for which each lender must consent/approve Fundamental matters for which lenders seek a “heightened” voting threshold A common “baseline” for decision- making relies on majority rule Matters for which a lender requires a veto right due to its heightened sensitivity to matter Matters that are only of interest to individual lender Examples Tenor/pricing of loans; release of collateral Incurrence by Borrower of additional debt; amendments to security documents Approval of budget; approval of insurance arrangements Environmental matters; potentially matters identified in Credit Committee approval Non-material changes to a lender’s facility agreement Lender Voting Group Unanimous Lenders Supermajority Lenders Majority Lenders Single Lender (Veto Right) Single Lender (“Interested” Lender) Description/Comment Fundamental matters for which each lender must consent/approve Fundamental matters for which lenders seek a “heightened” voting threshold A common “baseline” for decision- making relies on majority rule Matters for which a lender requires a veto right due to its heightened sensitivity to matter Matters that are only of interest to individual lender Examples Tenor/pricing of loans; release of collateral Incurrence by Borrower of additional debt; amendments to security documents Approval of budget; approval of insurance arrangements Environmental matters; potentially matters identified in Credit Committee approval Non-material changes to a lender’s facility agreement Lender Voting Group Unanimous Lenders Supermajority Lenders Majority Lenders Single Lender (Veto Right) Single Lender (“Interested” Lender) Description/Comment Fundamental matters for which each lender must consent/approve Fundamental matters for which lenders seek a “heightened” voting threshold A common “baseline” for decision- making relies on majority rule Matters for which a lender requires a veto right due to its heightened sensitivity to matter Matters that are only of interest to individual lender Examples Tenor/pricing of loans; release of collateral Incurrence by Borrower of additional debt; amendments to security documents Approval of budget; approval of insurance arrangements Environmental matters; potentially matters identified in Credit Committee approval Non-material changes to a lender’s facility agreement Lender Voting Group Unanimous Lenders Supermajority Lenders Majority Lenders Single Lender (Veto Right) Single Lender (“Interested” Lender) Description/Comment Fundamental matters for which each lender must consent/approve Fundamental matters for which lenders seek a “heightened” voting threshold A common “baseline” for decision- making relies on majority rule Matters for which a lender requires a veto right due to its heightened sensitivity to matter Matters that are only of interest to individual lender Examples Tenor/pricing of loans; release of collateral Incurrence by Borrower of additional debt; amendments to security documents Approval of budget; approval of insurance arrangements Environmental matters; potentially matters identified in Credit Committee approval Non-material changes to a lender’s facility agreement Lender Voting Group Unanimous Lenders Supermajority Lenders Majority Lenders Single Lender (Veto Right) Single Lender (“Interested” Lender) Description/Comment Fundamental matters for which each lender must consent/approve Fundamental matters for which lenders seek a “heightened” voting threshold A common “baseline” for decision- making relies on majority rule Matters for which a lender requires a veto right due to its heightened sensitivity to matter Matters that are only of interest to individual lender Examples Tenor/pricing of loans; release of collateral Incurrence by Borrower of additional debt; amendments to security documents Approval of budget; approval of insurance arrangements Environmental matters; potentially matters identified in Credit Committee approval Non-material changes to a lender’s facility agreement

9 Default/Remedial Action Goals - Requirements vs. Reality Procedures - Notice of Default/Consultation Period/Waiver or Exercise of Remedial Action

10 Remedial Action – Decision-making Default Agent Notice to Lenders/ Request for Instruction If No Lender Decision/ Commencement of WAITING PERIOD No Remedial Action until requested by Required Lenders – STEP DOWN–MECHANIC If Necessary Lenders agree to waive WAIVER If Necessary Lenders elect to enforce remedies Remedial Action If Necessary Lenders subsequently agree to waive WAIVER

11 Remedial Action – “Step Down” % of Lenders 30 Days 90 Days Time ⅔ Days 120 Days Non-Fundamental Default Fundamental Default

12 Swap Provider Issues Risks and Benefits of Swap Involvement Nature of Swap Coordination and Integration of Swaps  Swap Voting Rights  Swap Termination Rights  Swap Termination Payments

13 Equity-related Intercreditor Issues Role of Borrower  Borrower Interest in Intercreditor Matters  Spectrum of Structures Sponsor Debt