A large project financed without recourse to its shareholders rests on a simple idea: the lenders will be repaid from the future revenues of the works, and nothing else. If the works are not built, or are built too late, or are built and do not work, they do not get their money back. That structure makes insurance a piece of the financing rather than a cost line, and it explains why lenders impose requirements that surprise people who discover them after negotiating the program.
The first of those requirements concerns who receives the money. An indemnified loss hands a sum to the project owner, and nothing naturally obliges it to use that sum to rebuild: it could distribute it, invest it, or keep it. The lenders, whose security is the works themselves, therefore require to be named as loss payees, which moves the recipient of the settlement without changing a word of the cover. The module on international programs described a case where the money existed but did not arrive in the right place; here the place is chosen deliberately, and the project owner is no longer the one deciding its use.
That designation is graded by amount, and the gradation is what makes it workable. Below a threshold, the indemnity goes straight to the project owner, which repairs: nobody wants to hold up a two hundred thousand euro settlement in a banking circuit. Above it, the money passes through a controlled account and is released as reconstruction progresses. Above a second threshold, or where reconstruction is no longer judged viable, the indemnity serves to prepay the debt rather than to rebuild. That last case is the one shareholders discover too late: the project stops and the lenders come out repaid, which is exactly what their security provided for.
The second requirement concerns what lenders can do with the contract itself. They ask to be informed before any cancellation or material change, to have a period in which to pay themselves a premium the borrower has not settled, and for the policy not to be avoided by reason of a breach attributable to the borrower. That last clause carries the heaviest consequences, since it asks the insurer to give up remedies it holds from the law, and it is therefore genuinely negotiated rather than merely signed.
The third requirement concerns content, and it produces an effect worth seeing. Lenders impose indemnity periods, limits and extensions that follow from their financial model and not from an analysis of the industrial risk: an eighteen-month period because debt service tolerates no more, mandatory delay cover because repayment starts on a fixed date. Those requirements are often more protective than what the project owner would have bought alone, which is the good side; they are sometimes ill-suited to the reality of the site, which is the other, and nobody has a mandate to arbitrate between the two.
A practical consequence appears at the time of the loss and unsettles project teams. Settlement is no longer a matter between the insured and its insurer: it involves a security agent, sometimes the lenders' technical adviser, and a fund release circuit. Timescales lengthen accordingly, and the module on the insurer's delay takes on an extra dimension here, since time does not cost the project owner, the lenders and the insurer the same. Three clocks instead of two, and the lenders' is the most patient since their claim bears interest.
That leaves what must be done, and it is done when the financing is documented, not afterwards. Read the loan agreement's insurance undertakings BEFORE finalizing the program, because they describe a minimum cover the policy will have to satisfy and it is far simpler to place conforming cover than to have a signed loan agreement amended. Check the consistency of the two texts on three points only: the indemnity period, the thresholds for releasing indemnities, and the list of events giving rise to prepayment rather than reconstruction. Those three points decide who receives what, when, and to do what with, which is the substance of the question.
A production facility is financed without recourse, drawn debt of 210 million euros. The loan agreement names the security agent as loss payee, provides for direct payment to the project owner below 500,000 euros, a controlled account between 500,000 and 25 million, and mandatory debt prepayment above 25 million or if reconstruction cannot be completed within twenty-four months. It requires delay cover of at least eighteen months. The program placed carries a twelve-month indemnity period. A fire destroys the main unit: 31 million of damage, reconstruction estimated at thirty months. Where do the shareholders stand?
One must look at what the amount triggers before looking at what the policy covers, because it is the loan agreement that governs here. Thirty-one million exceeds the 25 million threshold, and thirty months of reconstruction exceeds twenty-four: both prepayment conditions are met, when one would have sufficed. The property indemnity will therefore not serve to rebuild, it will go to repay the debt, and the project stops. The lenders come out repaid to the extent the indemnity covers, which is exactly what their security provided for, and the shareholders lose their equity with no cover having been declined. That is the point the structure made foreseeable and that nobody had read as such. Then comes the period mismatch, which worsens the picture in an independent way: the loan agreement required eighteen months of delay cover, the program carries twelve, and that non-conformity generally amounts to a breach of the loan's insurance undertakings, independently of the loss. The project owner therefore finds itself both deprived of its project and in contractual default on a point that did not cause the damage. The act that would have changed everything cost nothing: read the loan's insurance undertakings before placing the program, and check three lines, the period, the release thresholds, and the list of events that repay instead of rebuilding.
- 01On non-recourse financing, insurance is a piece of the financing and not a cost line: lenders have only the works as security and therefore write their own requirements.
- 02Being named loss payee moves the recipient of the settlement without changing a word of the cover: the project owner is no longer the one deciding how the indemnity is used.
- 03Above a threshold, or if reconstruction cannot be completed within a period, the indemnity repays the debt instead of rebuilding: the project stops and the lenders come out repaid.
- 04Lenders' requirements follow from their financial model and not from the industrial risk: often more protective than what one would have bought alone, sometimes ill-suited, and nobody has a mandate to arbitrate.
- 05Three lines to check before placing the program: the indemnity period required, the thresholds for releasing indemnities, and the list of events that repay instead of rebuilding.