Depositary bank and collateral agent

A depositary bank (also known as an account bank) and collateral agent play a crucial role throughout the duration of your project finance transaction. Designating a full-service partner that can provide the wide range of services you require, while understanding the needs and intricacies of your project, can have a significant impact on the success of your project.

Project financing has changed over the years to include a more multi-faceted structure. In the past the purpose of the financing may have been to simply build a facility. However, today, it is not uncommon for a single project to be divided into multiple phases or be composed of multiple facilities to meet the long-range goals of the project.

The financing for this type of structure may include multiple loan types with different parameters, include additional time frames for equity contributions or other types of cash infusions, or include conditional lenders such as a swap counterparty or a letter of credit provider. This level of complexity requires that your chosen depositary bank and collateral agent understand how these phases affect the cash flow and assignment of collateral to the secured parties.

When choosing a depositary bank and collateral agent to successfully administer your project finance transaction, the agency service provider should understand the structure and purpose of your deal over its lifetime, bring focused technical review during document drafting without causing delays or interruptions, and proactively maintain communication with the active parties in the transaction. Since the depositary bank and collateral agent necessarily work together, appointing the same institution to both roles promotes seamless and efficient processing.

The combination of an experienced depositary bank and knowledgeable collateral agent should offer seamless success for your project. When selecting an institution to perform depositary bank and/or collateral agent duties, one should choose carefully, keeping the partnership between these two roles in mind while executing your search. It is important to note that the terms “depositary bank” and “account bank” are synonymous, as are “collateral agent” and “collateral trustee.” “Secured party” will be used to represent the lenders.

The life of your project

The importance of the depositary bank and collateral agent in a project finance transaction must not be underestimated or undervalued since they are typically engaged for the duration of the transaction. The primary incentive for appointing an experienced depositary bank and collateral agent is quantifiable in the value added by their involvement during the negotiation and document drafting stage. An institution with depositary bank and collateral agent experience will understand your project and its purpose. They will consider factors such as the type of financing, project location, operational needs and other parameters. You can be confident that they will account for all the details of your project and finance structure without derailing the momentum of the deal.

Additionally, all funds, including loan or revenue proceeds, equity contributions, letter of credit draws, or swap payments, are held and administered by the depositary bank and pledged to the collateral agent on behalf of the secured party. Due to the aligned nature of these roles, it is important to ensure the appointed institution understands the distinct differences between the two roles and functions accordingly.

The role of the depositary bank

This entity is charged with the administration of the accounts into which project proceeds are deposited and transferred in accordance with the transaction’s governing agreements. Here are just some of the responsibilities a depositary bank handles:

• Opening and maintaining all collateral accounts
• Crediting funds to the appropriate account(s)
• Appropriately managing the phases of the project and the corresponding funds flow for each phase
• Appropriately processing payments during the construction phase and funds during the revenue-generating phase
• Managing the timing and mechanics for processing transfers from reserve accounts and/or draws on letters of credit to meet any deficiencies connected with certain payment obligations and requirements connected with these deficiencies.

Additional duties include, but are not limited to:

• Confirming all investments selected by the borrower or other authorized parties match the guidelines for permitted investments, and that the available funds criteria is satisfied
• Ensuring all disbursement requests are presented in the approved format and manner with the designated authorized signature(s)
• Processing all withdrawals, transfers, and payments – whether related to construction costs, debt obligations, operating expenses or restricted payments
• Transferring funds among the various collateral and company accounts in a timely manner and in accordance with the direction of the authorized party

Furthermore, the depositary bank must read and understand the terms of the relevant deal documents, including: collateral agreements, depositary agreements, credit/loan agreements and security/pledge agreements. Using an experienced, professional depositary bank means that operational issues in the flow of funds, collateral or other contractual terms will be identified and resolved before the documents are signed.

The role of the collateral agent

The collateral agent is tasked with holding collateral on behalf of the secured parties and when directed, enforcing the rights against that collateral. The assets of a project – typically including the projected revenue stream – are a key consideration for any secured party when deciding to invest in the facility. All such designated assets of the project are pledged to the collateral agent as security for the benefit of the secured party. Other considerations for the secured party include: the term, purchase price and price renegotiation options of the power purchase agreement, types of reserve funds required by the agreement and the timing of funding for such reserve funds, currency exchange risks and any other factors that may impact the funds flow. It is important to note that the assets pledged increase as the project nears completion.

Your collateral agent should understand the schematics of your transaction and contribute to improving efficiency by streamlining funds flow and minimizing timing gaps for your specific project type. In addition, the collateral agent should be actively involved in the negotiation process, diligently performing essential tasks, including:

• Requiring that the timing and disbursement provisions follow a logical pattern
• Incorporating the process and methodology for satisfying insufficient funds in order to eliminate any gaps between funding and processing payments
• Providing a neutral viewpoint as one of the few parties without a vested interest in a specific outcome
• Reviewing descriptions of all assigned and/or pledged collateral and mechanics for exercising applicable liens
• Reviewing the formats for various disbursements, withdrawal certificates, requests, and countersignatures of the administrative agent, if applicable

The collateral agent should be able to participate in technical discussions without causing any delays or interruptions to documentation deadlines that could impact the scope of the project.

To proficiently administer a project finance transaction, the collateral agent must review a variety of agreements to understand the immediate and potential impact of each of these factors as they relate to the project. To do this effectively, the collateral agent must understand the practical application of terminology commonly used in project finance transactions. That vocabulary includes words such as waterfall, date certain, commercial operation date, infrastructure project, force majeure, and swap counterparty.

The general terminology also includes acronyms such as PPA, PPO, IE, CPs and EOM. While most parties in a project finance transaction have a specific area of expertise such as independent engineer or sponsor, the collateral agent needs to have a broader level of expertise that encompasses the entire framework of the project. The collateral agent, in addition to understanding the duties and responsibilities assigned to the depositary bank, may be charged with:

• Exercising rights and remedies on behalf of the secured party on the occurrence of a default or trigger event as directed by the administrative agent, required lenders or other authorized party
• Initiating draws on guarantees, letters of credit, promissory notes and other supporting documents in the event of a deficiency or other event as defined in the governing agreement
• Monitoring milestones, satisfaction of reserve requirements and the document provisions related to each
• Understanding the assets as well as the form of assets pledged to it

Should a trigger event or event of default occur and be declared through a notice, the collateral agent will play an active role coordinating with the borrower, required lenders, administrative agent, inter-creditor agent and various other parties, as applicable, to protect the interests of the secured party. It is imperative upon receipt of a notice of default or a trigger event notice that the collateral agent stop taking direction from the borrower, seize control of the company account(s), and monitor any transactions posted against the accounts. These actions will help safeguard against an inappropriate release of project assets beyond the control of the collateral agent. The collateral agent will work closely with the appropriate parties, so the facility remains operational and productive and the interests of the secured party are protected and maintained. The collateral agent will receive instructions for cash movement from the administrative agent, inter-creditor agent or required senior lender, as applicable, according to the terms of the governing agreement(s). At this stage the need for a collateral agent who understands its role becomes much more significant.

The depositary bank and collateral agent combination

As mentioned earlier, because of their aligned roles, the same institution is usually appointed both. The depositary bank and collateral agent are usually parties to the project's agreements. Given the awareness and understanding of the terms of the agreements, both agents are in a better position to administer your project finance transaction.

To meet the responsibilities under project finance transaction agreement(s), the combination of the depositary bank and collateral agent must have the ability to translate the legal verbiage of the agreement to layman’s terms, in order to:

• Comprehend the terms of the financing
• Identify the parties and understand the respective duties and responsibilities of each party in their designated capacity, including how they work with each other
• Outline and document on their internal systems, the mechanics and procedures for withdrawals and transfers from the various collateral and company accounts as specified by the governing agreement
• Plan and document all specified events such as commercial operation date and the required actions connected with the satisfaction and declaration of such events

Two additional items to highlight with regard to the depositary bank and collateral agent combination: First, since project finance transactions entail the movement of funds, a cash management system is integral to the process of managing cash inflows and outflows and volume of both. Typically such money movements occur on the first and/or last business day of the month, adding an element of complexity. Access to a single cash system that enables the borrower to review all account activity is a great tool for managing its various collateral accounts. This is especially true with regard to cross border transactions where the borrower is in one time zone and the depositary bank and collateral agent is in another.

It is worth noting that the depositary bank and collateral agent should serve as ongoing resources to the borrower. After the deal has been finalized and the agreements executed, the depositary bank and collateral agent are there to assist the borrower in navigating the various governing agreements’ terms such as how to access funds, disbursement requests' deadlines, compliance items' deadlines such as insurance certificates and UCC continuation statements. To best serve the interests of the borrower and be a knowledgeable resource, the depositary bank and collateral agent require an experienced staff dedicated to providing exceptional service with systems that will facilitate the administration of a project finance transaction.

Making your choice

When it comes to choosing a depositary bank and collateral agent that will successfully administer your project finance transaction, look for an institution that understands both the structure of your deal and related responsibilities as reflected under the related project agreements to which they are a party. Engage a depositary bank and collateral agent experienced with reviewing and negotiating all agreements, that will proactively maintain communication as needed, with the active parties to the transaction. Additionally, confirm that the depositary bank and collateral agent maintain a contingency plan that will facilitate timely and accurate processing of payments in the event of an emergency, provide an online cash system to view account activity, and have an internal automated system upon which it can set up the parameters of the transaction which will track and advise of defined dates and required actions.

There are many administrative and operational challenges to any large project/transaction. So, identifying and engaging the right depositary bank and collateral agent can be instrumental to its success.

U.S. Bank administers a variety of infrastructure asset types and has the dedicated expertise to assist investors at every stage of the project finance lifecycle. See our extensive suite of services for debt financing here or contact our team.