Roles of a depositary bank and collateral agent within project finance

Depositary banks and collateral agents play a crucial role throughout the duration of your project finance transaction. Finding a full service partner that can provide everything you need, while understanding the needs and intricacies of your project, will set you up for success.

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, look for ones that understand the structure and purpose of your deal over its lifetime, bring focused technical review during document drafting without causing delays or interruptions, and maintain communication proactively with the active parties in the transaction. Since the depositary bank and collateral agent roles intertwine, 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.” For this article, we will use depositary bank and collateral agent, and “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'll consider factors such as the type of financing, project location, loan conversion and other parameters. You can be confident that they'll 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 intermingled 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 necessary so that the project proceeds 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

•  Providing the checks and balances the parties need and want in their agreements

Furthermore, the depositary bank must read, understand, and be able to act on a variety of different agreement types, including: collateral agreements, depositary agreements, credit/loan agreements, and security/pledge agreements. Using an experienced, professional depositary bank means that flaws 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 monitoring and administering the collateral security on behalf of the secured party. Since the assets of a project – typically including the projected revenue stream – are a key consideration for any secured party when making a decision to invest in the facility, all 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 vital 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, interruptions to documentation deadlines, or introducing previously unheard of considerations that could impact the scope of the project.

In order 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 be able to converse in the 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, is charged with the tasks of:

•  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 act in order 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 so the assets are not inappropriately released 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). It is clear that at this stage the collateral agent’s role becomes much more significant and having an experienced professional makes a world of difference to the interest of the secured party.

Additionally, in a cross-border transaction, it is important that any onshore and offshore agents are connected and aware of each other, particularly in connection with the funds flow process. The agreement will cover the process for satisfying shortfalls in the onshore accounts as well as the process for the transfer of excess funds from the onshore account and most importantly currency conversions. It is also critical that each have access to accounts and due to the differences in business hours, online access is critical.

The depositary bank and collateral agent combination

As mentioned earlier, because of their intermingled nature, the same institution is usually appointed to both of these roles. The depositary bank and collateral agent are usually parties to the project's agreements. This way, they can cross-reference each other to better understand and administer your project finance transaction. The inability or failure of the depositary bank and collateral agent to recognize and act on any cross-references could cause serious harm to the project and negatively impact the ability to accomplish project deadlines.

In order to meet the responsibilities of 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 each inter-relates with the 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 lean heavily toward the receipt and disposition of funds, a cash management system is an absolute necessity. The volume of disbursements also adds to the complexity with most withdrawals and transfers occurring on the first and/or last business day of the month. Access to a single cash system allowing the borrower to review all account activity is a great asset for managing their various collateral accounts, especially on cross border transactions where the borrower is in one time zone and the depositary bank and collateral agent is in another.

Our second and final point is that the depositary bank and collateral agent are an ongoing resource for the borrower. After the deal has been finalized and the agreements executed, the depositary bank and collateral agent remain to assist the borrower in navigating the project’s various governing agreements; providing guidance on how to access funds, when disbursement requests have to be submitted as well as required delivery of compliance items such as insurance certificates and UCC continuation statements. In order 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 the structure of your deal and its corresponding responsibilities based on the project agreement and any ancillary agreements to which they are signatories. Engage a depositary bank and collateral agent experienced with reviewing and negotiating all agreements, that will proactively maintain communication with the active parties in the transaction on various events and issues. Additionally, confirm that the depositary bank and collateral agent maintain a contingency plan that will facilitate timely and accurate processing of payments as directed by the borrower in accordance with the governing agreement(s) in the event of an emergency, provide an online cash system so the borrower may independently 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 challenges to any large project/transaction—knowing what to look for and hiring the depositary bank and collateral agent that are right for your project 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.