Project Finance Documentation
Direct Agreements in Project Finance
A direct agreement gives project lenders contractual rights against a key project counterparty. It normally requires notice before termination, gives lenders time to cure a project company default, and creates a controlled process for step-in or substitution. These protections help preserve the contracts and cash flows supporting limited-recourse debt.
What Is a Direct Agreement in Project Finance?
A direct agreement is a contract among the project company, a key project counterparty, and the project lenders or their security agent. It creates a direct contractual relationship between parties that would otherwise have no contract with each other. Depending on the jurisdiction, the same document may be called a lender direct agreement, consent agreement, substitution agreement, or tripartite deed.
The agreement is usually attached to a material project document such as a concession agreement, power purchase agreement, long-term offtake contract, engineering, procurement and construction contract, or operations and maintenance agreement. Its purpose is not to rewrite the underlying project contract. It protects the continuity and financeability of that contract when the project company defaults.
Why Project Lenders Require Direct Agreements
In project finance, lenders principally underwrite the future cash flow of a special purpose project company. Their recourse to the sponsor may be limited after completion or after specified performance tests are satisfied. A terminated concession, PPA, or essential operating contract can therefore remove the project company's revenue source or its ability to operate.
Security over shares, bank accounts, receivables, and project assets is valuable, but it may be insufficient if a critical counterparty can terminate its contract before lenders have an opportunity to stabilize the project. The direct agreement closes this gap by coordinating contractual termination rights with the lender enforcement process.
Without a Direct Agreement
The counterparty may notify only the project company, allow the contractual cure period to expire, and terminate. Lenders may discover the problem after the project's principal revenue or operating contract has already been lost.
With a Direct Agreement
The counterparty must notify the security agent, observe the agreed standstill, and allow the lenders to cure, step in, or nominate a substitute before exercising specified termination rights.
Who Signs the Agreement?
The signing structure varies with the contract and local law. A typical lender direct agreement includes three parties:
- The project company: The special purpose vehicle that owns or operates the project and has borrowed the senior debt.
- The project counterparty: The public authority, offtaker, grantor, EPC contractor, O&M contractor, feedstock supplier, landowner, or other party to the underlying project document.
- The lenders' representative: Usually the security trustee, collateral agent, or facility agent acting for the finance parties.
Some agreements are bilateral between the security agent and the project counterparty, with the project company providing a separate acknowledgment. Others include a government ministry, guarantor, nominee, or replacement operator when the project structure requires additional consent.
Which Project Contracts Usually Need One?
| Underlying Contract | Risk Protected | Typical Direct Agreement Focus |
|---|---|---|
| Concession or PPP agreement | Loss of the right to construct, operate, charge users, or receive availability payments | Authority notice, lender cure, step-in, substitution, termination compensation, and consent to security |
| PPA or offtake agreement | Loss of contracted project revenue | Notice of seller default, payment direction, cure periods, continuity of purchases, and replacement of the project company |
| EPC contract | Construction delay, abandonment, or loss of warranties before completion | Notice, cure, assignment of warranties, continued performance, and limits on amendment or termination |
| O&M agreement | Interruption of operation or failure to meet performance standards | Continuity of service, transfer of records, lender nominee rights, and replacement operator arrangements |
| Feedstock or supply agreement | Loss of an essential input required for production | Continued supply, assignment, cure of payment defaults, and controlled substitution |
| Land, lease, grid, or interconnection agreement | Loss of site access or physical connection to the market | Notice, non-disturbance, cure, recognition of security, and successor rights |
Not every project document needs a direct agreement. Lenders prioritize contracts whose termination would materially impair construction, operations, revenue, asset access, or enforcement value. This review forms part of a broader project finance bankability assessment.
Core Provisions in a Lender Direct Agreement
| Provision | Commercial Function |
|---|---|
| Acknowledgment and consent | The counterparty acknowledges the financing and consents to the security assignment of the project company's rights under the underlying contract. |
| Default notice | The counterparty must send the security agent copies of specified default, suspension, and termination notices at the agreed addresses. |
| Standstill period | The counterparty agrees not to terminate for a defined period after lender notice, subject to exceptions for urgent safety, illegality, or other negotiated events. |
| Cure rights | Lenders may remedy payment defaults and, where feasible, operational or performance defaults. Different defaults normally receive different cure periods. |
| Step-in rights | The security agent or its nominee may temporarily assume specified rights and obligations to stabilize the project and prevent termination. |
| Substitution rights | Lenders may transfer the project company's position to a qualified replacement entity, subject to objective technical, financial, legal, and regulatory criteria. |
| Restrictions on changes | Material amendments, waivers, rescission, or voluntary termination may require lender consent while the senior debt remains outstanding. |
| Payment directions | The counterparty acknowledges the secured revenue account and may agree to follow revised payment instructions after an enforcement event. |
| Continuing performance | The counterparty continues performing while the agreed cure, step-in, or substitution process remains active and its conditions are satisfied. |
| Liability during step-in | The document allocates responsibility for obligations incurred before, during, and after step-in, including accrued amounts and ongoing operating costs. |
How Lender Step-In Works
Step-in is a controlled contractual intervention, not an automatic transfer of project ownership. A typical sequence operates as follows:
- The project company defaults under a material project contract.
- The project counterparty sends a default notice to both the project company and the lenders' security agent.
- The project company receives its ordinary contractual cure period.
- If the default remains uncured, the lenders receive an additional standstill or cure period under the direct agreement.
- The security agent may cure the default directly, appoint a nominee to perform, enforce share security, or begin the substitution process.
- The counterparty continues the underlying contract while the lenders comply with the direct agreement and actively pursue the selected remedy.
- The project returns to the original project company, transfers to an approved substitute, or becomes terminable if the agreed process fails.
Direct Agreement vs. Other Finance Documents
| Document | Primary Purpose | Difference From a Direct Agreement |
|---|---|---|
| Underlying project agreement | Sets the commercial rights and obligations between the project company and its counterparty | The direct agreement overlays lender protections without replacing the underlying commercial contract. |
| Security assignment | Creates security over contractual rights and receivables | The direct agreement records counterparty consent and makes the security enforceable in practical contractual terms. |
| Intercreditor agreement | Determines priority and enforcement rules among lenders, hedge providers, and other secured creditors | It regulates creditors among themselves, not their relationship with a project counterparty. |
| Guarantee | Creates a payment or performance obligation for the guarantor | A direct agreement usually protects continuity and remedies. It does not ordinarily guarantee the project company's debt. |
| Common terms agreement | Harmonizes shared financing terms across multiple facilities | It coordinates finance parties and loan documents rather than preserving a specific project contract. |
How Direct Agreements Affect Bankability
Direct agreements reduce the risk that enforcement over project shares, receivables, or contractual rights becomes commercially useless after a key contract is terminated. They also give lenders time to compare remedial options instead of forcing an immediate distressed enforcement.
Their effectiveness still depends on the complete contractual package. Cure rights cannot compensate for an uncreditworthy offtaker, an unfinanceable termination regime, a weak completion package, or unrealistic operating assumptions. The legal protections should be tested alongside the project's financial model, debt service coverage, downside cases, reserve structure, and termination payments.
For this reason, lenders often treat executed direct agreements as conditions precedent to first utilization or financial close. Draft forms may be agreed earlier so that unresolved step-in or consent issues do not emerge after the principal finance documents have been negotiated.
Key Negotiation Issues
Direct agreement negotiations are highly project-specific. The most difficult points commonly include:
- Cure duration: Payment defaults can often be cured quickly. Technical, construction, insolvency, and concession defaults may require longer periods or cannot legally be cured by a third party.
- Scope of standstill: The counterparty will resist an unlimited restriction on termination, particularly where public safety, environmental compliance, corruption, sanctions, or illegality is involved.
- Accrued liabilities: Parties must determine which historical defaults and unpaid amounts a step-in nominee must discharge before receiving contractual protection.
- Substitute qualification: Approval standards should be objective enough for enforcement to work while protecting legitimate technical, financial, licensing, and national-security requirements.
- Termination compensation: The direct agreement must align with the termination payment waterfall, secured debt definition, insurance proceeds, and lender recovery rules in the underlying contract.
- Governing law and approvals: Insolvency law, public procurement law, concession legislation, sector regulation, and foreign-law restrictions can affect the validity of assignment and step-in rights.
These points should be identified during documentation review, not deferred until closing. Sponsors can reduce execution risk by integrating direct agreement requirements into the initial term sheet, procurement documents, and counterparty negotiations. Financely's project finance term-sheet negotiation and technical coordination services support this wider financing process.
What Lenders Review Before Accepting the Draft
- Whether the correct legal entities and all material underlying contracts are covered.
- Whether notice obligations match the finance documents and use operationally reliable addresses.
- Whether cure, standstill, step-in, and substitution periods work together without gaps.
- Whether security assignment, payment directions, account control, and enforcement rights are recognized.
- Whether the counterparty must continue performance while lender remedies are being exercised.
- Whether liability during step-in is defined and commercially acceptable.
- Whether the agreement survives changes to the lender group, refinancing, transfer, or replacement of the security agent.
- Whether governing law, dispute resolution, sovereign immunity, procurement rules, and regulatory consents are compatible with enforcement.
A complete diligence process also reviews offtake bankability, construction risk allocation, insurance, permits, land rights, completion support, and the sponsor's capacity to fund the equity and cost-overrun commitments. Direct agreements are one component of the complete lender security and contractual protection package.
Structure a Financeable Project Contract Package
Financely supports sponsors with project bankability review, financial modeling, lender positioning, term-sheet coordination, and debt capital raising for energy, infrastructure, industrial, and other capital-intensive projects.
Frequently Asked Questions
Is a direct agreement mandatory in project finance?
It is not universally required by statute, but lenders commonly require one for contracts whose termination would materially damage project revenue, construction, operations, or enforcement value. The exact requirement depends on the project, lender policy, governing law, and underlying contract.
Does a direct agreement give lenders ownership of the project?
No. It gives lenders specified notice, cure, step-in, substitution, consent, and enforcement protections. Ownership changes only through a separate share enforcement, asset transfer, novation, or other legally effective process.
Is step-in the same as substitution?
No. Step-in is usually a temporary intervention by the security agent or its nominee. Substitution replaces the project company under the affected contract, generally with an entity that satisfies agreed qualification and approval standards.
Can a counterparty still terminate after signing a direct agreement?
Yes. The counterparty retains its termination rights, but it must follow the additional notice, standstill, cure, and step-in procedure. If the lenders do not cure the default or complete an agreed remedy within the applicable period, termination may proceed.
When should direct agreements be negotiated?
Material direct agreement requirements should be identified during bankability review and reflected in procurement and project-contract negotiations. The forms are often agreed before financial close and executed as conditions precedent to debt utilization.
Are direct agreements used only in public-private partnerships?
No. They are common in PPPs and concessions, but they also appear in privately developed power, renewable energy, natural resources, transportation, digital infrastructure, and industrial projects whenever a key contract supports limited-recourse debt.
This article provides general commercial information and is not legal advice. Direct agreement enforceability and lender remedies depend on the transaction documents, governing law, insolvency regime, public procurement rules, and required regulatory approvals. Reference framework: World Bank Group recommended PPP contractual provisions.