Financing Agreement FA

Why lenders get to read your entire world

The FA exists because of the shape of the borrower. A project-financed BESS sits inside a special-purpose vehicle (SPV) that owns nothing except the project — the site rights, the interconnection position, the equipment contracts, the revenue contracts. Lending to it is non-recourse: if the project fails, the lenders cannot chase the sponsor's balance sheet.

Their entire security is the project's future cash flow, which is why the FA grants them consent rights over almost everything the SPV touches. The EPC contract, the BESA, the tolling agreement or offtake agreement, the O&M agreement, the LTSA — all of them get assigned to the lenders as security, and none of them can be amended or terminated without lender consent. When people talk about bankability, this is the document doing the asking.

Drawdowns move against certificates, not invoices

Financial close does not put money in the account. The FA's conditions precedent to first drawdown largely mirror the ready to build checklist — site control, permits in force, an executed interconnection agreement, executed EPC and supply contracts — plus financing-specific items like insurance, security filings, and legal opinions.

After that, construction funds are released in tranches against milestones, and the milestones are not self-declared: the lenders' independent engineer inspects and certifies each one before the agent bank releases funds. A sponsor who has scheduled equipment down payments under the BESA against an optimistic drawdown calendar will discover this mechanism the hard way. Certification takes time, disputes happen, and the FA — not the construction schedule — decides when cash actually moves.

The waterfall — who gets paid, in what order

Once the project reaches its commercial operation date, every dollar of revenue flows through a contractually mandated sequence: operating costs and the O&M agreement first, then lender fees, then interest and principal on the debt, then top-ups to reserve accounts — the debt service reserve, commonly sized at around six months of scheduled debt service, and often a maintenance or augmentation reserve — and only then, at the bottom, distributions to equity.

Distributions are conditional: miss a coverage covenant and cash gets trapped in the SPV, locked up until the tests are passed again. On an actual default, the same waterfall answers the ugly question of who absorbs the loss — lenders first in right, equity last.

The covenants are the operating-years police. The FA typically restricts additional debt, asset sales, budget overruns, and amendments to project contracts, and lenders commonly take a view on how much merchant exposure — uncontracted revenue stacking — the project may carry versus contracted cash flow under a tolling agreement or hedge agreement.

Augmentation spending usually needs an approved plan or a funded reserve behind it. None of this is bureaucratic decoration: a covenant breach is an event of default, and an event of default gives lenders the right to sweep cash, block distributions, and ultimately step in and take the project.

When there is more than one class of money

Real capital stacks are rarely one bank. Multiple lenders, a hedge agreement counterparty with termination-payment claims, sometimes mezzanine debt — their relative rights are settled in an intercreditor agreement that sits alongside the FA and decides who votes, who waives, and who ranks where in the waterfall.

In the US market, tax equity adds a further layer: the ECCA governs the tax-equity investor's capital contributions and sits in structured tension with the lenders, since both want first claim on the same project. If you are the developer, the practical lesson is that any change to any project document — an EPC change order, a BESA amendment, a revised augmentation plan — may need consents from every one of these parties. Budget calendar time for it.