13. The Financial Close

Financial close is a stage with a high degree of variation in market practice among jurisdictions. Financial close means not only that the financing documents have been signed, but also that the prior conditions for the availability of financing have been fulfilled.

As described in chapter 5, in some jurisdictions (for example, in Spain), the contract provides a limited time (which might be as little as six months or as much as eighteen months) after contract signing in which the private partner must arrange finance and execute the financial agreements. In some other jurisdictions and processes (typically negotiated or dialogue processes), bidders have already arranged the finance prior to contract award, and financial close occurs soon after commercial close (the process can take anywhere from a few hours to several weeks, depending on the circumstances). Chapter 1.7.3 contains a discussion about these two different approaches.

Table 6.2 provides example projects of the actual time periods that elapsed between contract signing and financial close in various countries.

TABLE 6.2: Examples of time periods between contract signature and financial close

No matter when financial close occurs, that milestone will have implications for the authority. In all cases, the authority will have to validate the financial agreements to check that they do not contravene the provisions of the contracts or represent any direct risk or additional responsibility not considered in the contract. It is common for the authority (especial in emerging markets) to acknowledge the contract and specifically validate the lender´s rights as agreed and described in the contract (for example, the lender’s rights to step-in and cure defaults).

The authority may also make direct contractual representations to the lenders (through direct agreements or direct letters). These are not necessarily direct guarantees in favour of the lenders[15], but nevertheless these representations give the lenders comfort that they will be able to exercise their rights in respect of the project should the need arise.

During this period, there is a degree of alignment between the authority and the private partner. It is generally in both parties’ interests to promptly achieve financial close so that this finance is available for the project to proceed.

Another typical issue that may have implications for the authority during the financial close period is the use of the base interest rate risk-sharing mechanisms (see chapter Appendix to chapter 5). In some projects, the procuring authority will bear part or all of the risk that base interest rates change in the period before financial close.