1. Overview
The global push to achieve net-zero emissions by 2050 has intensified the demand for renewable energy projects, driving investors to adopt innovative financing strategies.
Portfolio financings, which bundle multiple projects—often across jurisdictions—into a single financing structure, have become an important tool for sponsors to attract debt, reduce transaction costs, diversify equity risk and secure more favourable financing terms.
These portfolio financing structures can vary greatly depending on a number of factors, including the maturity and development stage of the underlying assets, flexibility required by a sponsor to include or dispose of projects, etc.
This article examines key early-stage considerations for sponsors looking to obtain senior debt on a portfolio basis to scale their development pipelines and optimise financing outcomes for greenfield assets, drawing comparisons to single asset project finance structures.
2. Due Diligence, Security and Direct Agreements
In greenfield portfolios, where construction risks are inherent, senior lenders continue to request a full project finance-style security package and due diligence reports covering a similar scope as in single asset project financing transactions. Direct agreements with key project counterparties are also an important component in their credit approval.
Even sponsors with strong bargaining power are – in our experience – unlikely to be able to dispense of all these requirements. However, early stage structuring considerations can significantly streamline and optimise the process and the scope of deliverables which are required for funding.
1. Focus on Major Project Documents and Counterparties.
Streamlining security and direct agreements to cover only critical contracts—such as offtake agreements, EPC contracts, and O&M agreements—can significantly reduce administrative burdens. This approach also preserves operational flexibility for managing minor contracts.
2. Develop Template Direct Agreements.
Negotiating template direct agreements at the outset for each jurisdiction where projects are located can save significant time and effort. Once a template is agreed, the expectation among sponsors and senior lenders should be that any pre-agreed major commercial terms should not be re-opened when the template is used as a drafting base. The caveat to this is that third-party contractors (as parties to direct agreements) can vary across projects and, therefore, have their own specific requirements to such direct agreements. .
3. Establish Common Security Principles.
Negotiating and annexing common security principles to the main finance documents can provide clarity and consistency across the portfolio. These principles should address key issues such as uniform enforcement triggers and the process for releasing security in the event of a project disposal (see also Exit and Take-out Flexibility below).
4. Engage Local Counsel Early to Address Jurisdictional Nuances.
Local law considerations can present unexpected challenges, particularly when financing is structured at the holding company level above SPVs. Engaging local counsel during the structuring phase can help flag potential issues, such as restrictions on securing shareholder obligations, thereby ensuring that such issues (if any) are addressed early to avoid derailing timelines.
5. Pre-Agreed Forms and Confirmatory Due Diligence.
It is a time-consuming and costly exercise to conduct a full legal due diligence on the project agreements for each portfolio project. Instead, sponsors should to the extent possible harmonise project agreements and agree with lenders that the legal review is restricted to a small subset of projects. For the remaining projects, the relevant due diligence provider can instead provide a confirmation that there are no material deviations from the sample due diligence.
3. Optimise Financing Terms
The diversification benefits of portfolios allow sponsors to obtain more favourable and flexible financing terms compared to single asset project finance.
Financial Covenants
Sponsors may wish to consider whether financial ratios should be tested on a portfolio-wide basis (rather than a project-specific basis) to leverage the collective strength of their projects. By pooling performance metrics, sponsors can (i) optimise debt sizing and (ii) mitigate the impact of underperformance by individual projects, ensuring that isolated instances of underperformance do not jeopardise the financing as a whole.
That said, there are scenarios where project-level covenants may still be appropriate. These should be limited to specific circumstances, such as when a new project is added to the portfolio, where it may be necessary to ensure that the asset meets the required financial thresholds for inclusion in the portfolio.
Portfolio Effect
One of the key advantages of portfolio financing is the diversification it offers. This principle should extend to the rights and remedies of lenders by qualifying their exercise with a “portfolio effect”. As a result, a breach of a representation, undertaking, or other event should not jeopardise the financing as a whole, provided that a critical mass of the portfolio remains unaffected — whether measured in terms of megawatt, cash flow, or other terms. This approach ensures that isolated issues at the asset level which may unexpectedly arise during the life of portfolio financing do not undermine the stability of such financing.
Two ways of structuring the portfolio effect
In recent transactions, we have seen two different conceptual approaches to implementing a portfolio effect in financing structures.
- Qualifying defaults/events of default – one approach is to introduce a definition of “Portfolio Effect” or similar and to provide that no default or event of default shall arise unless a certain proportion of projects has been affected by such (or other) adverse events.
- Qualifying remedies - a different approach is to qualify individual remedies such that certain rights of the lenders (e.g. acceleration or enforcement) may not be exercised unless and until a certain threshold of assets is affected by an asset-specific default or event of default.
Why sponsors should favour the first approach
At first glance, the difference between these two approaches may seem technical, but for sponsors, the implications are significant. The first approach—qualifying defaults/events of default—is far more advantageous for sponsors because it prevents defaults or events of default from arising unless the portfolio as a whole is materially affected. This not only shifts the burden of reviewing the finance documents for each use of these defined terms to lenders and their advisers but also mitigates the hidden risks associated with the pervasive use of the terms “Default” and “Event of Default”.
For example, by addressing the issue at the definition stage, sponsors avoid unintended consequences such as draw stops, lender transfers, or other adverse outcomes triggered by isolated asset-level issues, ensuring a more robust and comprehensive safeguard.
A practical example
One recent example that we have come across in a deal highlights the potential pitfalls of failing to fully implement a portfolio effect across all lender rights.
Under the LMA standard documentation, when an Event of Default is continuing, the requirements for borrower consent to lender transfers and any related restrictions (e.g. no transfers to distressed debt funds) are often disapplied. In this case, the loan agreement adopted the second approach to the portfolio effect (i.e. the defined term “Event of Default” was not qualified by the portfolio effect, but certain rights – such as acceleration and enforcement – were qualified). Crucially, the rights of lenders to transfer their commitments in case of a continuing Event of Default was not qualified.
The result? Had this point not been spotted, a single project-specific breach of undertaking or misrepresentation could have triggered an Event of Default, and lenders would have been permitted to transfer their loans not just for the affected project but for the entire portfolio—without borrower consent and potentially to distressed debt investors.
4. Exit and Take-Out Flexibility
For sponsors, another important compelling advantage of portfolio financings over single-asset financings is the strategic flexibility they offer in terms of exit and monetisation strategies. By bundling assets into a single portfolio, sponsors gain the ability to sell individual projects or the entire portfolio, refinance at either the asset or portfolio level, and pursue other monetisation opportunities. However, these benefits are subject to the agreed restrictions on disposals set out in the financing documents, and navigating these restrictions requires careful planning and negotiation.
Challenges of Asset Take-Outs
The take-out of individual projects—whether through sale or refinancing—presents sponsors with complex questions around valuation, timing, and lender consent. Lenders, for their part, will be highly attuned to the risks of cherry-picking, where overperforming assets are sold off, potentially undermining the aggregation benefits of the portfolio.
Key challenges include:
- Timing: Negotiations around the timing of take-outs can be particularly contentious, especially if an event of default or funding shortfall is ongoing.
- Prepayment Amounts: Determining the appropriate prepayment amount—whether it includes the allocated debt amount, a premium, or other considerations—can lead to difficult discussions.
To avoid protracted disputes, these issues should be addressed early, ideally at the term sheet stage, when the overall structure of the financing is being designed.
Minimum Portfolio Size: Balancing Flexibility and Diversification
Lenders will often insist on a minimum portfolio size threshold to preserve the diversification benefits that underpin portfolio financings. This is especially relevant in accretive portfolios, where sponsors have the ability to add new projects to the financing framework (commonly referred to as “hunting” facilities).
Striking the right balance is critical:
- For sponsors: Operational flexibility and the ability to manage assets dynamically are key priorities.
- For lenders: Ensuring sufficient diversification, particularly in smaller day-one portfolios, is essential to mitigate risk.
Key takeaways
- Portfolio financings can offer sponsors significant advantages over single-asset project finance by providing greater operational flexibility, economies of scale, and more flexible financing terms.
- The structuring of portfolios — such as the security and direct agreement package, due diligence workstreams, financing terms, and exit/monetisation strategies — warrant careful consideration at the outset to ensure that the financing is both bankable and meets the sponsor’s objectives.
- Terms of security documents and direct agreements should – to the extent possible – be harmonised across projects and jurisdictions. To achieve this, common security principles and local law considerations should be considered at the outset of a transaction.
- Sponsors should push for more flexible financing terms to reflect the diversification benefits of portfolios. Some of the most important tools are portfolio-wide testing and the qualification of lender rights and remedies by introducing a portfolio effect.
- Portfolios finance structures can facilitate take-out of assets, refinancing at various levels of the structure and other monetisation strategies by the sponsor. To maximise return on investment, sponsors should ensure that envisaged monetisation strategies are properly structured and pre-baked into the documentation.
