Protecting the Deal Against Pre-Emptive Debt Hazards

Technical Notes

Nov 18, 2009 — Neil Boyle

Once the contract is in place, the security of project financed infrastructure is frequently threatened by revenue volatility and “creeping maladaptation” caused by the pre-emptive nature of highly leveraged bonds that are held by creditors for termination if things go awry. “Creeping maladaptation” refers to the incremental nature of the maladaptation process. As “disabled bureaucratic habits” go uncorrected result from misaligned incentives , those habits worsen over time diminishing the capacity of the organization to adapt. Dove-tailing of contracts can strengthen creditor control by compounding already high creditor leverage; leaving equity owner-managers on the side-lines as far as project management and adaptive ingenuirty of equity managers are concerned. This assignment of the equity-owners to the sidelines is detrimental to the relationship, as managing and completing the project as planned are made more difficult with uninformed lenders and constrained equity owners. To mitigate this hazard, lenders can be provided board representation with voting rights. Prevention of pre-emptive debt hazards can be achieved by negotiating the deal for governance closure to take place before financial closure is executed.

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