Robotics Project Financing
The use of an extended time horizon, the incorporation of a tailored force majeure clause and the selection of the right type of offtake agreement are three of the most widely discussed best practices in structuring capital-offtake agreements for any industry.
Identification of Best Practices
- An exhaustive search of publicly available materials covering capital-offtake agreements confirmed that there are limited, credible references that formally outline best practices associated with structuring capital-offtake agreements (e.g., ReedSmith).
- Moreover, where available, these resources generally focus on more nuanced agreement provisions, rather than guidelines for the overall structure of capital-offtake agreements.
- As such, the research team identified the following strategies as best practices based on the fact that they are consistently highlighted as "key considerations" that "must be carefully thought through" to effectively structure offtake agreements, according to a preponderance of trade finance consultants (e.g., Global Trade Funding, Energy and Environment Partnership), legal experts (e.g., ReedSmith, Bracewell, Lexology) and reputable financial trades (e.g., Bloomberg Tax, Investopedia, Project Finance International).
- Notably, all of the best practices outlined below were validated as essential offtake agreement practices by no less than five independent industry experts each.
Extended Time Horizon
- Global Trade Funding, Bracewell, Lexology Bloomberg Tax, Investopedia and Project Finance International are among the variety of industry experts that discuss the importance of structuring capital-offtake agreements around a sufficiently long time horizon.
- While Global Trade Funding reports that offtake agreements typically last "at least several years," Bracewell notes that tax equity investors generally require a "minimum term of 12-13 years" to find an offtake agreement meaningful, while Bracewell and Lexology add that other financing parties expect a "traditional" offtake agreement to span between 20 and 25 years.
- According to Project Finance International, this longer time horizon of "20 years or more" is generally necessary for a company to "access enough leverage to construct a project."
- This is because longer deal time horizons offer more substantive validation of cash flow forecasts, provide evidence that a market exists for the long-term output of a project and ensure a minimum level of revenue/profit for the project for "many years into the future."
- Although Bloomberg Tax reports that some offtake agreements choose a shorter contract duration given a "need for flexibility," the industry expert adds that longer contracts are generally better aligned with "transaction cost economics."
- Overall, Global Trade Funding asserts that capital offtake agreements must "continue for a long period of time," because "lenders are much more likely to approve the project financing loan" under these conditions.
- Similarly, Bracewell highlights that the term of an offtake agreement directly "affects its finaceability," and is therefore a "key consideration" when structuring such an agreement.
Force Majeure Clause
- In lockstep with this recommendation, industry experts (e.g., Global Trade Funding, Energy and Environment Partnership, ReedSmith, Lexology, Investopedia) also highlight the importance of implementing a thoughtfully crafted force majeure clause to counterbalance the risks associated with the time horizon of a capital-offtake deal.
- Lexology and Investopedia note that a variety of capital-offtake provisions can be included in a deal to manage the known risks associated with such long-term contracts (e.g., credit support requirements, performance guarantees, default clauses/penalties).
- However, Global Trade Funding adds that the specific inclusion of a force majeure clause is essential to protecting both the project company as well as the off-taker from occurrences that are "beyond the control of either party."
- Specifically, force majeure clauses allow either party of the deal to modify/cancel the offtake agreement if something "beyond anyone’s control" occurs during the term that places "undue hardship" on either party (e.g., fires, floods, natural disasters).
- As such, both Global Trade Funding and Investopedia assert that "most offtake agreements include force majeure clauses," adding that these provisions are irreplaceable for providing protection against unforeseeable "catastrophic harm."
- Moreover, ReedSmith cautions that force majeure provisions "must be carefully thought through," rather than "just lifted" from boilerplates such as standard short/spot contracts, given the recommended term of offtake agreements.
Right Variety/Type of Offtake
- Meanwhile Global Trade Funding, ReedSmith, Bracewell, Lexology and Project Finance International are among the industry experts that highlight the variety of existing and emerging types of capital-offtake agreements, and the relevance of selecting the format that best fits the particular industry/business need.
- For example, Global Trade Funding reports seven major forms of capital-offtake agreements:
- Take or pay contracts, which require the off-taker to satisfy payment requirements irrespective of product delivery.
- Take-and-pay contracts, a slightly less common format the requires the off-taker to pay only for the product it receives.
- Throughput contract s, which apply to pipeline agreements and involve minimum volume requirements.
- Power purchase agreements (PPAs), which are most "commonly" associated with "electrical power projects in developing countries" and frequently involve a government off-taker.
- Contract for differences, which is more like a synthetic or virtual offtake, wherein the project company sells its product directly to the market (rather than the off-taker), and the off-taker or project company makes a separate payment to their counterparty if market prices are lower or higher than agreed upon levels (similar to a short or long stock sale).
- Hedging contracts, which are typically used for commodity products such as oilfield projects.
- Long-term sales contracts , which establish volume exchanges but do not predetermine associated prices. Instead, prices are based on market prices or an agreed-upon market index.
- Project Finance International adds that a "new wave of unorthodox offtake arrangements are being underwritten and financed," that involve more flexible pricing, project reserves, cash sweets, unique amortization profiles.
- Meanwhile, Bracewell and Lexology suggest that selecting the right type of capital-offtake form is critical given that "different market participants prefer different offtake structures."
- For example, corporate purchasers generally prefer synthetic or "contract for differences" formats, whereas risk solution providers are attracted to hedging contracts.
- Similarly, TerraForm Power CEO Carlos Domenech asserts that creating "solid" offtake agreements that are "well-built" for the intended audience is essential for attracting "high-quality off-takers," thereby limiting risk and creating project predictability.