Typical Undertakings in a Project Finance Agreement

A practical guide for large infrastructure and PPP transactions

In a project finance transaction, undertakings are not boilerplate. They are the operating code of the financing. Conditions precedent establish the basis on which lenders are prepared to fund. Representations test the position at signing, financial close, utilisation and other repeating dates. Undertakings then govern how the project company, and in some cases the shareholders, sponsors and holding companies, must behave throughout the debt life.

This is especially important in limited-recourse financings. Lenders are not underwriting a diversified corporate balance sheet. They are relying on a single project, its cash flow, project documents, concessions, permits, assets, insurance programme, security package, reserve accounts and sponsor support. The undertaking package is therefore designed to preserve the bank case that was approved at financial close, prevent leakage, preserve security, maintain the project company as a clean special purpose vehicle, and ensure that warning signals reach the finance parties before value is impaired.

A well-drafted common terms agreement usually makes the undertakings continue until the senior debt has been repaid, the secured obligations have been discharged and the commitments have been cancelled. That duration point matters. Undertakings are not only construction period promises. They are life-of-loan controls.

1. What Are Undertakings?

An undertaking, often called a covenant, is a contractual promise by a project company, shareholder, sponsor or other obligor to do something, not do something, or provide information during the financing period.

Project finance undertakings generally fall into three categories:

The reason undertakings are central is simple. A project company normally exists for one project and has limited external value if that project fails. Lenders therefore need ongoing control over the project company's cash, assets, contracts, permits and risk profile.

2. The Undertaking Package Starts With the SPV Concept

The foundation of bankability is the single-purpose project company. The borrower should remain a clean SPV whose assets, liabilities and business are limited to the financed project and matters incidental to it.

Typical SPV undertakings require the project company to maintain its legal existence, preserve its status, hold the power to own its assets and conduct the project business, and avoid activities outside the project. A strong package will restrict the project company from:

1. carrying on any business other than the project,
2. owning assets that are unrelated to the project,
3. incurring financial indebtedness except permitted debt,
4. granting security except permitted security,
5. making investments other than authorised short-term investments,
6. entering into non-project contracts except permitted contracts,
7. merging, reorganising, acquiring businesses or changing constitutional documents without the required consent,
8. making loans or guarantees except in narrowly defined circumstances.

This keeps the borrower structurally clean. Lenders do not want the project cash flow to be exposed to creditors, claims or business risks that were not part of the approved financing case.

In transactions with offshore holding companies or bid holding companies, the same logic may extend above the project company. Lenders may require holding entities to remain special purpose vehicles, avoid third-party debt, hold only permitted assets, and grant share security in jurisdictions where enforcement is workable.

3. Authorisations, Permits and Compliance With Law

Large infrastructure and PPP projects are authorisation-heavy. They may require concessions, licences, construction permits, environmental approvals, land rights, operating permits, sector approvals, foreign ownership clearances, corporate approvals and finance-document filings.

A standard authorisations undertaking requires the project company to obtain, maintain, comply with and provide copies of all material authorisations required for the project and for the finance documents. The covenant should cover three separate risks:

1. the legality of the project,
2. the ability of the company to perform the project documents and finance documents,
3. the validity, enforceability and admissibility in evidence of the finance documents and security documents.

The authorisation covenant is broader than a general compliance with law undertaking. A missing licence can stop construction, block operation, interrupt revenues, prevent enforcement or trigger termination under a project document. For lenders, loss of a key permit can be as serious as a missed payment.

Drafting should avoid two common weaknesses. First, the covenant should not be limited only to authorisations known at financial close. It should also capture future authorisations required as the project develops. Second, materiality should be calibrated carefully. A broad material adverse effect qualifier may be appropriate for immaterial permits, but core concessions, land rights, environmental approvals and revenue permits often need tighter treatment.

4. Construction and Completion Undertakings

During construction, lenders are exposed to completion risk. They need the project built on time, within budget, to the required technical standard and in accordance with the revenue contract, EPC contract, permits and base case assumptions.

Typical construction undertakings require the project company to procure design, engineering, procurement, construction, commissioning, testing and completion with due care and diligence, and in accordance with the EPC contract and other project documents. A bankable package also connects construction undertakings to drawdown mechanics, cost reporting and independent technical review.

Drawdown conditions commonly require no default, true repeating representations, evidence that requested amounts are due, confirmation by the lenders' technical adviser, and a cost-to-complete test showing available funding is not less than remaining completion costs.

For financial modelers, the lesson is direct. The construction model must test availability period cut-offs, permitted project costs, equity draw timing, cost-to-complete headroom, contingency usage, reserve funding, completion longstop dates and technical adviser sign-off points. A sources and uses page alone is not enough.

5. Operating and Maintenance Undertakings

After commercial operation, the risk profile shifts from completion to performance. Lenders monitor whether the project is operating to the availability, cost, maintenance, lifecycle and revenue assumptions in the base case.

A typical operation and maintenance undertaking requires the company to operate, maintain and repair the project:

1. in accordance with the O&M agreement and project documents,
2. in accordance with good industry practice or the standard of a reasonable and prudent operator,
3. in compliance with law, permits, environmental requirements and insurance requirements,
4. within approved operating budgets, subject to agreed emergency or prudent-operator exceptions,
5. with timely reporting of outages, defects, major maintenance, revenue performance and operating cost variance.

Operating budgets are not merely planning documents. They set the permitted operating cost envelope for the project. If the finance documents cap spending above the approved budget unless lender consent is obtained, the model should mirror that logic and show where actual or forecast operating costs exceed the permitted threshold.

A strong operating package also requires access for lenders, technical advisers and insurance advisers, including access to records, plant, site meetings and personnel where reasonably required. That access is a practical monitoring right, not simply a legal formality.

6. Information Undertakings, Forecasts and the Financial Model

Project finance lenders do not rely only on annual audited accounts. They monitor performance through a structured information package that combines financial statements, project reports, budgets, forecasts, ratio calculations and notices.

The financial model is often a contractual tool. Changes to the model may be limited to correcting manifest errors, making the model capable of calculating agreed ratios, or improving forecast accuracy. If the borrower and lenders disagree, expert determination may be used. This ensures that ratios, distributions, reserve funding and default tests are not manipulated through unapproved model changes.

For modelers, this means DSCR, LLCR, reserve balances, waterfall movements, default flags and distribution capacity must be calculated exactly as the finance documents define them. A model that uses a lender-unapproved definition is not bankable, even if it is mathematically correct.

7. DSCR, LLCR and Financial Ratio Controls

Financial ratios are central to project finance undertakings, but they should be described precisely. In many transactions, DSCR and LLCR are not simply free-standing promises to maintain a ratio at all times. They are calculated on defined dates and used as controls for distributions, lock-up, cash sweep, default or mandatory prepayment.

The two most common ratios are:

Debt Service Cover Ratio, DSCR. DSCR generally compares available cash flow for a defined period with debt service for that same period. The agreement must specify the period, numerator, denominator, treatment of reserves, hedging receipts, working capital repayment, taxes and extraordinary receipts.

Loan Life Cover Ratio, LLCR. LLCR generally compares the discounted value of future available cash flow over the remaining loan life, often plus eligible reserve balances, with outstanding senior debt. The agreement must state the discount rate, forecast basis, reserve treatment and debt amount.

Robust drafting should answer these questions:

1. Is the test historic, projected, or both?
2. Is the calculation date scheduled, event-driven, or both?
3. Is available cash flow calculated on a cash basis?
4. Are reserve withdrawals included or excluded?
5. Are disputed revenues excluded until admitted or received?
6. Are hedge receipts netted against debt service?
7. Are future assumptions fixed, agreed, updated, or subject to expert determination?
8. Does failure cause distribution lock-up, cash sweep, default, or acceleration?

Thresholds are sector-specific. Availability-based PPPs, merchant power projects, renewable projects, water projects and transport concessions may all use different ratio levels and consequences. A publishable article should avoid implying that any ratio threshold is universal.

8. Project Accounts and the Cash Waterfall

Project finance is cash-controlled finance. Revenues are usually paid into controlled accounts and applied through a contractual waterfall. The accounts structure is one of the main ways lenders convert limited recourse into practical control.

Typical project accounts include:

1. a proceeds or disbursement account for debt and equity funding,
2. a revenue account for operating revenues,
3. a debt service payment account,
4. a debt service reserve account,
5. a maintenance reserve account,
6. an insurance or compensation proceeds account,
7. a rehabilitation, decommissioning or handback reserve, where relevant,
8. a distributions account.

The key undertaking is that the project company may open and operate only permitted accounts, deposit proceeds only into the correct accounts, and withdraw funds only as expressly permitted by the finance documents. Account protections typically include no overdrawing, lender access to records, separate account maintenance, restrictions during default, and an account bank waiver of set-off and combination rights.

A typical pre-enforcement waterfall might apply revenue in this order:

The waterfall should distinguish pre-enforcement priorities from post-enforcement recoveries. Before enforcement, the objective is operational continuity and scheduled debt service. After enforcement, recoveries are usually applied through a different enforcement waterfall.

9. Reserve Account Undertakings

Reserve accounts convert future liquidity risk into current cash or eligible credit support. They are not optional model lines. They are contractual mechanics.

The most common reserve accounts are:

Debt Service Reserve Account, DSRA. The DSRA protects senior lenders against short-term cash flow shortfalls. It may be funded in cash, by an acceptable letter of credit, or by a mix of both. The documents should state the target balance, timing of funding, permitted withdrawals, top-up obligations, release mechanics and replacement requirements for expiring or downgraded support.

Maintenance Reserve Account, MRA. The MRA funds major maintenance, overhaul, lifecycle costs or spare parts. In some transactions it is funded from completion or operation. In others it is triggered by specific maintenance risk events, such as termination, suspension or insolvency of a long-term service provider. The drafting should match the project technology and lifecycle profile.

Compensation or insurance proceeds account. This account holds insurance proceeds, expropriation proceeds, termination payments and other capital compensation pending reinstatement, third-party payment or debt prepayment.

Distributions account. This account receives cash that has passed through the waterfall and the distribution lock-up tests. Shareholders should not receive value directly from operating accounts.

A model should calculate target balances, top-ups, permitted drawings, excess releases, letter of credit substitutions, mandatory prepayment from reserve releases, and any conditions to releasing cash to shareholders.

10. Insurance Undertakings

Insurance undertakings protect the physical asset, the revenue stream and the repayment profile. In major projects, the covenant should go beyond a simple promise to maintain insurance.

A bankable insurance package usually requires the project company to:

1. maintain required construction and operational policies,
2. name the lenders, security agent or finance parties where appropriate,
3. comply with the insurance schedule and insurance adviser recommendations,
4. ensure policies include agreed lender clauses, loss payee provisions and non-vitiation protections where available,
5. pay premiums on time,
6. notify material claims, cancellation, suspension and material changes in cover,
7. deliver broker undertakings and notices of assignment,
8. apply proceeds to reinstatement, third-party liabilities, revenue accounts or mandatory prepayment as required,
9. maintain reinsurance, cut-through or assignment arrangements where relevant.

Insurance proceeds must be integrated with the cash waterfall and mandatory prepayment provisions. If proceeds are needed and permitted for reinstatement, the documents should control how they are released. If they are not used for reinstatement, they may be required to prepay debt. Delay in start-up and business interruption proceeds are often treated differently from physical damage proceeds because they replace revenue rather than capital assets.

11. Negative Undertakings, Preventing Leakage and Structural Drift

Negative undertakings stop the project company from changing the deal that lenders approved. They are particularly important because a project finance borrower has little margin for unrelated risk.

The drafting should distinguish prohibited actions from permitted baskets. Baskets may be needed for ordinary-course disposals, obsolete asset replacement, permitted encumbrances, authorised investments, project document requirements and minor financial indebtedness. The point is not to freeze the project company commercially. It is to ensure any material change to the risk profile requires lender consent or falls within an agreed exception.

12. Distribution Lock-Up Undertakings

Distribution controls are one of the most important protections in the finance documents. They decide when value can leave the ring-fenced project structure.

A robust distribution lock-up requires that distributions be made only from the distributions account, and only after all applicable conditions are met. Typical conditions include:

1. completion or final cost confirmation has occurred,
2. a minimum operating seasoning period has passed, where required,
3. the first repayment date has occurred and amounts due have been paid,
4. no default, policy trigger or insurer trigger is continuing or would result,
5. the borrower has delivered advance notice, calculations and supporting information,
6. historic DSCR is at or above the required threshold,
7. LLCR is at or above the required threshold,
8. projected DSCR for the next test periods is at or above the required threshold,
9. DSRA is fully funded, including eligible DSRA letter of credit support where permitted,
10. maintenance reserve is fully funded to the required level,
11. operating accounts retain minimum working capital and contingent liability reserves,
12. the distribution is lawful and does not breach project documents or finance documents.

The lock-up should be modelled as a hard gate, not as a post-processing adjustment. The model should test every condition before any cash is moved to the distributions account. This is where legal drafting and financial modelling often fail to align. If the model distributes all free cash flow but the finance documents impose lock-up conditions, the model overstates shareholder value.

Some sophisticated financings permit partial distributions where forward-looking projected DSCR is below the normal distribution threshold, but only if a portion of cash remains locked up so that the projected ratio is cured. That is an advanced feature and should be modelled transparently.

13. Hedging and Treasury Undertakings

Hedging undertakings depend on the debt structure. Where senior debt is floating rate, lenders may require the project company to enter into interest rate swaps or other hedging arrangements with acceptable hedge providers.

Typical hedging controls cover:

1. minimum hedged percentage of floating-rate exposure,
2. maximum hedged percentage to prevent over-hedging,
3. acceptable hedge providers and minimum credit ratings,
4. downgrade triggers and replacement, guarantee or close-out rights,
5. alignment of hedge payment dates with debt service dates,
6. treatment of hedge termination receipts and payments,
7. prohibition on speculative derivatives,
8. ranking and intercreditor treatment of hedge claims.

In other transactions, the covenant may be drafted as a prohibition on treasury transactions except those permitted by the finance documents. Either way, the policy is the same. Hedging should reduce financing risk, not create speculative exposure or unapproved liabilities.

14. Shareholder, Equity and Sponsor Undertakings

Project finance undertakings do not stop at the borrower. Lenders also care about who owns the project, who funds equity, and whether shareholder claims are subordinated.

Typical shareholder and sponsor undertakings include:

1. base equity contribution obligations,
2. standby equity or cost overrun support,
3. letters of credit, corporate guarantees or parent guarantees supporting equity commitments,
4. equity bridge loan repayment requirements,
5. subordination of equity bridge, shareholder loan and sponsor claims,
6. restrictions on payment of subordinated debt interest or principal until distribution conditions are met,
7. share retention undertakings during construction or for a defined post-completion period,
8. restrictions on transfers of shares and shareholder loans,
9. accession requirements for transferees,
10. maintenance of security over shares and shareholder loans,
11. know-your-customer, legal opinion and credit support conditions for permitted transfers.

Shareholder agreements can also include project-relevant controls that support bankability, such as capital contribution procedures, remedies for failure to contribute, transfer restrictions, governance approval rights, annual budget approval, bank account controls, information rights and related-party transaction controls.

The finance documents and shareholder documents should be aligned. If the shareholders' agreement permits a transfer, dividend, subordinated loan repayment or related-party transaction that the finance documents prohibit, the project company may face conflicting obligations. Bankable drafting resolves that conflict by subordinating shareholder economics and transfer rights to the senior finance documents.

15. Environmental, Social and Policy Undertakings

International infrastructure financings often include undertakings driven by export credit agencies, development finance institutions, political risk insurers or covered lenders. These may include environmental and social requirements, anti-corruption obligations, sanctions, procurement requirements, local law compliance, ownership conditions and reporting obligations.

The important drafting point is to distinguish ordinary defaults from policy trigger events. A policy trigger may give a particular lender or insurer cancellation, prepayment, cash sweep or acceleration rights, sometimes without the same majority-lender process that applies to ordinary defaults.

Typical policy-related controls may include:

1. compliance with lender or insurer environmental and social requirements,
2. accuracy of environmental and social representations,
3. notice of environmental claims or material remedial action,
4. maintenance of specified sponsor ownership or nationality requirements,
5. evidence of paid-up equity or minimum equity contribution by a target date,
6. additional reporting to covered lenders or insurers,
7. cash sweep or mandatory prepayment following defined policy triggers.

These undertakings should not be treated as boilerplate. They can materially affect transferability, enforcement strategy, prepayment risk and distribution capacity.

16. Events of Default, The Enforcement Backbone

Undertakings matter because breach has consequences. The events of default clause turns selected covenant failures into lender remedies.

A typical default framework distinguishes:

A well-calibrated package gives lenders early escalation rights without turning every administrative breach into immediate acceleration. Key negative covenants should be strict. Remediable reporting or administrative failures may justify cure periods. Ratio failures should be mapped carefully to lock-up, cash sweep and default thresholds.

17. Practical Drafting Checklist

A strong undertaking package should answer the following questions:

18. Modelxcel Perspective, What Financial Modelers Should Build

For financial modelers, undertakings should be converted into model logic. A bankable model should not only forecast cash. It should forecast what the finance documents permit.

A project finance model should include:

1. sources and uses controls, showing whether each funding source is used only for permitted costs,
2. availability period checks, ensuring no facility is drawn after the contractual cut-off date,
3. equity funding logic, including pro rata debt-equity drawing, back-ended equity or equity bridge mechanics,
4. cost-to-complete tests, comparing remaining project costs with available funding,
5. construction budget variance tests, including line-item and aggregate thresholds,
6. debt service calculations, including interest, profit, fees, principal, hedge payments and tax gross-up where relevant,
7. DSCR, LLCR and projected DSCR calculations that match finance document definitions,
8. reserve account schedules for DSRA, maintenance, compensation, handback and any true-up reserve,
9. support instrument logic, including letters of credit, expiry, replacement and eligible balance treatment,
10. pre-enforcement cash waterfall in the exact contractual order,
11. distribution lock-up tests and partial distribution mechanics where applicable,
12. mandatory prepayment logic for insurance proceeds, compensation, disposals, hedge close-out receipts, reserve releases and policy triggers,
13. default and lock-up flags, separating events of default from distribution blocks and cash sweep triggers,
14. shareholder loan and subordinated payment restrictions,
15. sensitivity outputs showing which undertaking is constraining distributions or debt service resilience.

The best models do not merely forecast dividends. They forecast whether dividends are legally permitted.

Conclusion

Typical undertakings in a project finance agreement are designed to preserve the lender-approved risk profile from financial close to final repayment. They keep the borrower single-purpose, preserve authorisations, protect security, control accounts, enforce the waterfall, maintain reserves, regulate insurance proceeds, monitor ratios, restrict leakage, preserve project documents and create early warning rights.

For sponsors, undertakings can feel restrictive. For lenders, they are the core of limited-recourse credit protection. For modelers, they are the bridge between legal documentation and financial outputs.

A project finance agreement is bankable when its undertakings, accounts, reserves, ratios, distributions, prepayment mechanics and default regime operate as one integrated system. A project finance model is bankable only when it reflects that system faithfully.