Dykema attorneys were recently involved in an interesting infrastructure project finance transaction relating to the rehabilitation of a portion of the Pennsylvania Convention Center. Dykema represented the lender in this transaction. To complete the transaction, a fairly unusual structure had to evolve.

Project Scope

The Pennsylvania Convention Center Authority (the “Authority”) was in need of a replacement heating, ventilating and air-conditioning (“HVAC”) system. It was interested in finding a creative mechanism to finance this improvement. The Authority’s objectives were twofold: (1) it wished to find a turnkey solution for obtaining cool air in the summer and warm air in the winter that would include the purchase of the equipment and its installation and ongoing system maintenance; and (2) it wished to pay for the system over ten years, matching payments with its annual legislative appropriations, thus avoiding the incurrence of any debt on its balance sheet.

The Authority was able to satisfy these objectives by entering into a Design/Build Agreement with Xtnrgy, LLC (“XT”), a company engaged in the business of developing and upgrading HVAC infrastructure for both public and private entities. Under the Design/Build Agreement, XT agreed to supply, install and maintain the HVAC equipment the Authority needed. XT, in turn, subcontracted to a large international HVAC contractor all of its performance obligations under the Design/Build Agreement pursuant to a Design/Build/Maintenance Prime Subcontract. As the payments due to the HVAC Contractor for providing and installing the system under the Prime Subcontract were due upon completion of the project, and the payments due to XT from the Authority under the Design/Build Agreement were payable over ten years (to match the legislative appropriations), XT wished to finance its obligations under the Prime Subcontract.

Dykema’s Role

Dykema represented the financing source, the equipment finance division of a large commercial lender. As this was far from a garden variety equipment loan, the Lender looked to Dykema to help determine the best structure for the transaction. The Lender had considered a variety of leasing and financing structures, but we ultimately concluded that its objectives could be best accomplished by a conventional Loan and Security Agreement, with the Lender taking a security interest in the installed HVAC equipment and the Prime Subcontract. But as Dykema learned, the Lender really viewed this loan as one to the Authority and not to XT. We addressed this perspective by working with the parties to develop a mutually agreeable structure.

Although the Lender made its loan to XT and took the security interests described above, it was more focused on the annual financial wherewithal of the Authority to make annual payments under the Design/Build Agreement. In that regard, the most important issue from the Lender’s perspective seemed to be the risk of annual appropriation by the legislature of the Commonwealth of Pennsylvania to the Authority. Accordingly, much time was spent determining, through review of the Authority’s governing documents, the extent to which such annual appropriations were at the discretion of the legislature or whether they were mandatory. It was an unusual but interesting role for Lender’s counsel.

To ensure the priority of the Lender’s annual principal and interest payment under the loan agreement, the annual payments from the Authority to XT were subject to a waterfall arrangement agreed to among the Lender, the HVAC Contractor and XT (the “Waterfall”). The Waterfall first provided that all payments from the Authority to XT under the Design/Build Agreement would be paid directly to a blocked account maintained and controlled by an affiliate of the Lender (acting as agent). The Waterfall then provided for payments to be applied in the following sequence: (1) the reimbursement of all expenses paid to the Lender in its capacity as agent; (2) the payment of all principal and interest payable to the Lender under the loan agreement; (3) the payment to HVAC Contractor of an annual maintenance fee for the HVAC system and (4) the payment to XT of the balance. The Waterfall essentially transferred the risk of nonpayment from XT to the Authority.

Dykema’s Experience

Dykema’s attorneys possess the range of skills needed to assist lenders making loans in the infrastructure business segment, which often requires conforming unusual business relationships to conventional lending structures. If you are considering a financing in this area or would like to learn more about this or any other topic in the project finance arena, please contact us at www/dykema.com/infrastructure/