Trends in overseas and alternative financing – tips for keeping the horse before the cart
As discussed in the article “Why Your ESG Policy Is More Than Just Talk” and “The Rise of Alternative Financing for Resource Projects” in our 2021 edition of Emerging Issues, the focus on passing profits of shareholders to a broader presence of stakeholders continues to be seen and felt in the banking and financial sector. The shift away from traditional funding sources continued throughout 2021, and securing funding remains a major impediment to project development for resource developers. Following the 2021 G20 conference – during which Australia’s climate change policies came under global scrutiny – we have seen increasing pressure on finance providers, funds and programs listed to international and domestic lenders, to limit financing and investment in coal, gas and oil projects. For example, three of the four national banks have come under fire for being part of a global banking consortium that recently partially funded the Woodside-Global Infrastructures Partners gas project.
Banks, pension funds and other potential lenders must manage rising stakeholder expectations that investment decisions will be made with consideration of net-zero emissions goals and a focus on environmental compliance. Paris Agreement.
Each of the four major national banks has signed up to the Equator Principles, another risk management framework that specifically helps lenders manage ESG risks across projects. With banks increasingly concerned about shareholder sentiment in this regard, miners and operators are turning to other sources of funding, many of which can only be found overseas, opening up a variety of issues and of considerations.
When examining unconventional loan streams, it is important to explore the common, yet complex, issues faced by lenders and borrowers.
Common issues for lenders
Foreign Investment Approval
The most obvious and pressing hurdle for any foreign entity seeking to finance a project (or any potential foreign financier seeking to obtain a guarantee for a project) is the regulatory requirements of the Foreign Investment Review Board (FIRB).
FIRB traces the ownership of any foreign project or entity seeking to take security in respect of a project, back to its ultimate shareholders. Therefore, financing a project by or through a foreign (and particularly government-owned) entity means that FIRB approval will be required. It is essential that the time required for the application to be prepared and approved by the FIRB, as well as the associated costs, are factored into such a transaction.
The requirement to obtain FIRB approval is not always immediately obvious in typical lending scenarios, particularly when the security package does not include taking security over the land. However, in the resource sector, where financiers typically require security for their funding to include a mortgage on a building, project site or shared security in a land-rich Australian company, the provision of such security will require FIRB approval.
The time required to obtain FIRB approval can often present challenges for project proponents. The time constraints of a transaction do not always allow FIRB approval to be obtained prior to financial close, and the granting of relevant guarantees is sometimes conditional on obtaining such approval. Critically for lenders, security arrangements conditional in this way are not effective until FIRB approval is received – meaning the relevant collateral does not benefit from the priority protection accorded to the registration under the Personal Property Securities Act 2009 (Cth) or the indefeasibility of title granted by a mortgage on real estate and buildings. This means that the secured party cannot enforce its security interest in those particular assets and is effectively taking “insolvency risk” with respect to the borrower and the relevant project assets until the approval of the FIRB is obtained. This underscores the need to consider the nature of the security being offered and to keep FIRBs in mind from the early stages of a transaction.
As alternative financing arrangements become more common, the scope of potential collateral and arrangements expands. For example, sources of funding based on royalties, streaming, and production involve taking security over revenue-generating assets, such as the buildings from which the resource is produced, the product itself, and licensing contracts. sale for this product. The means of taking effective security over these assets vary, and financiers and borrowers need to know exactly what security is being taken and the steps needed to perfect it. Where ‘royalty financing’ and associated security intersect with separate ‘project financing’, intercreditor agreements will need to be agreed and documented between the affected secured parties.
Another relevant issue in the context of financing provided by non-Australian lenders is the Australian Interest Withholding Tax (IWT). Basically, there is a 10% tax on interest paid by:
- Australian resident borrowers who incur interest charges in carrying on business in Australia; or
- non-resident borrowers carrying on business in Australia, in or through a permanent establishment in Australia (together, the Borrowers), to
- financiers not resident in Australia or acting through a permanent establishment in Australia.
The Australian Taxation Office (ATO) requires borrowers to remit the IWT amount and pay it to the ATO. However, the financial documents generally require the borrower to “gross up” any amount so withheld. This means that the Borrowers are required to make an additional payment to the financier for the tax withheld (in other words, to “gross up” the amount that the Borrowers are required to pay to the financier to account for the IWT ).