Q. Which types of financier does the Due Diligence team predominately work for?
A. We normally work for banks, investment funds and fund managers who invest in infrastructure assets (including schools, universities, office blocks, retail park buildings, renewable energy, hospitals, roads etc). We help them ensure their interests and investments are protected by adequate insurance, so we review limits, the scope of cover, wording language and ensure that essential lender clauses and extensions have been included in the insurances procured by the borrowers (‘operating partners’).
We also ensure that the operating partners are complying with the insurance terms of any loans or facilities and point out any areas of non-compliance, then negotiate with the operating partners’ brokers to reach a suitable solution. We also evaluate the insurance markets selected by the brokers and comment on suitability for the project in question.
Finally, They are aware that if they choose not to engage a Lenders Advisor that they are taking the risk that the operating partner might not purchase the right type of insurance, that the selected insurers might not have the right expertise, that the scope of cover is limited or that the key clauses and extensions are not included.
In the worst cases, I’ve seen policies where the lender has not even been included as a co-insured on the policy! Often these can just be a result of an oversight from a placing broker - but from a financier perspective, this leaves them exposed if not addressed.
As investors remain focused on yield, this does mean that some are looking for larger projects or considering projects with more complex risks, so it is essential that financiers have confidence that the right insurance cover is in place.
Q. Can you provide an example of when something went wrong?
A. A big European institutional investor asked us to review the insurances for one of their projects, which is located in Africa. The loan agreement made it a requirement that the insurances contained certain Lenders Clauses, which all insurers and reinsurers had to agree on.
The placement included more than 30 insurers and reinsurers per class of business. The operating partner’s broker had finalised the placement yet several of the chosen markets had not agreed the lenders clauses. This was one of the many issues which were uncovered during the due diligence process.
This rendered the operating partner’s insurance non-compliant and also put our client at risk. Had a claim occurred, our client would have had little recourse. This is why it is important to carry out due diligence on both existing and new projects.
Q. Are you seeing any particular trends at the moment?
A. Many lenders when refinancing are deciding to have us sense check the facility insurance requirements and improve its requirements if needed. Increasingly they are moving away from copying and pasting the existing requirements and are instead going for a more tailored approach, with the insurance clauses pretty much being drafted from scratch.
Q. What might change for due diligence in the next few years i.e what external factors are shaping how lenders/project stakeholders are behaving or the projects they are investing in?
A. The economy will always dictate the strategies that lenders will use to select their investments and insurance market cycles will also play a part in that. However, I’m seeing a lot of activity in the refinancing of existing projects as well as an uptick in construction activity for Grade A office blocks, refurbishments of older stock in city centres, and also developments in industrial estates. It seems like re-generation of existing sites is gaining more interest. I’m also seeing a lot of new investment in the renewable energy sector.
Q. If you had a top tip for companies that should be using Due Diligence services but currently don’t, what would it be?
A. Due diligence gives you peace of mind; it ensures an expert helps with the drafting of insurance requirements (refinancing/new deals only), reviews the insurances (either proposed or existing at the different stages) and ensures your interests are protected.
If due diligence is not used you’re relying solely on the word of your operating partner that they are complying with the Project Agreement Insurance requirements, that the covers are suitable and that appropriate insurers have been selected. Most lenders I work with simply aren’t happy passing this responsibility to the operating partner when they have so much to lose.
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