TABLE OF CONTENTS Covenants are undertakings by the Project Company either to take certain actions ("positive" or "affirmative" covenants), or not to do certain things ("negative" or "protective" covenants). These undertakings by the Project Company are a characteristic of project finance, being more comprehensive and detailed than usually found in other types of financing. (These controls are typically less stringent for a bond issue cf. 5.3.) It is through the covenants that the lenders exercise their continuing control over the construction and operation of the project, but they may need to take care that this control does not also make them liable for Project Company obligations to third parties; for example, in the United Kingdom, if lenders are deemed to have acted as "shadow directors" of an insolvent company, this could create liability for them towards other creditors.
The main purposes of the covenants are:
To ensure that the project is constructed and operated as agreed with the lenders
To give lenders advance warning of any problems that might affect the Project Company
To protect the lenders' security
If the Project Company is not able to comply with a covenant, for what the lenders consider to be a good reason, a temporary or permanent waiver of the requirement can be given (cf. 13.12). Since many lenders have to go through a formal credit approval procedure for even quite small waivers of this type, the covenants on the Project Company should not be so restrictive that it has to keep requesting such waivers.
Typical positive covenants by the Project Company include obligations to:
Maintain its...
