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Standfirst: A project finance term sheet is not a summary of the deal. It is the document that decides who actually controls the asset the day something goes wrong, and what a sponsor must prove, contract by contract, before a single dollar of debt is disbursed. For anyone evaluating consortium entry, the clauses that matter are rarely the ones in the executive summary.
I. Conditions precedent are not paperwork, they are sector reform disguised as a checklist
A condition precedent (CP) is a requirement that must be satisfied before lenders release funds. In a mature market, CPs are largely administrative: insurance in place, permits filed, security perfected. In a Nigerian power or infrastructure financing, CPs routinely function as leverage to force sector-level fixes that have nothing to do with the individual project.
The clearest example is Azura-Edo. Among the conditions precedent to that financing were requirements that Nigeria’s power sector maintain a cost-reflective tariff sufficient to cover repayment of the facility and other market participants’ obligations, and that the underlying electricity sector contracts be activated to ensure adequate remedies existed between parties in the event of payment risk. In effect, lenders would not release nearly a billion dollars until the surrounding regulatory environment, not just the project company, met a bankability standard.
The lesson for anyone assessing a live Nigerian infrastructure deal: read the CP schedule for conditions that reach outside the project company. A CP tied to tariff methodology, sector contract activation, or a specific government undertaking is a signal that lenders view the sovereign and regulatory environment, not the sponsor’s engineering, as the primary risk to be closed out before financial close.
II. Direct agreements are where step-in rights actually live
A term sheet’s covenant package tells lenders what the project company must and must not do. Direct agreements tell lenders what they themselves are entitled to do when the project company fails to do it. This is the distinction most read-throughs miss: covenants constrain the borrower, direct agreements empower the lender.
In the Azura-Edo financing, lenders secured direct agreements attaching to each of the project’s core commercial contracts, specifically a Power Purchase Agreement direct agreement, an Operations & Maintenance direct agreement, an EPC direct agreement, and a Put and Call Option Agreement direct agreement. Each one gives lenders the contractual right to step into the sponsor’s position under that specific contract once a default has occurred, rather than having to unwind the whole financing and start over with a new counterparty.
| Direct agreement | Counterparty it runs against | What step-in actually permits |
|---|---|---|
| PPA direct agreement | Offtaker (e.g. NBET) | Lenders can continue delivering power and collecting revenue under the existing tariff, rather than the PPA terminating on sponsor default |
| O&M direct agreement | Operations contractor | Lenders can keep the existing operator in place and paid, preserving asset performance during a sponsor-level default |
| EPC direct agreement | EPC contractor | Lenders can step in mid-construction to complete the build using the existing contractor, rather than losing the build slot entirely |
| PCOA direct agreement | Government (put/call counterparty) | Preserves the put option’s exercisability for lenders even if the original sponsor entity is displaced |
Without this structure, a sponsor-level default would force lenders to either accept a fire-sale of a half-built or newly operating asset, or attempt to renegotiate every commercial contract from scratch, with a lender, not an operator, at the table. Step-in rights are what let a project survive a sponsor’s failure without every counterparty contract collapsing with it.
III. The PCOA as a covenant substitute, not just an exit clause
The put and call option agreement, first used in Nigeria on Azura-Edo, is sometimes described as simply a wind-down mechanism. It is better read as a covenant-equivalent: it fixes, in advance, the financial consequence of specific default and termination scenarios, so lenders are not negotiating a termination sum after the fact under duress.
Under Azura’s PCOA, the project company and its lenders hold a put option requiring the Nigerian government to purchase the plant, or the shares in the project company, at a pre-agreed price if the Power Purchase Agreement terminates on specified trigger events, with that purchase price set, at minimum, to cover the outstanding project debt. The government correspondingly holds a call option, letting it require the project to be transferred to it or its designee under defined circumstances. Structuring it this way gave Nigeria comfort that it would always receive an asset, the plant or its shares, in exchange for any payout, rather than simply guaranteeing a cash termination sum with nothing recovered in return, which is the standard sovereign guarantee approach the PCOA was designed to avoid.
For a consortium reading a term sheet today, the presence or absence of a PCOA-style mechanism, versus a simple sovereign guarantee, or nothing at all, is one of the fastest ways to gauge how much of the government’s own exposure has actually been pre-negotiated, as opposed to left for a future dispute.
IV. What to actually check before signing on
- CP schedule: does it stop at the project company, or does it reach into sector-level tariff, contract, or regulatory conditions? The latter signals a longer, harder path to financial close, but also more durable bankability once achieved.
- Direct agreements: are they in place for every material counterparty contract (offtake, O&M, EPC), or only some? A gap in direct agreement coverage is a gap in what lenders, and by extension co-investors, can actually protect if a sponsor defaults.
- Termination economics: is there a PCOA-style, pre-agreed asset-for-payment mechanism, or only a promise to pay a termination sum calculated later? The former is enforceable before a dispute exists. The latter is a negotiation waiting to happen.
catch up: https://www.theprojectherald.com/non-recourse-vs-limited-recourse-nigerian-infrastructure/