International investment treaties guarantee specific standards of investment protection to foreign investors making investments in host states, and usually provide a direct route to arbitrate claims against the state. Such treaties can help to protect investors against measures taken by the host state which adversely affect the investment. These protections can be very valuable if problems arise with large-scale, and costly, projects in the renewable energy, infrastructure, and traditional energy sectors.

Usually, however, a claim under an investment treaty would be brought by equity investors in a local project company. Claims by third-party financiers are rare.

Although lenders to a financed energy or infrastructure project will try to insulate themselves from project risks, in reality project finance lenders do take significant investment-type risks when they lend to projects, particularly where recourse to the project equity investors is limited. A common project finance structure would see a special purpose project company owned (directly or indirectly) by offshore equity investors, with financiers lending to the project company 50% to 80%, or more, of the cost of developing the project. The lenders may have to rely on cashflow generated by the project company to service the debt, meaning that if the project company is unable to make debt repayments the lenders would not have recourse to the equity investors. If the actions of the government of a project’s host country affect the project company’s ability to generate cashflow, its financiers could be left with a non-performing loan and limited avenues for redress.

While the tribunal’s decision in Portigon AG v Spain is not yet publicly available, if reports are accurate, then this marks the first time a tribunal has confirmed that a third-party financier providing this type of funding to a project company has made a protected investment. While the merits of the claim are still to be argued, this is a welcome decision for investors in large-scale, complex projects, particularly in the renewables sector, where regulatory changes by states can significantly impact the viability of projects.

Actions for investors and lenders

In any large-scale project, both equity investors and third-party financiers should be looking from the very start of the project to maximise the protections afforded to their investments. Alongside other common protections against host government actions, such as political risk insurance and direct agreements between lenders and host governments, the availability of investment treaty protection should be considered. To benefit from investment treaty protection, parties should ensure they include assessment of potentially applicable investment treaties in their deal due diligence. The structuring of investments often depends on tax considerations, but the availability of investment treaty protections is an important part of structuring analysis that ought to be considered by both equity investors and lenders. It may also be possible to re-structure existing investments to benefit from treaty protections, provided a dispute has not yet arisen.

Lenders should also pay particular attention to recording any commitments of the host state on which the lender relies when making its investment and they should consider investment protection issues when making any changes to existing financing arrangements (such as syndication, securitisation, assignment or refinancing).