HomeIndustry SectorsBusiness and marketsUsing notarial bonds as security for financing of renewable projects

Using notarial bonds as security for financing of renewable projects

The South African energy sector has seen the uptake of renewable energy in the last few years. These projects require a substantial amount of financing and the registration of a notarial bond plays a vital role as a form of security in financing these renewable energy projects.

Unsurprisingly, numerous renewable energy projects have been completed, are still being constructed and are planned to be constructed in terms of the different bid windows of the South African Government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

On the premise that a renewable energy project is financed through a project finance structure, the registration of a notarial bond plays a vital role as a form of security in financing renewable energy projects.

A notarial bond secures the primary movable assets of the project (for example, the wind turbine generators and solar panels) that are responsible for generating the cash flows required to repay the lenders’ loans.

The registration of notarial bonds is required in addition to the registration of a mortgage bond over the land owned by the project company, or over the long-term registered notarial lease entered into between the project company and the landowner, as well as any other security that may be required by the lenders.

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Some context to the financing of a renewable project

The Request for Proposal for the procurement of new generation capacity of 2,600MW under the REIPPPP bid window 5 was recently released which aims to procure the development of 1,600MW of energy from wind farms and 1000MW from solar photovoltaic power plants. The development, operation and maintenance of renewable energy projects require high capital investment which is usually financed through a project finance structure.

The main reason for this is because renewable energy projects entail the long-term financing (usually 25 years) of the project infrastructure based on projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a renewable energy project financing structure involves a number of equity investors, known as “sponsors”, and a syndicate of banks or other lending institutions that provide loans to the operation.

The financing is typically secured by all of the project assets (by way of mortgage and notarial bonds) including the revenue-producing contracts. The lenders are also given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.

What serves as security under a notarial bond in a renewable energy project?

Generally, security serving under a notarial bond may be corporeal movable things such as furniture, the goods of a business, animals or incorporeal things such as a short term lease of immovable property, an unregistered lease or a liquor license.

In the context of renewable energy projects, when registering a general notarial bond (GNB), the drafting is fairly simple, as the GNB secures all of the project company’s movable assets generally, and there is no requirement to specify the movable assets in the GNB.

In contrast, when registering the special notarial bonds (SNB), it becomes a bit more complex given the size of the projects, the numerous assets falling under the scope of the project and the statutory requirements embedded in the Security by Means of Movable Property Act 57 of 1993 (SMMP Act) to describe each asset with sufficient specificity. By way of example, a wind farm project would usually consist of inter alia 

  • a substation;
  • wind turbine generators;
  • pad-mounted transformer kiosks;
  • meteorological masts; and
  • transmission cables,

All of the above have sub-components. For example:

  • A single substation could inter alia consist of numerous circuit breakers, current transformers, voltage transformers, disconnectors, surge arrestors, power transformers, switchgear, panels, distribution boards and generators; and
  • A wind turbine generator could inter alia consist of blades, tower units, nacelles and a generator.

The size and complexity of these projects have meant that special notarial bonds need to contain detailed descriptions of almost every component in order to comply with the statutory provisions of the SMMP Act. Therefore, each asset must be described with reference to the asset description, manufacturer details, serial numbers, GPS co-ordinates for the location of the asset and photos of the asset.

Normally, the notary responsible for the drafting of the SNB will conduct a site visit to verify the asset descriptions and to ensure that they are accurately and sufficiently described in the SNB.

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Duties of a notary

A notarial bond, whether being a GNB or SNB, must be executed by a notary and registered in the relevant deeds registry. The notary attending to the registration of the GNB and the SNB must be careful when drafting the respective notarial bonds.

If for example, the assets are generally bonded, and provision is not made for the attachment of the movable assets, then the court will not grant an order in favour of the creditor. If for example, the movable assets secured by a SNB are not sufficiently described in a manner that complies with SMMP Act, then the SNB will not be regarded as real security and the lender will not be afforded the protection afforded on insolvency.   

It should further be noted that a notary is instrumental in transmitting contractual actions by means of legally enforceable notarial deeds executed before him/her, to third parties, with the latter being able to rely on the accuracy of the information [Reference: Van der Merwe FE, Notarial Practice, Butterworths, Durban, 2001, at 12]

This means that every statement in the notarial bond is presumed to be correct and should it, in fact, be found that it was false, the notary responsible for the drafting of the notarial bond can be held liable in a court of law.

Conclusion

When lenders finance renewable energy projects, monies are advanced and while the idea of being part of innovating South Africa’s energy space is attractive, no lender will advance monies in a project finance transaction without having sufficient security over the assets that are the primary drivers of the cash flows required to repay their loans.

Registering notarial bonds enables the project company to unlock the full value of the renewable energy project assets and provide the lenders with the necessary comfort for their investment.

This is an edited version of an article written by Johan Coetzee, Partner, Jacques Marais, Associate and Arlina Ramothar from Fasken

Guest Contributor
The views expressed in this article by the author are not necessarily those of the publishers and/or association partners. While every effort is made to ensure accuracy, the publisher and editors cannot be held responsible for any inaccurate information supplied and/or published.

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