The Project Finance Law Review: Project Cash, Typical Account Structures and Project Cash Waterfalls


As discussed elsewhere in this work, the basic project finance structure provides limited or no recourse for the lenders following completion of construction. Given the limited nature of revenue sources for a typical project financing (e.g., a sole power purchase agreement or limited liquefied natural gas sales agreements), the control of the cash generated from these sales is paramount for ensuring the lenders are repaid. As long as the lenders can establish a reasonable means of controlling the flow of funds through the project company, they will typically agree to take operating risk from the project. The means of obtaining this control is an agreement among the borrower, the administrative agent for the lenders and the collateral agent (if different than the agent). The basic structure of a collateral and accounts agreement (accounts agreement) is to establish a series of bank accounts under the control of the collateral agent that will provide a road map for exactly how funds will be received, allocated for the project, and ultimately distributed to the equity owners. These accounts are established in a cascading order of priority (i.e., a waterfall structure) so that when the first account is full (or not applicable), the account below is filled until finally the money will be distributed to the borrower from the lowest account level in the waterfall.


The backbone of an accounts agreement is the accounts themselves. There is significant variation in the level of complexity of an accounts agreement depending upon the nature of the underlying transaction. At the extreme end of the continuum of complexity is an accounts agreement that must contemplate more than one borrower (e.g., an aggregation structure), onshore and offshore collateral accounts that will need to address more than one currency (hard currency-denominated accounts and local currency accounts), multiple jurisdictions for the accounts themselves, a complex tax structure and finally, the relevant construction and commercial accounts. Depending on the underlying commercial transaction, these structures can be simplified significantly. An international project financing that has lenders in a major financial centre (e.g., New York or London) and a borrower based in a third jurisdiction (e.g., in the developing world) will typically have, at a minimum, the following accounts.

i Revenue account

The revenue account is designed to receive all revenue generated by the project, including from the sale of goods, performance of services, sale of obsolete equipment, etc. Any activity that generates revenue for the project will be deposited into the revenue account. Depending on the nature of the transaction, there may be an offshore and onshore revenue account. If revenue is generated in local currency, it will be deposited into a local revenue account (onshore local currency). Typically, lenders prefer accounts that receive money in local currency to convert these funds to hard currency as soon as possible and transfer them to an offshore revenue account (e.g., dollar-based revenue account in New York).

ii Construction account

The construction account is designed to distribute all monies related to the construction of the project. If there is a split engineering, procurement and construction contract (offshore and onshore) or if the project itself has onshore and offshore accounts, there will be a hard currency construction account and a local currency construction account. Money will typically be deposited by the borrower and the lenders in the offshore construction account. For amounts that are payable in hard currency, the borrower will instruct payments to be made to the contractors of the project through the offshore account. To the extent that amounts are payable in local currency, amounts will be converted into local currency and deposited into the onshore construction account for payment to be made to the onshore contractors. For international project financing, it is very typical for some costs to be denominated in local currency and other costs to be denominated in hard currency.

iii Operating account

This account is designed to cover the ongoing expenses of the project from the amounts initially paid into the revenue account. This is a general account for the payment of operation and maintenance expenses, together with general ongoing expense (e.g., taxes, payroll, etc.). Lenders typically require annual and rolling three- or five-year budgets. The amounts payable from these operating accounts are then compared to the budgeted amount to determine the overall status of the project. Similar to the payment of construction expenses, there are often onshore and offshore expenses that necessitate onshore and offshore operating accounts.

iv Maintenance reserve account

A maintenance reserve account is designed to allow the project to slowly accumulate funds for major maintenance or a major overhaul of the equipment. The rate at which this account is filled is based upon the recommended maintenance cycle from the manufacturer of the equipment. For example, if every five years major maintenance were required for a major piece of equipment, the account would require 20 per cent of the estimated costs to be deposited each year so that 100 per cent of the costs would be available in the five-year cycle. Similar to the construction account and operating account, this expense-related account will typically have an onshore and offshore account structure. Not all project financings have a maintenance reserve account. For example, it is typical for the borrower in a power project to enter into a long-term service agreement with the manufacturer of the turbines that includes major maintenance imbedded in the annual fee (i.e., the reserve account is not required because the payment scheduled is levelised to take into account periodic major maintenance).

v Lost proceeds account

Given the limited recourse available to the lenders in a project financing, lenders require a robust insurance package to be put in place to address catastrophic losses. If an event of force majeure occurs that results in catastrophic loss to a significant portion of the project, the insurance proceeds received under the insurance policies will be deposited in the lost proceeds account. If the project is not capable of being rebuilt or repaired to permit the project to operate at or near its prior level of operations, the insurance proceeds will be used to prepay all or a portion of the loan. If the project is capable of being rebuilt or repaired (following confirmation by the independent engineer), the insurance proceeds will be used to rebuild the project. The credit agreement will typically provide detailed provisions regarding the ability of the borrower to use insurance proceeds.

vi Debt service reserve account

The debt service reserve account is not an operating account (i.e., it is not used on a regular basis). The account is designed to be filled (often with initial borrowings) and maintained as a reserve. Ideally, the account is never used by the lenders. Because of this 'dead money' problem, borrowers will often seek to post a letter of credit or other security in lieu of maintaining several months of payments in a debt service reserve account.

vii Distribution account

This account is designed to let the borrower distribute funds to itself following satisfaction of all of the requirements in the credit agreement and the accounts agreement. Typically, amounts can only be distributed on a periodic basis from this account (e.g., every three months). If an event of default occurs (regardless of whether it is a technical default such as a failure to maintain a particular coverage ratio or an actual payment default of amounts due), this account is locked and no distributions may be made until the event of default is cured. The credit agreement will often have a provision that states that if amounts have been held in the distribution account in excess of a specified period (e.g., 12 months) because the account has been locked owing to an event of default that remains uncured, the amounts in that account will be used to prepay the loan.

viii Other

In any given transaction, there may be a need for additional reserve accounts (e.g., specific maintenance reserve accounts related to specific equipment or a tax reserve account) or additional operational accounts (e.g., revenue is received from more than one source or payments must be made by more than one borrower or guarantor). Separately, if additional loans are being made based upon distinct collateral (e.g., VAT loans), a parallel accounts structure will need to be established to synchronise with the traditional collateral accounts structure.


The fundamental reason for the account structure is to provide the secured creditors with accounts over which they have a valid lien that is first in priority (in comparison to other potential creditors). In all jurisdictions, the type of collateral in which a lender is taking a security interest will dictate the mechanism for perfecting the security interest. For example, in the case of real estate (immovable assets), the secured parties are required to file in a local real estate registry to put all third parties on notice of the encumbrance upon the real property. For other collateral, the filing of a financing statement will be sufficient as long as it describes the collateral that is being encumbered by the secured parties and is filed in the appropriate commercial registry. While it will depend in large part upon the requirements of local law, there is some level of commonality in all jurisdictions. With respect to the collateral accounts, because it is difficult to put third parties on notice of the encumbrance on the accounts, the most common way to have a valid encumbrance over a deposit account is to maintain 'control' over that account and be able to direct the flow of funds in that account.

The concept of 'control' can vary from jurisdiction to jurisdiction, but the general rule is that the borrower can place funds in deposit accounts that are opened in the bank of the collateral agent, which allows the collateral agent to exert control over those accounts. Thus, for an international project financing, there would be two collateral agents (onshore and offshore). Each of these banks would have accounts established by the borrower with them to provide sufficient control for the collateral agent. As an alternative, the borrower, a third-party bank and the collateral agent may enter into some form of control agreement that would allow the collateral agent to make elections and direct the flow of funds with the third-party account (i.e., a third bank would agree to receive instructions from the collateral agent regarding the transfer of funds from the controlled accounts). The final alternative would be to have the collateral agent serve as the actual owner of the account in lieu of the borrower, but this often presents logistical problems if the account is used for day-to-day operations by the borrower.

Once the basic structure of the collateral accounts is established, the specific treatment of each account is further developed in the accounts agreement (e.g., these accounts may be segregated). For example, one tax complexity that would need to be addressed in some jurisdictions is the treatment of value added tax (VAT) loans (essentially credits issued by the government that can be financed as part of an 'equity' package) that are part of the overall transaction, but receive different treatment with respect to the collateral. Certain lenders may be a secured party in all of the collateral accounts established under the accounts structure, while other lenders only have rights to specifically identified accounts. In the scenario of a VAT lender, the VAT lender may only have priority rights to the VAT collateral accounts and may have a secondary lien on the overall project account. The inter-creditor agreement will establish the relationship between the secured parties, which will include the lenders and certain hedge providers (e.g., interest rate hedges or commodity hedges). The accounts agreement will merely reflect the commercial understanding reached by the various secured parties under the inter-creditor agreement regarding priority to the collateral accounts.

In addition to establishing the various collateral accounts and granting a first priority lien in favour of the collateral agent for the benefit of the secured parties, the borrower may grant secondary liens to certain secured parties to the extent permitted under the accounts agreement. Other than as specifically stipulated in the accounts agreement, the borrower agrees not to allow any additional liens or encumbrances to be placed on any of the collateral accounts. The net result is a first priority lien for the secured lenders of collateral accounts that are under the control of the bank.


The collateral accounts agreement establishes the mechanism to ensure that all sources of income flow through the collateral account waterfall. To capture all revenue generated by the project, the collateral account structure will require the borrower to deposit all hard currency and local currency into the applicable revenue accounts. It will also prohibit the borrower from opening any new bank accounts or from depositing money in any account outside of the control accounts. In this way, all revenue derived from the project is subject to the waterfall and the repayment of the loan, and there is no 'leakage' of funds.

The accounts agreement also requires all debt and equity funding to be deposited in the collateral account structure. This applies to cash calls made by the equity owners of the project as well as borrowings under the credit agreement. As a result, all funds contributed as equity or debt in connection with the construction of the project are subject to the collateral account structure. One common exception to the obligation to deposit all capital requirements for the project is the recognition received for the benefit of the borrower for expenditures in the development of the project (e.g., obtaining permits or land rights) made prior to the establishment of the collateral accounts. The borrower will get credit for these prior expenditures as part of its mandatory equity contribution, which allows the borrower to maintain the required debt-to-equity ratio established under the credit agreement or to make any required equity contributions prior to making any borrowings under the credit agreement (some credit agreements require all equity contributions to be made prior to any borrowings).


Equally important for establishing the overall structure of the collateral accounts is to create the framework for how monies are transferred or withdrawn from the accounts. Once money has been deposited into the collateral account structure, the accounts structure must then delineate how the monies will be transferred, including to a lower priority account (i.e., lower in the waterfall), as payment of an expense, as a reserve or as a distribution to the equity holders of the project. To make a withdrawal, the borrower must provide a certificate to the collateral agent setting forth the mechanism under which the borrower would like to make a transfer from one account to another. This applies to transfers through the entire waterfall structure that are eventually subject to being distributed out to the equity owners. The ability of the borrower to make transfers is greatly curtailed during an event of default. The lenders will typically provide written instructions to the collateral agent regarding how funds are to be treated in the collateral accounts. If the amounts on deposit are insufficient to make a required payment, the borrower will always remain responsible for any deficiencies. Failure to have sufficient funds available to make a payment under the loan does not relieve the payment obligation. If the monies available are insufficient (e.g., there is a default by the offtaker), the only way the lenders may be able to recover the loaned amounts is through a forced sale (foreclosure).

For each account, there is a specific waterfall that is established under the collateral accounts agreement. Not all accounts necessarily flow from one to another (i.e., there is not one waterfall, but rather a waterfall for each account that depends on the nature of the account). For example, a revenue account will never flow down to a loss proceeds account (insurance proceeds) because they are addressing different events. A typical revenue account priority structure is set forth below. The structure for both an offshore revenue account and an onshore revenue account are similar (if the mirror image in many ways) as funds are required to flow between the two accounts. This example is merely intended as a representative example of how the structure works with both an onshore account and an offshore account. The actual priority and specific accounts are always negotiated. In this example, revenue will be deposited into the onshore revenue account in local currency, and funds will be paid out as follows: first – to all fees, cost and expenses payable to the administrative agent and the collateral agents; second – to the hard currency revenue account in the amount necessary to cover any shortfalls under the offshore revenue account waterfall (i.e., the onshore waterfall will be used to remedy any offshore shortfalls); third – to the local currency operation and maintenance account for payments in the next 30 days (onshore); and fourth – to the hard currency revenue account (the remaining amount in local currency that will be converted).

Once revenue in local currency has either been allocated for onshore payments of maintenance or converted and moved offshore to the hard currency revenue account, the accounts agreement establishes a separate waterfall for all hard currency revenue accounts. For revenue deposited into the offshore revenue account, the priority of payment in the current example would be as follows: first – to all fees, cost and expenses payable to the administrative agent and the collateral agents; second – to the local currency revenue account in the amount necessary to cover any shortfalls under the onshore revenue account waterfall (i.e., the offshore waterfall will be used to remedy any onshore shortfalls); third – to the hard currency operation and maintenance account for payments in the next 30 days (offshore); fourth – to the debt service reserve account; fifth – to the major maintenance reserve accounts; sixth – to the offshore construction account (in the case of a phased construction with parts of the facility reaching commercial operations while other phases of the project remain under construction); and seventh – to the hard currency distribution reserve account (for distribution to the equity owners of borrower).

Once all the conditions are satisfied with respect to any given account, the priority system of the next account will apply to allow funds to flow to the final account in the waterfall. All conditions must be satisfied for the funds to be moved to the next account.


The accounts agreement will set forth the permitted investments for amounts on deposit. They are temporary investments that are normally low-interest-bearing accounts that have virtually no risk associated with the investment. Owing to the nature of the accounts, which are only designed to hold funds for a limited amount of time, and the risk tolerance for the investments in those accounts, the net result is an extremely conservative investment profile for the funds held in the accounts. There is no obligation for any of the agents to invest those funds, but there is the ability to do so if it makes sense under the circumstances.

Get unlimited access to all The Law Reviews content