The financial crisis has enhanced the precautions taken by
risk committees at financial institutions in Spain, as
elsewhere in the world, when approving new financing,
particularly for certain projects and sectors.
The new harsh standards of control and preventive analysis
of potential transactions have consequently increased the
willingness of structuring departments to come up with
innovative and risk-mitigation schemes to finance new projects.
In such context, banks are progressively reshaping the
traditional way of financing public works in Spain.
Traditional financing structures for this kind of projects
used to involve a direct loan to the company constructing the
project which was paid back by such company by using the future
cash flows received from the Public Administration upon
completion of the works.
This traditional structure was usually secured by a pledge
over such future credit rights deriving from the payments to be
made by the Public Administration and over any other rights
owned by the constructor borrower.
In such structures banks did not have a direct access to the
cash flows and required enforcement in order to be applied to
the repayment of the loan. Additionally, despite the existence
of any performance bonds, there was an interim period of
uncertainty between closing the financing and actually
achieving the works completion milestone, which triggered the
Public Administration payment obligations.
In order to mitigate those two main risks, the Spanish
financing institutions started using a new structure which has
become very common in Spain. It consists of the lenders
actually acquiring the future rights to be paid by the Public
Administration in exchange for the construction of the
The purchase price would be the actual value of such cash
flows at a certain interest rate. This way the financing
institutions, instead of being pure lenders, become actual
owners of the future cash flows, gaining direct access to them
once such cash flows are actually due.
This structure is favourably accepted by the Public
Administrations in Spain, which are duly notified of the
transfer of their cash flows on closing date.
Additionally, to eliminate the risk of the works not being
completed, the financing institutions request a first demand
personal guarantee to be granted from official institutions in
the Public Administration, which remain in place until the
works are completely and duly executed and the credit rights
As a result, Spanish lenders replaced private risk by public
risk. The issue has now moved into the solvency of the Spanish
Public Administration involved (local, regional or state). In
any case, this structure has proved to be very efficient to
fund projects involving public works and credit rights from the
Spanish Public Administration.
Íñigo de Luisa and Agustín