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Wednesday, December 12, 2012

Expanded Scope of the Proposed Equator Principles III

The Equator Principles (EP) is an agreement amongst 76 global financial institutions to apply environmental and social standards to certain investment decisions. The third iteration of the EP is set to be released in January 2013 (“EP III”).

A draft of EP III was released in August 2012 suggesting what the final contents may look like. As before, EP III will apply to project financings of EPFI over $10 million.

The Equator Principles Association refers to the Basel II definition of project financing which is:

“a method of funding in which the lender looks primarily to the revenue generated by a single project, both as a source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment and telecommunications infrastructure…”

The strategic review leading to EP III reviewed the definition of “project finance” in light of concerns that project financings with challenging environmental and social risks were being disguised as corporate loans to avoid application of Equator Principles. The recommendation of the strategic review was to widen the scope of the Equator Principles to apply to corporate loans where fifty per cent or more of the proceeds of that loan are being used to finance a single asset.

The latest draft of the EP III has extends the scope of the agreement to apply to the following financial products:

• Project Finance Advisory services where the total Project capital costs are US$10m or more

• Project-Related Corporate Loans where the following all apply:

(i) the loan relates to a single Project

(ii) total aggregate loan amount is not less than US$100m

(iii) EPFI’s individual initial exposure is at least US$50m

(iv) loan tenor is at least 2 years; and

(v) Borrower has “Effective Operational Control” , either direct or indirect, of the Project

Bridge Loans with a tenor of less than 2 years that are intended to be re-financed by a Project Finance or a Project-Related Corporate Loan.

If this expanded scope is approved, the EP III framework will apply to these activities of EPFI on a going forward basis (not retroactively), including expansions or upgrades of existing facilities if such expansions or upgrades may have significant environmental and social impacts or change the nature or degree of existing impacts assessed under prior versions of the EP.

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