Security for non-recourse infrastructure finance in Bangladesh

In a non-recourse or limited-recourse financing the lender's recovery depends on the project, not on a sponsor balance sheet. That makes two questions decisive: what the lender can take security over, and what happens to the project when something outside the project's control goes wrong.

Assembling the package

A Bangladeshi security package is built from instruments drawn from different statutes, each with its own creation, registration and priority rules:

• Mortgage over immovable property, created and registered under the Transfer of Property Act and the Registration Act.
• Charge over company assets, registered with the Registrar of Joint Stock Companies and Firms within the statutory period — a deadline that is not forgiving.
• Hypothecation of movable plant, equipment and inventory, with the practical difficulty that possession remains with the borrower.
• Assignment of project agreements, insurances and receivables, with counterparty consents and acknowledgements obtained at the outset rather than at enforcement.
• Pledge of shares in the project company, with transfer mechanics that work under the Companies Act 1994 and the articles.
• Account control and cash waterfall arrangements with the onshore account bank, supported by offshore collection accounts where exchange control permits.

Perfection is formal. Failures of registration and stamping are the most common defect found in diligence, and they are generally not curable on favourable terms once a borrower is in difficulty.

Step-in and enforcement

Security is only valuable if it can be realised. A direct agreement with the offtaker and with the relevant government counterparty, providing lenders with notice of default and a right to step in and cure, is often worth more than any additional charge. Enforcement through the courts under the Artha Rin Adalat Ain is available but slow; the structure should be designed so that consensual substitution of the sponsor is the likely path.

Risk cover outside the package

What the security package cannot address is country risk: expropriation, currency inconvertibility and transfer restriction, breach of government undertakings, and political violence. For projects of scale these are covered by instruments that sit alongside the security — political risk insurance, partial risk guarantees from multilateral institutions, and export credit agency cover. Where a government support package is thin, that cover is frequently what makes the difference between a bankable project and a presentation.