6 Competing Considerations in Intercreditor Agreements
Project finance lenders , however , require payment of principal and interest regardless of the mine ’ s production levels or the level of commodity prices – meaning that project finance debt is arguably a riskier proposition for a mining company , as it entails incurring a fixed liability to be settled using the proceeds of uncertain revenues .
Lastly , a streaming agreement may be a highly effective solution for a mining company in securing a guaranteed long-term purchaser for a mine ’ s non-core products , which may be advantageous if there is not a particularly liquid or accessible market for that metal .
Intercreditor Agreements
Most project financing arrangements will include different classes of secured creditors , such as the providers of senior secured debt and the providers of secured interest rate and / or commodity hedging arrangements . This will typically mean that those secured creditors will require an intercreditor agreement to regulate , amongst other things , how those secured creditors may exercise and enforce their rights . A key function of an intercreditor agreement is to set out how the various creditors rank , and how those creditors would share in the proceeds of the enforcement of any secured assets .
The finance market for mining projects has evolved such that , broadly speaking , the providers of senior project finance debt have first priority , with a Stream Investor and / or a Royalty Holder ranking second in priority . As between a Stream Investor and Royalty Holder , they may rank pari passu or with such other hierarchy as is negotiated between both parties ( depending on a number of factors , including timing and quantum ). The intercreditor agreement regulates the claims of each of these separate classes of creditor in a legally valid , binding and enforceable contract .
Intercreditor Considerations for Stream Investors and Royalty Holders
There is no set LMA 1 or LSTA 2 template for a project finance intercreditor . As such , it remains possible for a Stream Investor or Royalty Holder to seek to negotiate intercreditor terms that are bespoke to its requirements ( and potentially those of the mining company ).
Some of the key considerations for Stream Investors and Royalty Holders in any intercreditor agreement are as follows .
Cashflow waterfall
A “ cashflow waterfall ” regulates the priority of payments made by the borrower ( the mining company ) under a project financing . The treatment of any Stream Investor or Royalty Holder within the cashflow waterfall for the project financing may be a highly negotiated point , although the usual opening position would be that , in the ordinary course , a Royalty Holder will seek to categorise its royalty payments as operating expenditure , meaning that those payments would be made at the top of the cash waterfall ( above payments of principal and interest under the project finance loans ).
In the case of a Stream Investor , the “ payment ” made by the mining company is in the form of delivery of the relevant metal or mineral , so the issue is less contentious , as the project finance lenders will wish to ensure that the revenue received for those deliveries ( albeit at a discount ) is available to service their debt .
The project finance lenders will likely seek to alter the standard position with a Royalty Holder in a downside scenario ( that is , following the occurrence of a material event of default under the project finance loan documentation ). In such a scenario , project finance lenders will typically seek that the royalty payments are no longer paid at the top of the waterfall , but are instead subordinated below repayment of principal and interest due under their project finance loans .
A Royalty Holder will typically seek to ensure that no amendments can be made to the cash waterfall that could or would impair their preferential position in the waterfall .
Termination of the stream / royalty
Project finance lenders may also seek the right to suspend or terminate the ordinary operation of the arrangements under a streaming or royalty agreement if they were to accelerate the project finance debt ( meaning that the project finance debt would be stated to be immediately due and payable ). The benefit to the project finance lenders of terminating or suspending :
■ a streaming agreement , is that the mining company would then be able to sell the relevant product at the full market price without a discount ; and / or
■ a royalty agreement , is that the mining company would retain more revenue or profit , in each case , allowing the project finance lenders to recover their debt more quickly . Stream Investors and Royalty Holders are likely to be highly resistant to this proposition , and insist that any purchaser following a sale on enforcement by the senior project finance lenders continues to be bound by its streaming agreement or royalty agreement . This is typically a key concern for any Stream Investor or Royalty Holder .
In intercreditor discussions , lenders may also seek the right to terminate a stream or royalty if there is an enforcement of share security over the mining company in order to sell the mining company to a third party , so as to obtain a better sales price . This would be on the basis that an unfettered company / asset with the potential to fully maximise sales revenue will be more attractive to purchasers . This is also typically a highly negotiated point and again the Royalty Holder and Stream Investor will want their positions to be preserved through any such sale .
Enforcement
Stream Investors and Royalty Holders may seek to negotiate the ability to enforce any rights they may have as an unsecured thirdparty creditor ( or by virtue of the applicable laws of that jurisdiction ) regardless of the provisions of the intercreditor agreement .
Governing law
The governing law of the intercreditor agreement may , more than is typical , be an important consideration for the Stream Investor or Royalty Holder . For example , under an English law governed intercreditor agreement , enforcement would typically always be led by the first-ranking creditors ( e . g . the project finance lenders ); whereas , in certain North American jurisdictions , there may be more flexibility and willingness to permit second- or thirdranking creditors to lead any enforcement action .
© Published and reproduced with kind permission by Global Legal Group Ltd , London
Mining Law 2023