The Rise of the Put-Call Option Agreement
The put-call option agreement (PCOA) proposed by the Nigerian government as part of the Azura IPP in 2015 was the first of its kind. For the lenders and investors to that project it was new ground for a project financing and much deliberation and analysis followed before it was ultimately adopted. Fast-forward two years and the PCOA is now being considered across a variety of projects in Africa. By 2020 the PCOA may become a staple feature of any host-government’s toolkit if it is seeking to attract international financial investment.
What is a PCOA?
A PCOA is a contractual arrangement between a host government and a project company. It provides for:
- a “put” option in favour of the project company, entitling it to “put” the project assets to the host government following the occurrence of certain agreed triggers; and
- a “call” option in favour of the host government, entitling it to “call” for the project assets following the occurrence of certain agreed triggers.
In each case the exercise of the put or call will require the host government to make a payment to the project company or its shareholders. Lenders receive the benefit of these arrangements indirectly through direct agreements and their security package.
Why are host governments considering PCOAs?
A PCOA is an alternative to a traditional sovereign guarantee or letter of support. These instruments have typically been used to underwrite the obligations of a government agency or ministry to pay compensation on termination of a project. Like a guarantee or letter of support, a PCOA can be rolled out for an IPP, PPP or a project financing, where some form of sovereign support is deemed to be necessary to attract investment. Unlike a traditional guarantee or letter of support, the PCOA can, if properly structured, avoid being classed as a liability on the balance sheet of the host government. This is extremely attractive for host governments which are concerned about their debt burden or which have obligations to the World Bank or IMF.
What to look for?
The express terms of a PCOA will need to be reviewed closely to ensure it achieves the stated aims of the host government and private sector investors. Examples of the key concerns for investors include:
- When can the put or call option be exercised? Does it allow the project company to put the assets to the host government in the event of default by the host government or project company? Does the host government have the right to call for the assets at any time?
- What payment falls due in in the event that the put or call option is exercised? Is this payment sized in the same way for put and call alike? Does it cover debt and equity return in the way that a typical sovereign instrument would?
- Is it expressed to constitute a guarantee by the host government? Whilst the express terms of the PCOA will be of paramount importance, local legislation governing the issuance of sovereign support will be of equal significance and will need to be considered on a case-by-case basis.
The Azura PCOA broke new ground. Other IPPs in Africa, such as the Bridge Power Project in Ghana (on which Norton Rose Fulbright are advising), already have approved PCOAs. Equally, other sectors are beginning to explore the PCOA structure. With clear benefits for a host government, we think it is safe for investors to assume that the PCOA is on the rise.