Securitization of PPP project payment: reconfiguration of underlying assets

With the intensification of public-private partnership (PPP) compliance reviews and financial oversight, financing for PPP projects has become more difficult, and funding pressures on private investors have increased sharply. How to revitalize the vast quantity of works accounts receivable of PPP projects has become a hot issue holding the attention of the industry, and asset securitization is one path that is currently being tried. This article looks at reconfiguring the underlying assets during the asset securitization of works funds.

The asset securitization of PPP project works money has its own particular origin and background. It is a type of asset securitization of enterprise accounts receivable, with the underlying assets being the contractor’s claims that consist of the works accounts receivable under a PPP project.

The employer pays works progress money to the contractor on a monthly basis, usually paying for about 80% of the work quantities completed by the contractor during the month in question. In such a circumstance, as the payment period for the accounts receivable is relatively short, there is no objective requirement for the contractor to sell its accounts receivable claims for the period in question to raise financing.

However, in a PPP project, the employer is the project company controlled and established by the private investor. Due to the current financing environment, securing project finance is difficult for project companies, and the employer lacks sufficient funds to punctually pay the works money to the contractor. Furthermore, the contractor is usually the private investor itself, or an affiliate. If the contractor suspends work, what results is a breach by the private investor under the PPP project contract towards the public party.

Accordingly, the contractor has no choice but to advance funds to do the construction. Therefore, until the project financing has been fully secured, the private investor is essentially using only its own funds to implement the project, exposing it to major funding pressure. As a result, replacing the investment of one’s own funds by way of asset securitization of the works money is one of the few financing options available to a private investor at this stage.

From the above background, we can also see that the reason for opting for asset securitization of work money as a means of financing is often the inability to perform as agreed the payment of the works progress money under the original construction contract. In such a situation, the contractor’s works accounts receivable claims are in fact underlying assets that are past due and in default. Of course, it is difficult for such assets to serve as qualified assets that can be entered into a pool, therefore it is first necessary to reconfigure the above-mentioned underlying assets.

First, the payment date for the works accounts receivables needs to be reconfigured. The crux is adjusting the payment date for the progress money in default, resetting, based on the actual circumstances, a future realizable date for the payment of the project money and a payment ratio.

The project company and the contractor can enter into a supplementary agreement to the original construction contract, adjusting the date for payment of the works money and specifying the specific date for payment by the employer of the works money, and the amount outstanding at the time of the execution of the supplementary agreement, as well as the times at which the employer will pay the works money in future.

The timetable after the above-mentioned reconfiguration should mainly take into account the project company’s financing progress, and be consistent with the payment times for the other underlying assets in the pool, to ensure to the greatest extent possible that late payment of post-reconfiguration underlying assets does not occur, while also satisfying the collection and allocation of the dedicated plan’s cashflow and the recurring purchase arrangement.

Furthermore, the right of defence of the works accounts receivable debtor (i.e., the employer) also needs to be reconfigured. The Guidelines of the Shenzhen Stock Exchange for Confirmation of the Listing Conditions for Asset-Backed Securities That Consist of Enterprise Accounts Receivable specify that, “the transaction contract relating to the underlying assets shall be lawful and valid, the creditor shall have performed its obligations under the contract, the payment conditions specified in the contract shall have been fulfilled, there shall not be any advance payments, and the performance by the debtor of its payment obligations shall not be subject to any defence grounds or set-off”. However, whether works accounts receivable claims can satisfy the above requirements for underlying assets remains questionable.

The employer is required to pay the contractor the money for the works completed based on the progress of the works, and at the payment times and in the payment ratio specified in the contract, but strictly speaking, the works provided by the contractor cannot finally be confirmed as compliant works until they have passed final acceptance, and the employer has the right to require the contractor to rework or remedy works that fail to pass final acceptance and the right to lodge works claims against the contractor. So, with respect to the payment of works progress money, it can only be understood as provisionally not being subject to defence grounds.

Given the above, to ensure that underlying assets in a pool are defined and not subject to defence grounds, the exercise by the debtor of its right of defence needs to be reconfigured. Through reasonable risk mitigation measures, not only can the reasonable right of defence of the debtor be ensured, but they can also cause the stability of the underlying assets already in the pool to remain unaffected when the debtor exercises its right of defence.

For example, the contractor may specify with the employer that when the employer exercises its right of defence the same may not affect the payment of the works accounts receivable that have already been transferred to the dedicated plan, and the employer may deduct from the retained balance of the works money or from the progress money for the next payment period the compensation, indemnities or expenses bearable by the contractor, or that the contractor or an affiliate will separately bear the relevant liability and provide corresponding security.

The asset securitization of PPP project works money is a very special type of asset securitization of enterprise accounts receivable, as its underlying assets have intrinsic defects. The first and foremost barrier to overcome in carrying out asset securitization is to cause the assets to satisfy the requirements of laws, regulations and the exchange. There are also numerous other legal difficulties that require exploration and resolution.

Wang Jihong is a partner and Tang Hongwei is an associate at Zhong Lun Law Firm