The right to invoke force majeure (FM) in infrastructure and project finance is under greater scrutiny due to the pressures from the coronavirus pandemic, says Fitch Ratings. FM definitions in infrastructure transaction documents range from very limited, specifying particular events, to broadly covering any events out of the control of either party. Issuers may be negatively affected following a successful claim of FM, depending on the remedy exercised.
FM is intended to excuse performance when extraordinary events affect the ability of parties to perform. Narrower definitions in infrastructure project documents are often limited to events that cause physical damage to the asset. Although a FM definition may not cover a pandemic, related government actions, including a declaration of emergency or suspension of travel, may fall within the definition and create a possibility of contractual relief.
Even when contract parties agree that circumstances provide relief according to the terms of a FM provision, remedies specified in the contract may have varied effects on project cash flow. FM is most critical prior to project completion when events could cause construction delays. If remedies allow for an extension of construction deadlines and prevent assessment of liquidated damages, project delays beyond completion will delay revenue generation and collection and result in debt service shortfalls. Demand based projects are at greater risk under this scenario. Unless the FM event is also a compensation or relief event requiring the government sponsor to compensate for lost revenue, payment defaults could occur.
Depending upon the stage of project completion, bonds backed by availability payments may be protected following the invocation of FM if the government’s obligation to make availability payments continues as originally scheduled. Some project agreements provide for contract extensions, which might allow eventual recoupment of lost revenues, but others have firm contract terms that do not permit extension beyond specified dates.
FM provisions vary considerably per a Fitch review of a sample of infrastructure and project finance transportation transaction documents. We are aware of a few projects where FM has already been invoked as a result of the coronavirus pandemic, including cruise lines at Port Canaveral, the A-30 toll road in Canada, and the Purple Line transit project in Maryland.
Port cruise contracts generally have broad FM provisions under which minimum annual guarantee payments may be suspended. FM definitions in cargo shipping agreements with port operators are narrower than port cruise contracts. To our knowledge, no cargo lines have asserted FM.
Several airport use and lease agreements include broad FM provisions that appear to cover pandemics. However, these FM clauses do not excuse the airlines’ obligations to make some categories of payments to airports. Delinquent payments are events of default and penalty rates may be assessed in several of these agreements, but an airport may have little incentive to terminate a contract with an airline due to non-payment, as all airlines are similarly affected by coronavirus disruptions.
The toll road concession FM clauses that we reviewed do not cover pandemics but contract clauses may allow for non-performance in cases where there is a change in government policy or law. Furthermore, once a toll road is operating, performance obligations of the concessionaire are mainly related to operations and maintenance (O&M). Consequently, even if the FM provisions are broadly interpreted to cover coronavirus-related events, excused performance of O&M responsibilities is unlikely to affect revenue available for debt service.
There are also common law concepts in the US, such as impossibility of performance, which may be invoked if FM does not provide relief. Fitch expects to see an increase in the invocation of contract clauses, FM or others, which may allow parties flexibility on contract non-performance. Infrastructure parties are expected to work through these issues through negotiation, although an increase in litigation is also possible. When time and/or dollar amounts are disputed, transaction parties may not be made whole, or if disagreements cannot be resolved, the entire project is at risk. We will assess and reflect the effect of the activation of FM or other provisions, breach of contract, or litigation in our ratings.
