BY SEUN TIMI-KOLEOLU AND PROMISE ITAH

INTRODUCTION

Nigeria faces a significant infrastructure gap across various sectors such as power, transportation, and energy. It is estimated that the country will require over $3 billion annually for the next 30 years to effectively close this gap and meet development goals. Given the limitations of public funding, project finance has emerged as a key instrument for mobilising capital to finance large-scale infrastructure projects by leveraging future revenue streams, rather than depending on public budgets or sponsor balance sheets.

At its core, project finance is predominantly structured around debt, which is sourced from different sources including commercial banks, development finance institutions (DFIs), and institutional investors.

In this newsletter, we highlight the key legal considerations for lenders involved in project finance transactions in Nigeria.

1.    Eligible Lending Licences Under Nigerian Law

Under Nigerian law, various financial licences may permit an entity to issue loans or extend credit within the country. These include state-level licences such as money lenders licence. However, in the context of project finance transactions, the requisite licenses required by institutional lenders are primarily regulated by the Central Bank of Nigeria (CBN) pursuant to the Central Bank of Nigeria Act, 2007 and the Banks and Other Financial Institutions Act (BOFIA), 2023. Common licence types include commercial banking licences, microfinance bank licences, and finance company licences, among others. For a detailed overview of the requirements for obtaining these licences, please see our newsletter here.

2.    Key Legal Considerations for Lenders

A major concern in project finance transactions is the timely repayment of loans advanced to the project. Various risks that can threaten financial recovery include construction delays, regulatory uncertainty, and operational disruptions. In view of this, it is important that lenders pay attention to certain legal and contractual considerations to mitigate these risks and safeguard loan repayment. Some of these considerations include:

a.    Foreign Exchange Controls: Foreign currency debt must comply with Central Bank of Nigeria (CBN) regulations on foreign exchange. Lenders should endeavour to obtain Certificates of Capital Importation (CCI) to ensure repatriation of repayments.

b.    Acquisition of Necessary Licenses and Permits: Securing the appropriate licenses and permits is essential for the successful implementation of most projects. Without these licenses, operations may be hindered, jeopardizing the project’s ability to generate sufficient revenue streams required to service and repay loans. Additionally, relevant planning and building approvals must be obtained for the project site to ensure full compliance with regulatory and zoning requirements.

c.     Perfection and Enforcement of Security Interests: Security interests—such as charges over assets, receivables, and contractual rights—must be duly perfected in accordance with the Companies and Allied Matters Act (CAMA) by registration at the Corporate Affairs Commission (CAC) within ninety (90) days from the date of creation of the charge. Where land is offered as collateral, additional requirements under applicable state and federal land registration laws must be complied with.

The perfection of security interests over land typically involves a three-step process: (i) payment of stamp duties, (ii) obtaining the Governor’s consent in accordance with the Land Use Act, and (iii) registration of the instrument at the relevant land registry.

Depending on the nature of the asset, security interests must also be registered at the appropriate specialized registries. For example, a mortgage over trademarks must be registered at the Trademarks Registry, while a mortgage over a vessel must be registered with the Registrar of Ships.

Perfection of security is critical to ensuring enforceability in the event of default.

d.    Adequate Contractual Provisions: Lenders must ensure that project finance agreements are meticulously structured to secure adequate oversight, risk protection, and contractual enforceability—while still allowing sponsors operational flexibility necessary for project execution. Key contractual considerations include:

  • Covenant Packages: Financial and operational covenants in financing agreements should be designed to give lenders oversight while preserving the sponsor’s flexibility to manage and grow the project effectively.
  • Intercreditor Agreements: Where financing structures involve multiple layers of debt—including senior, mezzanine, and subordinated facilities—an intercreditor agreement should be executed to clearly delineate the respective rights and obligations of each creditor class. The agreement should comprehensively address critical provisions such as enforcement rights and payment subordination.
  • Cash Waterfall Arrangements: A transparent and enforceable mechanism should be established in the financing and project agreements to govern the allocation of project revenues. This arrangement will prescribe the order of priority for disbursements, typically as follows: (i) payment of statutory obligations, including taxes and approved operating expenses; (ii)servicing of debt obligations as per the financing agreements; (iii) funding of reserve accounts, particularly the Debt Service Reserve Account (DSRA); and (iv) distribution of residual funds to sponsors, subject to compliance with financial covenants and minimum reserve thresholds.
  • Step-in Rights and Account Controls: The project documentation, including the direct agreements, financing agreement, construction contract, and operations and maintenance contract, should comprehensively outline the lender’s enforcement mechanisms and any limitations to them. These may include clearly defined step-in rights, escrow arrangements, and controls over reserve accounts.

Conclusion

As Nigeria continues to pursue large-scale infrastructure development, project finance remains a powerful tool for mobilising private capital to bridge the country’s financing gap. However, the success of any project finance transaction depends on the ability to effectively structure and manage legal and regulatory risks—particularly those that impact lenders’ rights and repayment certainty. While this newsletter outlines key legal considerations, it is not exhaustive. Lenders are therefore encouraged to seek tailored legal advice suited to the specific risks and dynamics of each project.