What limited recourse means here, and what actually makes a UAE project bankable
Limited recourse is not a concession lenders grant to strong sponsors. It is the consequence of a structure in which the borrower is a single-purpose company whose only assets are a set of contracts and whose only revenue is the stream they produce. Lenders accept the absence of balance-sheet recourse because they have satisfied themselves that the contracts allocate every material risk to a party able to bear it, and that they can reach the revenue stream if the sponsor stops performing.
Bankability is therefore settled in the project documents, not the finance documents. By the time a mandate letter is signed, the questions that determine recovery in a downside have usually been answered: who bears completion risk and on what terms; whether the operating regime produces damages that repair the model or merely punish the operator; whether the offtake obligation survives the events that would actually stop the plant; whether termination compensation repays senior debt in full; and whether the concession survives a change in the identity of the project company's shareholder.
The commercial consequence is blunt. Sponsors who sign an EPC contract, an O&M agreement and an offtake before lenders have seen them are asking counterparties to reopen executed documents at the point of maximum weakness.
The security package onshore, and where it is genuinely weak
A UAE project security package is assembled, not granted. Each element is created under the law of the place of the asset and perfected after execution, and the composite is only as good as its weakest registration.
- Land and site rights. Where the project company holds a registrable interest in land, a mortgage is created by registration against the title with the emirate land authority. Many projects sit instead on a usufruct, a musataha, an industrial-zone lease or a free-zone or port authority licence — interests that may not be mortgageable at all, or only with the grantor's written consent. That consent is a bankability item, not a condition subsequent.
- Plant, equipment, inventory and receivables. Security over movables and contract proceeds is registered on the federal movable-assets register, which governs priority between secured creditors. This is the closest onshore analogue to a floating charge and it is not one: it secures identified classes of collateral, appoints nobody to run the business, and confers no self-help sale.
- Project accounts. The waterfall only works if the accounts sit where the security agent can control them. Offshore proceeds accounts, common for export revenues, need separate analysis.
- Project documents and insurances. Assignments by way of security over the EPC, O&M, supply and offtake contracts, and over insurance proceeds with lenders noted as loss payee, are standard. Counterparty consent is generally required and best obtained in the direct agreement.
- Share security over the project company. This is the load-bearing element. A pledge over shares in an onshore company is notarised and recorded with the licensing authority; shares in a DIFC or ADGM vehicle are secured under those jurisdictions' own security laws. Enforcing an onshore pledge runs through the courts and delivers a company carrying every licence restriction attaching to it. Enforcement over a DIFC or ADGM holding company is faster, in English, and available out of court in the ordinary case — which is why so many structures interpose one.
Two limits should be stated plainly to any credit committee. There is no onshore concept of a general charge over the whole undertaking, and no out-of-court receivership handing lenders an operating business. And the most valuable things a project owns — the concession, the generation or desalination licence, the sector and environmental permits — are typically non-assignable and non-mortgageable instruments granted at emirate level. The route to those is through control of the shareholder, not a charge.
| Issue | Onshore UAE project company | DIFC or ADGM holding / financing vehicle |
|---|---|---|
| General charge over the undertaking | No equivalent. Security is created class by class over identified assets and perfected in the relevant register. | Common-law style all-asset security available under those jurisdictions' own security laws and registers. |
| Security over shares | Notarised pledge recorded with the licensing authority; enforcement is judicial and delivers a licensed entity. | Registered charge over shares; enforcement is generally available out of court on ordinary terms. |
| Receiver or out-of-court sale | No onshore receivership handing lenders an operating business; realisation is court-supervised. | Common-law enforcement remedies, including appointment of a receiver in the ordinary case. |
| Insolvency regime | Federal bankruptcy and restructuring regime, administered by the specialised bankruptcy court. | Separate DIFC or ADGM insolvency law; the federal regime does not apply to the vehicle. |
| Courts and language | Onshore courts, in Arabic; execution judge supervises realisation and sale. | DIFC or ADGM Courts, in English; onshore assets are reached through a referral mechanism, not directly. |
| Concession, licences and permits | Held here. Generally non-assignable and non-mortgageable; transfer needs regulator consent, often at emirate level. | Cannot hold the operating licence. Its value to lenders is as the transferable layer above it. |
| Land and site rights | Mortgage registered with the emirate land authority where the interest is registrable; usufruct, musataha and zone leases need separate analysis. | Not the holder of the site interest; relevant only through control of the entity that is. |
Direct agreements, and whether step-in works in practice
Direct agreements with the grantor, the offtaker, the EPC contractor and the operator do three things: they require notice to lenders before termination, they give lenders a cure period, and they permit substitution of the project company or its shareholder by an entity the counterparty will accept. The first two work well and are worth negotiating hard; the usual defects are notice periods that begin on the counterparty's own timetable and cure periods measured against obligations lenders cannot physically perform.
Substitution is the harder question. A direct agreement binds the grantor as a contracting party; it does not bind a licensing authority acting in a regulatory capacity, and here those are frequently different entities. A power or water project holds sector authorisations; an industrial project holds a trade licence and environmental permits; a free-zone project holds its licence from the zone authority. Each may require prior approval of a change of shareholder, some against criteria that are not published.
Three consequences follow. Pre-agree the substitution criteria in writing with the grantor and, where possible, the licensing authority, at financial close. Structure so substitution can be effected by transferring shares in a holding company rather than the licensed entity itself — one of the strongest arguments for a DIFC or ADGM holdco. And accept that in some sectors the realistic remedy is termination with compensation, in which case the compensation formula is where the effort belongs.
Offtake, and the credit that sits behind it
UAE projects have historically been financed on the strength of the offtaker. Availability-based power and water offtakes with government-linked purchasers support long tenors and thin margins precisely because the demand risk is not really demand risk.
That is not a general truth about the market. A government-linked offtaker is not a sovereign guarantee; where credit support exists it is a discrete instrument with its own terms, and where it does not, the analysis is the purchaser's own balance sheet and tariff base. Offtakes at emirate level are supported by emirate resources, and the emirates are not fungible. The growth areas — merchant and partially merchant renewables, corporate PPAs, data-centre power, hydrogen and its derivatives — involve private offtakers on tenors shorter than the debt.
Where the offtake is shorter than the loan, lenders take merchant tail risk whatever the term sheet says. Honest structures acknowledge it: shorter tenor, cash sweeps, a debt sizing independent of the tail, or a contracted floor. The dishonest ones assume renewal.
Change in law, corporate tax, force majeure and political risk
Change-in-law protection decides whether a twenty-year model survives contact with a legislature. Federal corporate tax made that concrete. Under Federal Decree-Law No. 47 of 2022, taxable persons became subject to corporate tax for financial years beginning on or after 1 June 2023, at a headline 9% rate above the statutory threshold, with a domestic minimum top-up tax later introduced for large multinational groups. Projects financed on pre-tax cash flow had to establish, quickly, whether the tax was a compensable change in law, whether a carve-out for taxes on income excluded it, and who bore it if it did not.
The lesson generalises. A change-in-law regime is only useful if it identifies which changes are compensable — discriminatory, project-specific, tax, environmental, general — and states the mechanism: tariff adjustment, lump sum, term extension, or termination with compensation. Silence on mechanism converts a right into a negotiation.
Force majeure needs the same discipline. UAE law recognises supervening impossibility and permits judicial relief for exceptional unforeseen circumstances, but a project financing cannot be run on a general doctrine. The documents should distinguish natural, political and non-political events, state which produce relief, which produce payment and which produce termination, and align those definitions across the offtake, the EPC and O&M contracts and the supply chain. A gap between EPC and offtake force majeure lands on the sponsor.
Political risk cover addresses expropriation, transfer and convertibility, and war and civil disturbance. For most UAE projects the live risk is none of those; it is regulatory and tariff change at emirate level, which such cover generally does not reach. Contract drafting does.
ECAs, multilaterals and Islamic tranches alongside conventional debt
Export credit agency support is driven by procurement. Where equipment is sourced from a country whose agency supports it, cover typically brings longer tenor and lower cost, at the price of the agency's conditions: environmental and social standards, content rules, sanctions and integrity policies, and its own approval calendar. Those conditions bind the project company, not only the lenders, and several constrain the EPC contract. An ECA introduced after the EPC is signed is a change order. Multilateral and development finance participation brings a comparable overlay, increasingly on hydrogen, carbon capture and grid infrastructure.
Islamic tranches sit alongside conventional debt in most large UAE financings, construction funding commonly structured as istisna with a forward lease taking effect at completion, so the Islamic participants hold or lease identified assets while conventional lenders hold conventional debt against the same project. The work is in the intercreditor architecture: common security held by one agent for both pools, shared enforcement proceeds, aligned events of default, and voting mechanics that stop one pool accelerating into the other. Two points recur. The Sharia supervisory board's approval is a hard gate, and a structure taken to term sheet before the board has seen it risks redesign. And an asset leased to the Islamic tranche cannot simultaneously be pledged on unrestricted terms.
Refinancing across the life of the asset
Very few UAE projects are financed once. Construction-phase bank debt gives way to a post-completion refinancing at lower margin and longer tenor, and mature operating assets are increasingly refinanced into the bond market or sold into infrastructure funds.
Three points shape whether that is available later. Prepayment and make-whole terms determine the cost of leaving the original facility. Refinancing gain-share provisions in the concession or offtake determine how much of the benefit the sponsor keeps, and are frequently agreed at bid stage with little attention. And whether the project documents can support a rated capital-markets refinancing — disclosure, reporting, an intercreditor structure a bond trustee can join — is decided in the original drafting, not at issue.
The related question is exit. Change-of-control provisions appear in the concession, the offtake, the licence and the facility, and are rarely aligned. A sponsor planning a stake sale at commercial operation should check all four before marketing the asset.
Default and enforcement, on the day it is actually needed
Most project distress here is resolved consensually, but the consensual outcome is priced against what would happen if it were not. That makes enforcement a live commercial input from the first day of a workout.
Onshore, enforcement of registered security runs through the courts, in Arabic: proceedings or a direct application to the execution judge depending on the instrument, then an execution file, then valuation and court-supervised sale. Enforcing a share pledge over the project company delivers shares in a licensed entity, so the buyer must itself be acceptable to the licensing authority — a constraint on the pool of bidders and therefore on price. Enforcement over a DIFC or ADGM holding company is faster and uses familiar common-law remedies, but a judgment of those courts reaches onshore assets through a referral mechanism rather than directly.
The federal insolvency regime, administered by a specialised bankruptcy court, provides for restructuring and liquidation with court supervision, stays on creditor action and challenges to pre-filing transactions. DIFC and ADGM operate their own separate insolvency laws. Which regime applies to which entity depends on where it is incorporated, and in a typical project group more than one applies. Lenders who have not mapped that before signing map it under stress.
The window between visible distress and formal filing is where recoveries are determined, and the first task in any workout is confirming that the security registrations say what the closing certificate said they would.
Where project finance mandates go wrong
The failure patterns are consistent, and almost all originate before close.
- Project documents signed before lenders have seen them. The EPC and offtake are executed on commercial terms, and bankability changes are then sought from counterparties with no reason to give them.
- Step-in drafted without the licensing chain. A full suite of direct agreements, and no confirmation that the regulator or zone authority will approve a change of shareholder or a substitute's identity.
- A common-law security model applied onshore. Credit approved on the assumption of an all-assets charge and an out-of-court receiver, neither of which exists onshore.
- Site rights that cannot carry security. A usufruct, musataha or zone lease taken without checking whether it is mortgageable, or mortgageable only with a consent nobody has requested.
- Perfection treated as post-closing administration. Registration left to a covenant with no drawstop and no event of default attached; funds go out, registration does not, and the defect surfaces at enforcement.
- Change-in-law provisions without a mechanism. A right to be made whole with no formula, no timetable and a tax carve-out nobody modelled — precisely how corporate tax landed on projects that had not provided for it.
- Force majeure defined differently in each contract. The gap between the EPC and offtake definitions is uninsured and falls on the sponsor.
- Merchant tail treated as contracted. Debt sized on the assumption that a shorter offtake will be renewed on comparable terms.
- ECA or multilateral introduced late. Environmental, social, content and integrity conditions arriving after the EPC is signed, and paid for as variations.
- Sharia approval sought at the end. An Islamic tranche negotiated to term sheet before the supervisory board has reviewed the structure.
- No map of which insolvency law applies to which entity. A group spanning onshore, DIFC and ADGM treated as though a single waterfall governs it.
Each is inexpensive to prevent and, once the project is operating, close to impossible to fix. That asymmetry is the argument for engaging finance counsel at bid stage, not at mandate.
Frequently asked questions
Why is a DIFC or ADGM holding company used above an onshore project company?
Because it gives lenders a security and enforcement layer that onshore law does not provide. Security over shares in a DIFC or ADGM company is created and registered under a common-law regime, enforced in English before those courts, and generally realisable without a full judicial sale process. Onshore share pledges are notarised, recorded with the licensing authority and enforced through the courts, and what they deliver is a licensed entity that a buyer must be approved to hold. The holdco does not remove the onshore constraints — the concession and licences still sit below it — but it makes the transfer of economic control materially cleaner. It is a structuring choice with tax, substance and regulatory consequences of its own, and should be made on the whole picture rather than on the security point alone.
Is there any onshore equivalent of a floating charge or an all-assets debenture?
No. Onshore security is created over identified asset classes and perfected in the register applicable to each. The federal movable-assets security register allows security over movables, receivables, inventory and contract proceeds and governs priority between secured creditors, which covers part of the ground a floating charge would cover, but it does not sweep the whole undertaking, does not attach automatically to after-acquired categories outside its terms, and does not deliver anyone to operate the business. There is also no onshore out-of-court receivership. Lenders whose recovery model assumes an English-style debenture and a receiver should re-run it before credit approval.
Do direct agreements and step-in rights actually work in the UAE?
The notice and cure limbs work well and are worth negotiating carefully. Substitution is the limb that fails in practice, because a direct agreement binds the grantor as a contracting party but does not bind a licensing authority acting in a regulatory capacity — and many of the relevant approvals are granted at emirate level and are discretionary. Where a project depends on a sector authorisation, an environmental permit or a free-zone licence, the substitution route has to be tested against each of those before close, ideally with the criteria for an acceptable substitute agreed in writing. Where it cannot be made to work, the realistic remedy is termination with compensation, and the compensation formula is where the effort should go.
Can security be taken over a concession or an operating licence?
Generally not in any useful sense. Concessions, sector authorisations and permits are typically personal to the holder, non-assignable without consent, and not registrable as collateral. Lenders reach them indirectly, through security over the shares in the entity that holds them and through direct agreements with the grantor. That is why the share security and the substitution mechanics carry so much weight in a UAE project financing, and why a package that looks complete on paper can be thin if the licensing analysis was never done.
How did the introduction of corporate tax affect existing project financings?
Under Federal Decree-Law No. 47 of 2022, corporate tax applies to taxable persons for financial years beginning on or after 1 June 2023, at a headline 9% rate above the statutory threshold, with a domestic minimum top-up tax later introduced for large multinational groups. Projects modelled on pre-tax cash flow had to determine whether the tax was a compensable change in law under the offtake or concession, whether a carve-out for taxes on income excluded it, and where the cost landed if no relief was available. The exercise exposed how many change-in-law clauses confer a right without specifying a mechanism. On new deals the drafting point is to define which categories of change are compensable and to state the adjustment route — tariff, lump sum, term extension or termination — rather than leaving it to later negotiation.
What credit support sits behind a government-linked offtaker?
It varies, and the distinction matters. A government-related purchaser is not the same as a sovereign guarantee. Where credit support exists it is a separate instrument with its own scope, triggers and payment mechanics, and it should be diligenced as such rather than assumed from the counterparty's ownership. Where it does not exist, the analysis is the purchaser's own balance sheet, tariff base and regulatory position — and because these arrangements are typically at emirate level, the relevant resources are the emirate's, not the federation's. On merchant and corporate-PPA structures the question does not arise at all, and the merchant tail has to be priced honestly.
How are conventional and Islamic tranches combined in the same financing?
Commonly, and usually with construction-phase funding structured as istisna with a forward lease taking effect at completion, sitting alongside a conventional facility. The engineering is in the intercreditor documentation: common security held by a single agent for both pools, shared enforcement proceeds, aligned events of default and voting mechanics that prevent one pool acting unilaterally. Two constraints recur. The Sharia supervisory board's approval is a hard gate, so the structure should be put to it before the term sheet is agreed rather than after. And the assets leased to the Islamic participants cannot simultaneously be pledged on unrestricted terms, so the security package has to be designed around that from the start.
What should lenders do first when a project starts to underperform?
Verify the security position before opening any negotiation. Establish that every registration was made, in the correct register, and says what the closing certificate said it would; confirm which entity has standing to enforce and in which forum; and map which insolvency regime applies to each entity in the structure, because in a typical group spanning onshore, DIFC and ADGM more than one does. Then decide whether protective attachment is needed now to preserve the position. Only after that is the workout conversation worth having, because the consensual outcome is priced against the enforcement outcome, and that cannot be priced without knowing what is actually held.