Conditions Precedent

Definition¶

Conditions precedent (commonly abbreviated CPs) are contractual requirements specified in financing agreements that must be satisfied before a lender is obligated to advance funds under a loan facility. In project finance, CPs must be satisfied (or formally waived) before financial close — the moment at which the financing documents are executed and the first drawdown of debt is made available.

The satisfaction of CPs is a formal contractual process. The lender's technical adviser, legal counsel, and other advisers typically certify that each CP has been met before the lender is obligated to fund.

Financial Model Audit as a Condition Precedent¶

An independent financial model audit is a condition precedent in the majority of institutional project finance transactions. The lender requires confirmation from an independent, qualified auditor that:

• The financial model has been reviewed against the agreed audit scope
• Specified structural and calculation checks have been performed
• Material findings have been disclosed and, where required, remediated
• The model's DSCR and key covenant calculations satisfy the lender's minimum requirements under the base case and the agreed stress scenarios

This confirmation is typically delivered in the form of a model audit certificate — a formal letter from the independent auditor addressed to the lender. The model audit certificate is itself a CP: financial close cannot proceed until the certificate is received and accepted by the lender.

Model Audit Conditions in Practice¶

The scope and form of the model audit CP varies between transactions but typically requires:

• A defined scope agreed between the auditor, the borrower, and the lender in advance
• A minimum standard of review (structural integrity checks, calculation logic verification, and scenario analysis verification as a minimum)
• A specific certificate format or wording agreed with the lender's counsel
• Resolution or disclosure of any material findings identified during the audit
• Sometimes a requirement that the auditor confirm the model's compliance with the agreed base case DSCR minimum

Implications for Financial Model Preparation¶

Because the model audit certificate is a CP, any model error that is identified during the audit and cannot be resolved before the CP deadline will delay financial close. This creates a strong commercial incentive to submit a model that has been thoroughly pre-checked before engagement of the independent auditor.

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Prerequisites¶

• Project Finance Model Audit — the parent pillar

Related Glossary¶

• Financial Close — the milestone that CPs gate
• DSCR — the coverage metric verified as part of the model audit CP

Related Checklists¶

• Pre Financial Close Audit Checklist — the checklist for model preparation before the CP audit
• Lender Model Review Checklist — the checklist of lender model requirements

Related Products¶

• Financial Model Audit Engine (FMAE) — deterministic structural auditing referenced throughout this guide