Project finance is one of those practice areas law firms covet. It has cachet — make a name for yourself in project finance, and your name gets uttered in the same breath with the leading New York and London law firms.

For Canadian law firms looking to achieve global relevance, the pull is irresistible. Therein lies the rub.

As far as project finance work goes, it’s rarely a case of Mc- Carthy Tetrault vying with Blake Cassels &Graydon. The practice area is international, so the competition is global. Even on the home turf.

Well, except in Calgary. “Without a doubt this is an international practice area, but surprisingly, here, there is not that much international competition for the work,” says Richard Borden, a partner with Macleod Dixon.

“For the most part, for the deals I’m working on, it’s always local lawyers that are involved for all parties,” continues Mr. Borden. “Thus far, it has still been a closed shop.”

There are a couple of reasons for the protected status of the Alberta market. While neither Calgary nor Edmonton claim to be “world-class” financial centres, no one in Alberta espouses similar modesty as far as energy expertise is concerned.

“Part of it is that many of the projects have a heavy oil and gas component to them, and it’s hard for some of the non-Alberta-based lawyers to have the same expertise in the area,” says Mr. Borden. “They’re not dealing with it day in and day out, and we are.”

Pipeline, natural liquid gas, cogeneration and other power projects are all grist for the mill, too, and Alberta lawyers such as Mr. Borden are happy to export their expertise in these areas to the world. There, of course, they face global competition. They have an ace up their sleeve, though. Ready for it?

They don’t really do project finance. The official definition of project finance, courtesy of the International Project Finance Association, goes like this: “The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.”

The unofficial definition: a form of long-term financing for projects that, whatever else it might be, is rarely flexible, and never cheap.

“True project finance is really expensive, and from a legal perspective, it is really expensive to put in place,” says John Wilmot, a partner with Calgary’s Burnet Duckworth & Palmer. “A real project finance usually runs a client into hundreds of thousands of dollars in legal fees.”

“A typical corporate financing is a pretty straightforward piece of paper with six closing documents. But a real project finance — you’re looking under every rock, because the lenders are expected to look solely to the project to get repaid. You leave no stone unturned,” explains Mr. Wilmot.

That’s why, for many companies, project finance is what they do if they can’t do it any other way. Mr. Wilmot’s firm is involved in the Horizon Oilsands Project for Canadian Natural Resources Ltd.

“But that’s not a project finance per se,” says Mr. Wilmot. “They’ve chosen to finance it so far with their regular corporate lines, which is a smart thing to do because it is way cheaper.”

The same is true for almost every oilsands project developed by the majors with investment grade credit rating.

“When you look at the big guys who have real strong balance sheets and are not worried about the risk of a project materializing, they would tend to finance their project almost entirely not as project finance,” says Mr. Wilmot.

Then, there’s the inflexibility, the other defining aspect of project finance. Once a project finance structure is in place, changing any aspect of it is onerous and, to the borrower, costly.

“These projects are built out over years and decades, so it is good they have the security of long-term money,” notes Mr. Borden. “But if the crystal ball was cloudy and the universe did not unfold the way it should, and you need to get rid of a deal or amend it, you are rarely in a good position to do so.”

You can, of course. But, as Mr. Borden notes. “You will need to get out the chequebook.”

That is changing, particularly in Alberta. While the project- finance legal bar may be a closed shop, the lenders are facing unprecedented competition and realizing they need to loosen up.

“For the local projects, there has clearly been more interest from lenders outside of Canada, particularly U.S. lenders from the term-loan Bmarket and the high-yield market,” says Phil Backman, a partner with Bennett Jones.

Now, high-yield and term-B loans come with their own brand of golden handcuffs. But compared with traditional project finance, they are simpler, cheaper and — the big selling point –more flexible.

“There are all sorts of international lenders trying to get into the oilsands sector,” agrees Mr. Borden. “More and more of these guys are coming into town, opening offices and increasing competition and that means all lenders interested in this market will have to be more flexible on terms of the deal.”

The wake-up call for traditional project-finance lenders sounded last year when Calgary’s Meg Energy — whose start-up nature made its oilsands project a prime candidate for “real” project finance — went the term loan B route.

“For a company like Meg Energy to do a $750-million term loan B at the stage of development they were at, that was a bit of an eye- opener to the project-finance lending market,” says Mr. Borden.

“They saw that unless they started to simplify things and perhaps not so rigorously apply project-finance principles, they were not going to get the deals.”

It’s not surprising that Alberta projects should be pushing the envelope on project finance. Oil and gas projects never have fit neatly into the constraints of traditional project finance.

“Project finance in other parts of the world and other industries is defined by all these long-term contracts,” says Mr. Backman. “But the oil business doesn’t work that way. People don’t enter into 25- year contracts because they sell their oil at market prices. So the lenders that service this industry, they have always had to engage in a slightly different, simpler form of project financing than is prevalent in many other projects around the world.”

Now, they just have to keep on moving in that direction. Isn’t competition great? Among lenders, anyway.

(Copyright National Post 2007)