The contract is what you actually own

The idea

Most people read the contract last. He reads it first, and reads it as the asset.

It usually gets treated as paperwork that follows the deal, something for the lawyers once the commercial points are agreed. He sees it the other way round.

The plant, the mine, the terminal: those are the things that have to keep working so the contract can pay. The contract is what you actually own.

What he reads for

What “firm” really means

A volume commitment can be firm, or firm subject to availability, or subject to reasonable endeavours, or subject to a nomination process that lets the buyer reshape volumes every quarter. All of them get called firm in a term sheet.

The useful question is what, specifically, relieves the other side of the obligation. He reads those clauses as though they will be used, because sooner or later they are.

Who is really on the other side

Take-or-pay protects against a buyer who won’t lift. It does nothing about a buyer who can’t pay, which is the position you are in when the market turns.

An agreement signed with a trading subsidiary is not the agreement it appears to be, even when the letterhead is the same. If the obligation matters, he wants the balance sheet that matters behind it, or a guarantee from it. Asking early is awkward. Finding out in year six is worse.

Whether the contract outlasts the debt

A fifteen-year financing sitting over a seven-year off-take is a refinancing risk under a different name. Whoever holds the equity finds that out when they have least room to do anything about it.

The hard part

None of this needs a technical background. It needs the contract read as the asset, which was the change in thinking that took him longest to make.

You cannot understand a contract without understanding the counterparty, and you cannot understand a counterparty from a data room. You have to go and meet them, more than once.