Project financing for infrastructure projects

Project financing for infrastructure projects tài liệu, giáo án, bài giảng , luận văn, luận án, đồ án, bài tập lớn về tấ...

Agenda

Part 1: Introduction to Project Finance

What is “Project Finance”?

“A financing of a particular project or asset in which a financier is satisfied to look initially to the cash flows and earnings of project or asset as the source of funds from which a loan will be repaid and to the assets of the project as collateral for the loan.”

Financiers look to the cash flow of the financed asset for repayment Contrast with corporate finance.

Part 1: Introduction to Project Finance

Corporate Finance

 The balance sheet of the borrower is exposed to the project risk

 Corporate debt is often secured against the assets of the entire firm, not

just the project

− This means that if the project fails, creditors will be able to make claims against all assets of the borrower even those that are not related to the project

 Corporate debt is held on the balance sheet of the firm, increasing its

Part 1: Introduction to Project Finance

Project Finance

 A financing method that can help borrowers deal with

project-specific risks and limit exposure to the downside risk of the project.

 Financier’s recourse is limited project revenues and

assets (limited recourse financing)

 Financiers look at cash flows of a

single asset (the project) for

repayment

 No / limited guarantees for project

finance debt

 Project contracts are usually the main

security for lenders; project

companies’ physical assets are likely

to be worth much < the debt

Features

 Financiers look to the overall strength

of a company’s balance sheet and projections, which is usually derived not from a single asset but a range of assets and businesses

 All assets of the company can be used for security

 Has access to whole cash flow from spread of business as security, thus even if project fails, corporate lenders can be repaid

Part 1: Introduction to Project Finance

Comparisons Between Project Finance & Corporate Finance

 Project has a finite life as such the debt

must be repaid by the end of this life

 Lenders exercise close control over

activities of Project Company to ensure

value of project is not jeopardise

Features

 Company assumed to remain in business for an indefinite period and losses can be rolled over

 Leaves management of company to run business as they see fit

Part 1: Introduction to Project Finance

Project Finance

 A method of mobilizing corporate finance through a newly organized

company, partnership or contractual joint venture, called a project vehicle.

 Co loans are generally non-recourse or limited recourse to the sponsors of

the project.

 The funding for the Project Company has 2 elements:

1.Equity; and

2.Project-Financed debt

Procuring Entity

Subcontractors (infrastructure builders, equipment suppliers, O&M contractors etc.)

Equity Providers

Debt

Providers (Special Purpose Vehicle) Project Co.

Subcontracts

Receives Services

Periodic Payments Loans

Debt Service

Equity Stake

Equity Returns

Direct Agreement

SPV typically includes a

• Construction investor

• Facilities Management investor

• Equity Investor/ Project Manager

Part 1: Introduction to Project Finance

Typical Project Contractual Structure

Part 1: Introduction to Project Finance

Why Project Finance?

 Benefits for Investors

− Projects are highly leveraged  leads to a higher return on equity (ROE)

− Risk spreading – enables risk of investment to be divided up between

investors

− Limited ‘risk contamination’ between the project and the rest of the investor’s business (risk is quarantined to invested equity)

− Increased borrowing capacity of investors with the reallocation of project risks

to other contracting parties

− Avoids restrictive covenants on the corporate balance sheet arising from a

project’s debt financing

− Small amount of equity commitment required enables parties with different

financial strengths and skills to work together

− Matches each commercial undertaking with the specific assets and skills

required to build and operate it

Part 1: Introduction to Project Finance

Why Project Finance?

 Benefits for Investors

− Off balance sheet financing where equity represents a minority investment

Part 1: Introduction to Project Finance

Why Project Finance?

 Benefits for the Public Authority (PA)

− The increase in investor’s financial capacity creates a more competitive

market for projects, to the benefit of the PA

− Involvement of 3rd parties (lenders and advisers) would mean that a rigorous review of the risk transfer is carried out and any weaknesses exposed

(independent due diligence undertaken by financiers)

− Highly leverage inherent in a project-finance structure helps to ensure the

lowest cost to PA

− There is transparency as project financing is self-contained and the true costs

of the service can more easily be measured/monitored

Part 1: Introduction to Project Finance

3 Main Sectors Using Project Finance

1 Natural Resources Sectors

 Mining, oil & gas

2 Energy Sectors

 Independent power projects (IPPs) in the electricity sector, primarily for power generation using BOO/BOT structures, gas for power  gas pipelines & liquefied natural gas

3 Infrastructure Sectors

 Public Private Partnerships  Public Infrastructure (eg toll roads, schools, hospitals etc)

Part 1: Introduction to Project Finance

The Project Finance Market

Part 1: Introduction to Project Finance

Test/Event/Milestone 1-4 5-8 9-12 13-16 17-20 21-24 25-28 29-32 33-36 37-40 41-44 45-48 49-52

• Sponsors approve Project Feasibility Study

• Appoint project legal counsel and financial advisor

• Appoint other advisors (e.g Insurance environmental)

• Agree borrowing structure

• Negotiate additional equity

• Establish project vehicle

• Agree project documents with contractors/ operators/

suppliers/ offtakers

• Develop financing term sheet

• Prepare information memorandum

• Select arrangers/banks

• Agree loan documentation

• Agree security and other documentation

• Obtain all consents and permits for project

• Obtain sponsor board/shareholder approval

• Bank’s technical advisor to approve technical aspects of

project

• Bank’s insurance advisor to approve project insurances

• Agree financial model

• Agree legal opinions

• Finalise conditions precedent

• Signing and financial close

• First drawdown

Programme for Project Financing

Parties to a Project Financing

Typical participants in a project financing structure (Figure 1)

include:

O&M contractors etc.)

Part 1: Introduction to Project Finance

Procuring Entity

Subcontractors (infrastructure builders, equipment suppliers, O&M contractors etc.)

Equity Providers

Debt

Providers (Special Purpose Vehicle) Project Co.

Subcontracts

Receives Services

Periodic Payments Loans

Debt Service

Equity Stake

Equity Returns

Direct Agreement

SPV typically includes a

• Construction investor

• Facilities Management investor

• Equity Investor/ Project Manager

Part 1: Introduction to Project Finance

Typical Project Contractual Structure

Fig 1

Parties to a Project Financing

Part 1: Introduction to Project Finance

Source: Key Project Parties, A Guide to Project Finance (Denton Wilde Sapte)

KPMG’s Role in Project Finance

Agenda

Part 2: Project Structures

Structure

Part 2: Project Structures

Sources of Project Finance

Islamic Finance

Investment Funds

Multilateral Agencies

Government

Capital Markets Bank Debt

Sources of Project Finance

Part 2: Project Structures

 Bank Debt

− Foreign and local commercial banks

− Foreign banks important in Emerging Market Project Finance

− Cross-border loans to developing countries tend to be covered

− EG: OCBC, HSBC, CIMB, RHB

 Capital Markets

− Stock and bond issuance

− Securities markets allow finance to be raised for riskier projects

− Bond market offers long-term fixed rate funding (which is cheaper than bank loans)

Sources of Project Finance

Part 2: Project Structures

− Size – Bonds used for larger projects

− Cost – Bonds typically tend to have a lower cost than bank loans (but query credit

crisis and roles of monolines)

− Term – Bonds typically have longer tenor which suits profile of certain projects

− Flexibility – Bank loans are generally more flexible as bonds have wide spread and investors base (eg waivers and amendments etc)

Sources of Project Finance

− Created by investment banks, multilateral banks and insurance companies

− Channel equity and (sometimes) debt from institutional investors to power, telco and transport projects

− EG: Asian Giants Infrastructure Fund (AMP), Macquarie European Infrastructure Fund 2 (Macquarie)

− Financial support for (typically) major infrastructure projects:

Part 2: Project Structures

1. State may take on development of infrastructure integral to success of project (EG: port or gas pipeline)

2. Grants for infrastructure development, R&D etc

3. Compensates private sector through government availability payments and shadow/ real toll

Sources of Project Finance

− World Bank, ADB, AfDB, IsDB etc

− Provide loans, grants, guarantees etc

− Focus on the development/reconstruction of key infrastructure in emerging economies

− EG: Western Regional Road Corridor Development Project (Phase I) in Mongolia (US$112.1m, of which US$40m is an ADB Grant)

− Sharia Law prohibits Interest (Riba), Uncertainty (Gharar) & Gambling (Maisir)

− Sharia boards have to ascertain if transactions are Sharia-compliant

− Can be conceptualised as Structured Finance

− EG: US$425m Islamic project financing arranged for the US$615m construction

of a third terminal port in Jeddah, Saudi Arabia

Part 2: Project Structures

Sources of Project Finance

− Most common for assets such as ships, aircrafts etc

− Lessor typically looks to receive a guarantee or letter of credit to cover it against any project risk that it may be exposed to

− Intercreditor arrangements tedious to structure but may be worth it if overall tax benefits for the project are significant

− Project lender makes advance payment for the purchase of products generated

by the project which will be deliverable to the lender following the completion of the project

− Project company uses these proceeds for the construction and development of the project

− Lender either sells the products itself or to the project company

− EG: Oil and gas, minerals etc

Part 2: Project Structures

Sources of Project Finance

Part 2: Project Structures

Project Finance and Traffic/Transport Projects

Part 2: Project Structures

Public Private Partnerships

 PPP key features

− design, build, finance, operate the infrastructure over a specified period (>20 years)

− Private sector sets up an SPV

− Project finance structures used

− provision of end-to-end services – eg roads/public transport

− Private sector gets a return over service term (eg tolls, fares

Part 2: Project Structures

− for delivering a specified asset condition and service

− with appropriate incentives for performance over the life of the contract

− capital costs paid over the lifetime of the contract, revenue not capital

spending

− in the design, build and operation of infrastructure projects and they take responsibility for performance

− to decide what is the most effective mechanism for delivering the specified outputs

RISK TRANSFER

Part 2: Project Structures

 Private sector financing (both equity and debt)

− underpins business responsibility to deliver under contracts

− improve scrutiny of contractors ability to deliver contracts

− certainty of financing through long-dated funding structures

− uses $ payment structure to incentivise correct behaviour

Part 2: Project Structures

Public Sector

Construction Contractor

Construction Contract

Performance Guarantee

Maintenance/

Facilities Management

Operations/Facilities

Manager

Long-Term Asset Management Services

Project Sponsors Financier

Debt Servicing Debt/Equity

Underwriting

Parent Company Support

Special Purpose Vehicle

Concession Deed

Service Fee (ongoing)

Simplified contractual structure of a PPP

Agenda

Part 3: Documentation

Role of Documentation

Security Documents covering all project assets

LENDING DOCUMENTS

Loan Agreements with:

Banks/ Export Credit Agencies/ Multilaterals

PROJECT DOCUMENTS

Construction Agreement, Operation and Maintenance Agreement,

Fuel Supply Agreement, Sales/Offtake Agreement

PROJECT/

SPECIAL PURPOSE VEHICLE

Part 3: Documentation

Shareholder/ Sponsor Documentation

− Injection of share capital; how, when and in what form;

− Funding of the project company;

Part 3: Documentation

Support Agreements (tripartite agreement)

shareholders/sponsors

Part 3: Documentation

Loan and Security Documentation

− Prepared during due diligence process

− Regulate the terms and conditions of project loan

− Subject to condition precedents

− Prepared for the purpose of agreeing financing terms

− Typically only valid for a limited period of time (three months)

− Fully develop and document the terms and conditions of project loan

− Key financing document

Part 3: Documentation

Project Loan Agreement

− Drawdowns

 Multiple disbursements

 Tied to construction schedule

 Subject to conditions precedent

− Repayment of Loan

 Interest capitalised during construction phase

 Typically six-monthly repayment schedule (principal + interest)

 Commencing on service availability

 Two debt service methodology:

− annuity payments; or

− equal principal payments

Interest Interest

Interest Interest

Source: Project Development, Financing large Projects (M Fouzul Kabir Khan, Robert J Parra)

Part 3: Documentation

Project Loan Agreement

− Fees and expenses paid to lenders

− Commitment fee (25-75bps pa) calculated over the undisbursed balance lenders have committed

− Monitoring fees (25% bps) – administrative charge for monitoring the project

(particularly over construction period)

Part 3: Documentation

Project Loan Agreement

− Additional CPs required for subsequent disbursements

 Auditor to confirm project costs

 Certification of construction milestone/s

− Confirmation of Representation &Warranties

− No default on part of borrower

− No Material Adverse Change

− Minimises lenders’ due diligence costs

− Non-complianance with or untruth constitutes a default under the loan

− Typical R&Ws

 Maintenance of project accounts

 Cash waterfall – priority of payments from project cashflow

 Maintain project cover ratios (LLCR/DSCR)

 Furnishing information (eg access to inspect, financial, technical and operational information)

 Corporate status/validity of authorisation

 Maintenance of insurance

 Payment of taxes and other statutory fees

 Compliance with environmental requirements

− Amount of debt raised is determined by the projected cashflow

− Looks at the ability of the cashflow to service debt with a “safety” margin (ie

equity distributions)

− Annual Debt Service Cover Ratio (CADS / debt service (1.10-1.2X))

− Loan-life Cover Ratio (NPV of CADS over loan /Debt outstanding)

− Project Life Cover Ratio (NPV of CADS over project /Debt outstanding)

Part 3: Documentation

Project Loan Agreement

− Negative Covenants

 Restriction of use of free casflow

 No distributions (other than that allowable under the cash waterfall)