2. What is Project Finance?
Establishes
a
single
purpose
company
Project finance is
Lenders
are
totally
reliant
on
the
assets
and
cash
flows
of
the arrangement of financing that
project
for
interest
and
loan
repayment
and
sharing of risk between The
debt
is
secured
by
the
asset
and
various
associated
contracts
capable parties
for
No
direct
(or
only
limited)
recourse
to
the
project’s
infrastructure and industrial sponsors,
other
than
their
equity
commitments
projects based upon
the projected cash flows of the Project
risks
are
transferred
and
shared
amongst
stakeholders
project.
Two
main
debt
funding
op�ons:
*
Commercial
banks
/
lenders
provide
loans,
o�en
sharing
exposure
through
a
syndicate
structure
*
Bonds
are
sold
to
capital
markets,
arranged
by
investment
banks
1
3. Project Parties and Commercial Arrangements
Project
team
&
advisors
/
areas
of
exper�se
Financial
Revenue
Technical
Insurance
Legal
Capital Providers
Owners
Other
Investors
/
Sponsors
–
Equity
Sponsors
Technology
PPA/ Offtake U�lity
/
Industrial
Supplier
Agreement Client
Fixed Price
Project
Company
Operations and
Contractor
Construction Maintenance Operator
Contract -‐
SPC
Agreement
Credit Agreement and Security
Fees
Senior
Debt
Byproducts/
Enabling Providers
/
Bond
legislation
Services Holders
State
–
governance Permits
2
4. Project Finance is about Sharing Risks
♦ Transfers risk to the private sector / off-loads responsibilities and
obligations
– Development
– Construction maintenance
– Operation construction
– Maintenance
– Financing
operation
financing
♦ Brings off-balance-sheet financing
♦ Focuses on life-cycle costs
♦ Introduces private sector disciplines (management, efficiencies,
innovation, value engineering)
♦ Improves operating and management efficiencies
3
5. Key Project Risks
Public
Private
Lenders
Structural/Comments
Sector
Sector
Design
&
♦ Technology
performance
/
warranties
/
support
/
Depends
No
Technology
technology
vendor
Construction
No EPC No
♦ Fixed
price
contract
facilitates
cost
overrun
♦ Operator’s
risk
/
guarantees
&
warranties
/
Operation
No No
Operator contractual
/
incentives
&
penalties
mechanism
♦ Maintenance
responsibility
&
reserves
/
equity
Maintenance
No No
returns
post-‐funding
of
maintenance
service
♦ Most
often
this
function
and
risk
is
assumed
by
Land
No No
the
public
sector
(infrastructure
projects)
♦ All
project
permits
and
construction
permits
are
Permits
No No
the
responsibility
of
the
developers
Revenue
♦ Key
investment
driver
/
project
viability
/
Minimal
thorough
analysis
of
traffic
and
revenue
risk
♦ Project
type
/
Capital
structure
/
reserves
/
Finance
Depends
viability
4
7. Requirements for Private Participation
Category Definition
Definition Tightly-bound, ironclad definition of project with good & clean limits
Large enough to attract strong international interest, but not so large as to force need for
Size large bidding groups, thus limiting competition
Adequate to bring project to completion – balanced, sufficient time to organize tender
Timeframe competition but short enough to maintain high level of bidder interest
Should not require extensive skillsets – avoid complex, extensive multi-purpose projects that
Skill-sets require expensive and diverse skills
Complex project structure and inter-organizational agreements take longer to implement than
Interfaces simpler networks
Avoid projects with unproven technology, significant business risks, complex implementation
“Financeability” techniques, etc.
Required to establish project privatization with defined mechanisms on setting tariffs. Legal
Regulation framework for the Government to regulate and monitor PPP performance
Technical Factors Wealth of technical data available for more efficient monetization
Land &Permits Clear definition of ownership of land, right of way and permitting process
Competition From other projects or sectors
6
9. Forms of Private Sector Involvement
Concession/
JV/strateg ic
Manag ement
IPO
BO O (T)
Trade
sale
partner
Desig n-‐Build
contract
u Ownership
of
the
u Most
common
form
u An
existing
road
u Government
retains
u Public
procurement
u C ontractor
receives
a
asset
is
w idely
of
privatization
operating
company
an
interest
in
the
of
designed
projects
(management)
fee
distributed
u C ontractual
or
its
assets
are
sold
asset
(minority)
u Private
bidding
for
from
the
authority
u Assets
are
at
a
arrangement
and
to
corporate
investors
u Majority
interest
the
construction
based
on
mature
stage
o f
transfer
o f
the
or
joint
ventures
goes
to
the
p rivate
performance
and
u Public
ownership
and
developments
“ rights”
to
manage,
u Requires
careful
sector
implementation
of
public
operation
operate
and
maintain
drafting
of
b idding
services
provided
u “ Politically”
and
socially
more
a
road
terms
u Fees
and
charges
are
acceptable
o f
the
u Suitable
for
u Suitable
for
mature
paid
by
users
to
the
privatization
options
greenfield
assets
assets
asset
authority
(government)
DBB BT BL BTO DBFO BOT BOO(T)
Public Management
Private Sector Participation
Higher
Private Construction
8
10. Different Models for Infrastructure Delivery
Public Finance Model - USA PPP / Concession Model
Management
þ þ
Rating AA-BBB Mostly BBB
Debt 100% 55% - 85%
None or possibly development 10-20% optional capital
Equity
cost / investment structure
IRR/dividends None over 10%+
Taxation None Incentives-limited tax holiday(s)
Depreciation None Yes – depends on asset base
Cost of Debt [4.0% – 5.5%] [5.5% – 8.5%]
Control of Tolls /
User Fees State / Public Enterprise Private Sector / Regulated
9
11. Structuring Challenges for Project Finance
♦ Greenfield projects are highly complex
♦ Require careful preparation
♦ High risk profile / who pays for the risk and how
♦ Must prove profitability AND affordability
♦ Highly capital intensive
♦ Long construction periods
♦ Highly contested projects (unions; citizens; etc..)
♦ Expensive undertakings
10
12. Non Finance Challenges and Issues
♦ Public sector as counterparty
♦ Lack of resources trained in new implementation models
♦ Managing procurement change
♦ Easy targets to challenge / high level of scrutiny
♦ Complex design – impact to costs
♦ Necessity for sophisticated/experienced resources in Gov. teams
♦ Long gestation horizon
♦ High uncertainty and risk
...suitable team and strategy is crucial
to address these issues
11
13. Capital Structure and Providers of Capital
NewCo – Project Co
Equity investors Debt lenders
(10% — 30%) (70% — 90%)
Candidates
— Project sponsors
— Project vendors
Bank market Capital markets
— Operators
— Financial
investors Syndicated loan Bond issues
market — TIFIA
or — 144A
Credit — Bonds
IPO / Equity capital
enhancement — Monoline wraps
markets
____________________
(1) Does not include public sector support (grants or guarantees)
12
14. ...so how much do I pay for capital?
Equity: Debt:
Shareholders / financial investors Lenders / debt capital markets
Risk free rate (treasuries) Risk free rate (treasuries)
+ +
Construction risk Project risk premium
+ +
Revenue model Swap rate
+ +
Operation risk [Premium]
+
[Seniority]
+
Ownership premium
Expected Returns
Margins [250 – 400bp]
IRR [12% – 28%]
13
15. Project Stages
Development Construction Ramp-up Operation
Project’s equity performance & costs
Capital Risk to investor
Investment
Project life
Financial Close Construction
Completion 14
16. Project Stages (with Finance Events)
Development Construction Ramp-up Operation
Refinancing
Project’s equity performance & costs
Equity 10-15%
Debt / Bond l
85-90% l
Capital Equity value increased
Structure
Equity 20%
[Subsidy 30%]
Debt 50% Capital Risk to investor
Investment
l
l Project life
Financial Close Construction
Completion 15
17. Rationale for Project Equity
♦ …“Skin in the game”…
♦ Economic requirement
♦ Strong management discipline
♦ Accountability on performance
♦ Focus on the “bottom line”
♦ Design innovation
♦ Cost savings over life cycle
♦ EPC – completion on time; on budget and with quality
♦ O&M performance
16
18. Types of Debt Products
Form of Debt Provider
US & international commercial banks; syndicated
Commercial bank debt
market / underwritten
Public bond market Investment banks / best efforts
Institutional market; investment banks / best
Private placement
efforts
Subordinated debt Commercial banks; developers; project sponsors
Multilateral A/B loans World Bank; IFC; IADB; others
Credit enhancement ECAs; commercial banks
Insurance cover & guarantees ECAs; public agencies
….however, the project characteristics will determine the type of debt
and debt structure that is suitable for the project
17
19. Raising Bank Debt …
♦ Lead-arrangers versus Club
♦ “Personalized” service
♦ Highly iterative approach
♦ Managed approach
♦ Hands on and lots of input
♦ Ongoing negotiations
♦ Banks do add value to a deal
♦ Unrated deals possible (no need for S&P / Moody’s rating)
♦ Different structuring culture
18
20. Capital Suppliers in Infrastructure
Commercial Banks Investment Banks Institutional Investors Government Bodies
BNP Governments –
UBS
Calyon Ministries of Finance
Dexia Credit Suisse DB RREEF
BBVA Deutsche Bank Multi-Laterals (TIFIA)
Santander Goldman Sachs Departments of
Transportation
Canada Pension Plan PPP Teams /
RBS Morgan Stanley
Task Force
Barclays Lazard
WestLB JPM Others
HSH
MedioCredito
Espirito Santo
19
21. Financing Models for Less Economic Assets
or Social Infrastructure (*)
800
Project Revenues < Annual Costs
600
Millions of Euros nominal
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
year of concession
(200)
Opex Capex
(400)
Senior debt interest & fees Senior debt repayment
Dividends Tax
(600)
Equity subscribed Debt drawdown
(800) Revenues
Solution may entail: (*) Social Infrastructure includes hospitals, schools or
universities, and other projects with no direct user fees
♦ Availability Payment
♦ Government Support
♦ Hybrid payment mechanisms
20
22. An Innovative yet Practical Structure that
Supplements Project Revenues
Costs = Revenues Liquidity Support
Forecasted user
Opex
revenue
+ +
PROJECT
Debt service 12 month debt
service reserve
+ Financial
contribution1
1A-firm
Return on equity
+ + Any intra-year
DSRA cash flow shortfall is
DSRA amount covered by the
Replenishment
DSRA
Note: 1 State budget items
21
23. City Actions for Successful Implementation
♦ Sophisticated management team (leverage private-sector advisors)
♦ Establish clear priorities and objectives (public needs & project aligned)
♦ Maintain transparency throughout the project development
♦ Conduct competitive tender BUT accept unsolicited offers
♦ Mayor’s governance & powers
♦ Create investment incentives (tax deferral, tax holiday, fiscal support)
♦ Standardize tender process
♦ Offer fast track permitting
♦ Stick to the timetable
22
24. What have I learned along the way?
ü Sound structures that are sustainable (withstand recession)
ü Experienced advisors are worth the money
ü Understand and prioritize objectives
ü Aim for “win-win” among all stakeholders
ü Identify multiple funding options
ü Delays destroy project value ( value of time )
... and…
ü It all about people relationships
23
25. Contacts
Adam Nicolopoulos Scott D. Henderson
President and CEO Director, Finance
ADN Capital Venture, Inc. C40, in partnership with the Clinton Climate Initiative
810 College Avenue, Suite 7 Berkeley, CA 94708
Kentfield, California, 94904 USA
USA
Cell: +1 415-548-0099
Office: +1 415-785-4613 shenderson@clintonfoundation.org
Cell: +1 415-246-1765 http://live.c40cities.org/
anicolopoulos@adnvc.com
www.adncv.com
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