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6.1 Advisory and Arranging Activities for Project Finance Funding
6.1.1 Advisory Services
Advisory services include all studies and analyses required to make a preliminary valuation of the financial feasibility of a project and also to outline an initial assumption as to how the funding required to sustain a SPV can be obtained.
TABLE 6-1 Types of Services Proposed by Financial Intermediaries
Advisory (consultancy services) Analysis of technical aspects (together with technical advisors) Analysis of regulatory and legislative aspects (together with lawyers) Due diligence reporting as regards parties involved in the deal Development of assumptions for risk allocation
Preparation of the business plan and performing sensitivity analyses Establish financial requirements and methods to fund these Identify methods to obtain debt and equity capital Organize and negotiate terms of financing (arranging)
Organize and negotiate terms of bond issues (global coordination) Lending (financing services) Grant bridge financing
Underwrite bank financing Grant pool financing (lending) Grant leasing for plant Contribute to equity
Contribute to mezzanine finance Issue guarantees and suretyships Manage technical relations with the SPV
Act as agency, maintaining documentation and monitoring use of funds by the borrower
Advisory and Arranging Activities for Project Finance Funding 149
The advisor’s tasks are:
. To understand fully the sponsors’ objectives and then to identify alternative solutions to achieve these
. To evaluate risks inherent in the project and to attempt to find strategies to mitigate, manage, and allocate these risks
. To assist sponsors in preparing and negotiating major contracts concerning the project
. To assist sponsors as regards certification of all permits, licenses, and autho- rizations obtained
. To assist sponsors in preparing the business plan or by reviewing the plan already prepared by them
. To highlight problems sponsors have not considered but that must be resolved to ensure the deal’s success
Advisory services in the initial stages concern gathering technical, legal, and fiscal information regarding the project, the parties involved, the localization of the ven- ture, and political and administrative factors it involves. This activity is frequently performed in association with a team of advisors from different organizations who have the necessary expertise as regards the legal, technical, and insurance aspects concerned (as seen in Chapter 4).
The gathering and initial processing of basic information forms the foundation of input for the business plan. In essence the advisor must translate information gath- ered into figures to evaluate what impact the many variables will have on cash flows, profitability, and the equity structure of the SPV. The business plan must enable the advisor, together with the sponsors, to devise the mix of financing sources to be set up to ensure that the project has the financial support it requires (see Chapter 5).
The final outcome of the financial advisor’s work is the information memoran- dum, that is, the document with which the advisor contacts potential lenders and begins to negotiate the credit agreement and loan documentation with the arrangers until the financial close is reached (see Chapter 7). The advisory stage has a heavy service content and doesn’t require a commitment for lending from the party con- ducting the activity.
The factors that sponsors focus on when selecting an advisor are usually the organization’s reputation, competitive standing, expertise in specific sectors or spe- cific geographical locations, and possibly already existing relations with the sponsors (except, of course, in cases where they are able to prepare the business plan without needing assistance from external parties).
Figure 6-2 shows a league table for the top twenty advisors worldwide for the period 2001–2004. Considering the entire period analyzed, this represents more than 90% of total mandates awarded. In fact, the market shows quite a high level of concentration, even though the trend for this percentage is decreasing as a result of a progressive fragmentation in the sector.
At a world level, PricewaterhouseCoopers is the leader figuring in one of the two top places in the league table during the four-year period considered. Also the second and third positions are almost always occupied by Ernst & Young and Macquarie, although the latter was overtaken in 2004 by KPMG. As for the remaining positions, they show a much greater turnover, with a presence of both pure advisors (typically the corporate finance divisions of major auditing firms) and integrated commercial banks, as in the case of ABN Amro, Socie´te´ Ge´ne´rale, Royal Bank of Scotland, or ING.
150 C H A P T E R u 6 Financing the Deal
2001
0 20 40 60 80 100 120
0 20 40 60 80 100 120
0 20 40 60 80 100 120 140
PWC Ernst & Young Macquarie SG KPMG Taylor de Jongh Investec European Capital Andersen ABN Amro Fieldstone Babcock & Brown Citigroup BNP Paribas BES Royal Bank of Scotland Deutsche Bank Bank of America Credit Agricole Indosuez CDC IXIS Int. Advisory & Finance
2002
PWC Macquarie Ernst & Young David Wylde PF KPMG Grant Thornton Citigroup Sumimoto Mitsui Fieldstone ABN Amro Babcock & Brown SG CDC IXIS Taylor de Jongh Deutsche Bank Dexia Investec European Capital Korea Development Bank ING DrKW
2003
0 20 40 60 80 100 120 140 160
Ernst & Young PWC Macquarie KPMG ABN Amro Dexia Grant Thornton Taylor de Jongh Mizuho Financial Group David Wylde PF Sumitomo Mitsubishi CDC IXIS Espirito Santo Investment HSBC ING Investec European Capital Korea Development Bank
2004
PWC Ernst & Young KPMG Macquarie IXIS CIB ABN Amro HSBC Royal Bank of Canada Dexia Grant Thornton Taylor de Jongh KDB Investec European Capital Citigroup BNP Paribas SG SMBC BNL Royal Bank of Scotland ING
F I G U R E 6-2 Global Advisors by Number of Project Finance Deals (2001–2004) Source:Project Finance International.
Trends seem to be reasonably clear:
1. The progressive leadership of the corporate finance divisions of major consul- tancy and auditing firms (PricewaterhouseCoopers, KPMG Corporate Fi- nance, and Ernst & Young) as credible competitors to financial intermediaries;
2. Leading names in the international investment banking (Morgan Stanley, JPMorgan, Lehman Brothers, Credit Suisse First Boston, Merrill Lynch), who figured in league tables in the first half of the 1990s, have been overtaken by the group of large, integrated commercial banks. This situation would seem to confirm the competitive superiority of the ‘‘integrated’’ intermediary model illustrated later in Section 6.1.3.