LLCR ¼ Xsþn
6.1 Advisory and Arranging Activities for Project Finance Funding
6.1.3 Integration of Advisory and Arranging Services
We have analyzed the roles of financial advisors and arrangers separately. It is now time to clarify if the same bank (whether an investment bank or commercial bank) can simultaneously be both the financial advisor and the arranger of the deal, provided, of course, that the advisor has the financial strength to take on the task of organizing the pool of lenders.
As for the SPV-borrower, there are three alternatives.
1. The first is to maintain a clear-cut division between the roles of financial advisor and arranger: The borrower decides not to allow its financial advisor to participate in the loan pool once this is structured (specialization model).
1. This criterion was preferred to the alternative of using loan amounts effectively disbursed. The reason is that each project necessarily has a mandated lead arranger (or more than one if the size of the deal warrants this), who later sells more important or less important shares of the syndicated loan to other participants. Classifica- tion by amount of arranged financing leaves total resources effectively invested unchanged but offers the advantage of highlighting the more active intermediaries in the most important role for the success of the deal. It could be said that a classification by amount financed distorts perception of competitive interaction in the international syndicated loan arranging business field. In fact, the risk would be to find banks with only modest expertise in arranging but with massive balance sheet capabilities—pure lenders—toward the top of the league, whereas less ‘‘robust’’ banks from a financial standpoint but with the necessary expertise to structure deals would be way down the list.
Advisory and Arranging Activities for Project Finance Funding 153
2001
− 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 − 1,000 2,000 3,000 4,000 5,000 6,000 7,000
− 1,000 2,000 3,000 4,000 5,000 6,000 7,000
− 500 1,000 1,500 2,000 2,500 3,000
− 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 CitigroupWestLB
BNP ParibasSG CSFB JP Morgan DrKW ABN Amro Deutsche Bank Barclays Capital Mizuho IntesaBci Bank of AmericaCredit Lyonnais Royal Bank of ScotlandSEB BoT-MitsubishiANZ Santander Central HispanoCredit Agricole Indosuez
2002
CitigroupSG Royal Bank of ScotlandWestLB Barclays Capital Mizuho Financial Group BNP Paribas HypoVereinsbank Deutsche Bank Mitsubishi Tokyo Fin'lABN Amro HBOS Credit Agricole Indosuez Credit LyonnaisANZ Caja de AhorrosIntesaBci Korea Development JP Morgan Lloyds TSB Group
2003
Credit Agricole, Credit Lyonnais Royal Bank of ScotlandBNP Paribas SMBCSG WestLB Citigroup Mitsubishi Tokyo Fin'l GroupKorea Development BankBarclays Capital Banco Bilbao Vizcaya ArgentHSBC Deutsche BankANZ ABN AmroHBOS CIBC Mizuho ING Ind & Comm Bank of China
2004
Citigroup BNP ParibasCSFB RBSSG SMBC Mitsubishi Tokyo Fin'l Group HSBCKDB ABN Amro Barclays Capital Chiao Tung Bank Mizuho Financial GroupWestLB Calyon Kookmin Bank HBOS HypoVereinsbank Banco Bilbao Vizcaya ArgentSantander Central Hispano
January–June 2005
Citigroup BNP Pribas CSFB Royal Bank of Scotlan SG ABN Amro Calyon WestLB Santander Central Hispano Mitsubishi Tokyo Fin'lHSBC SMBC Barclays Capital Caja MadridMizuho KDB CBA ANZ HypoVereinsbank Banco Bilbao Vizcaya
F I G U R E 6-3 Global Mandated Lead Arrangers for Project Financing Deals (2001–2005; in millions of US dollars) Source:Project Finance International.
2. The second alternative is exactly the opposite, in which case the borrower decides beforehand that the chosen financial advisor will also be the arranger in the second phase (integration model).
3. The third situation lies somewhere between the previous two, namely, where the borrower decides to allow its financial advisor to compete with others for the role of arranger.
The advantages and disadvantages for each alternative are clearly exactly oppo- site in the case of total separation between advisor and arranger or integrated management of the two mandates.
Separating roles between two different intermediaries has the major merit of reducing potential conflict of interest between the party assigning the mandate (the SPV) and the party receiving it (the bank). The pure advisor simply provides a consultancy service where the aim is to get the project off the ground in order to earn the associated success fees. In this case the advisor has no interest in setting a price for the financial package that would be more remunerative in the absence of competitive offers—which might happen if the two roles are integrated. In essence the advisor should in principle ensure impartiality so as to guarantee a balance between the SPV’s interests and those of lenders who will later disburse funds to the project company.
However, the specialization model has its significant drawbacks. First of all the pure advisor doesn’t invest money in the deal, and so banks called on to support the project have no credible points of reference, such as an underwriting commitment.
For this reason banks may fear that the advisor is trying to sell them an excessively risky deal. This in turn means the borrower will find it difficult to source the necessary funds. Furthermore, the advisor may handle the mandate in a particularly prudent manner and structure the security package in favor of lenders, with the aim of making it easier to sell participation in the loan during the syndication phase. This would naturally be a disadvantage for the borrower because the cost of borrowed funds would be higher, making the deal less profitable for sponsors. As a third point, the decisive disadvantage of the specialization model is that duplication of roles is in any event costly for borrowers, even if the issues mentioned earlier were to be resolved.
Once the advisor has completed the mandate, the entire documentation is deliv- ered to the arranger. Before making contact with lenders, the arranger must review all the legal, fiscal, technical, and administrative aspects, which will often require further opinions on specific issues. Clearly this leads to additional costs that could be avoided if the roles of advisor and arranger were combined within a single organization. The question of increased initial costs is a very touchy issue in smaller projects, for which cash flows generated in the operations stage may not be sufficient to absorb struc- turing costs and at the same time provide an acceptable return on the share capital put up by sponsors.
For all these reasons, data available indicate that a growing number of banks operate in the dual role of advisor and arranger, offering their clients convenient one- stop-shopping solutions and abandoning more extreme forms of specialization.
In Table 6-2, prepared based on ProjectWare’s Dealogic data, information in the advisor and arranger league tables are cross-matched to verify the number of arrangers who figure among leaders in the advisory market. For the first twenty positions, excluding 2002, the match between advisory and arranging roles is always in the 50–60% range. The group of integrated intermediaries comprises a more or less Advisory and Arranging Activities for Project Finance Funding 155
stable nucleus of 10–12 banks that respectively account for a significant 50% and 55%
of the total worldwide advisory and arranging markets. Integration between com- mercial and investment banking also seems to be beneficial for capital market activities. Many integrated operators also figure in leading league positions for project bond bookrunners (see Section 6.11) and so are making inroads on a market segment traditionally dominated by investment banks, which tend to have much more experience in the bond market.
Narrowing the gap between the advisory and arranging business areas appears to be much more appealing to banks with a strong commercial background, tradition- ally focused on lending and therefore relatively more competitive in arranging services. In fact, it is understandably less costly for the latter banks to extend their
TABLE 6-2 Strategic Groups of Financial Intermediaries in the Project Finance Business (2001–2004)
Number of Top 20 Arrangers in Position of Top 20 Advisors
2001 2002 2003 2004
8 5 5 8
Integrated Intermediaries JPMorgan Chase & Co
Citigroup Inc Bank of America Corp
Deutsche Bank AG Socie´te´ Ge´ne´rale Credit Suisse First Boston (CSFB)
Barclays plc ABN Amro Holding NV Dresdner Kleinwort Wasserstein (DKW) Australia & New Zealand Banking Group Ltd
Toronto-Dominion Bank Focusing on Arranging Services Canadian Imperial Bank of Commerce
Credit Lyonnais National Australia Bank
WestLB AG BNP Paribas ING Groep Royal Bank of Scotland Focusing on Advisory Services
Macquarie Bank Ltd Merrill Lynch & Co. Inc.
Morgan Stanley Rothschild Lehman Brothers Inc
Source: Authors processing of Project Ware’s Dealogic data.
156 C H A P T E R u 6 Financing the Deal
range of activities to include advisory services than it is for an investment bank to increase its lending potential.2