Fees for Arranging Services 159 6.3.3 Fees to Participants and the Agent Bank 159
International Financial Institutions and Multilateral Banks 162
Bilateral Agencies: Developmental Agencies and
Other Financial Intermediaries Involved in Project Finance 183
Timing of the Equity Contribution and Stand-by Equity
Can Shares in an SPV Be Listed on a Stock Exchange? 188 6.8 Funding Options: Mezzanine Financing and Subordinated Debt 188
Refinancing Loans Already Granted to the SPV 201
Valuing the Convenience of a Project Leasing 208
Various Categories of Project Bonds 215
Procedure for Issuing Project Bonds 224
Reasons for Incorporating the Project in a Project Company 235 7.1.2 The Project Company as a Joint Venture
The Project Company and Groups of Companies 237 7.1.4 Corporate Documentation: Articles of Incorporation 237
Before the Financing: The Due Diligence Report and the
Classi W cation of Project Documents 242
Security Documents: Security Interests and What They Do 265
The Basel Committee’s Position on Structured Finance Transactions
Classes of Transactions Included in Specialized Lending 291 8.2 Rating Criteria for Specialized Lending and Their Application to
Rating Grade Slotting Criteria of the Basel Committee and
E V ects of the Basel Proposal on the Syndicated
Introduction to the Concepts of Expected Loss, Unexpected Loss,
Defining Default for Project Finance Deals 306
Identifying Project Variables and Key Drivers 309 8.7.3 Input Variables: Estimation and Data Collection 314
Estimating Value at Risk through Simulations 317 8.9 Defining Project Value in the Event of Default 319
My first collaboration resulted from the launch of a new research project examining the evolution of project finance techniques in Italy. But we must never forget that project finance is a highly leveraged transaction where two principles are key to success: (1) cash is king; (2) lenders control the fate of the project.
What Is Project Finance?
Why Do Sponsors Use Project Finance?
If the project is not successful, all the remaining assets and cash Xows can serve as a source of repayment for all the creditors (old and new) of the combined entity (existing Wrm plus new project). If the project is not successful, project creditors have no (or very limited) claim on the sponsor Wrms' assets and cash Xows.
Who Are the Sponsors of a Project Finance Deal?
- Industrial Sponsors in Project Finance Initiatives Linked to a Core Business
- Public Sponsors with Social Welfare Goals
- Contractor/Sponsors Who Develop, Build, or Run the Plant
- The ‘‘Purely’’ Financial Investor
In these latter cases, success depends mainly on the eYcient management of relations with public administration and, in certain cases, also on the contribution that the public sector can make to the project. The private party owns the works (as in the BOOT case), but ownership is not transferred at the end of the concession agreement.
Overview of the Features of Project Finance
- The Contractor and the Turnkey Construction Contract (TKCC)
- Operations and Maintenance Contractor and the O&M Agreement
- Purchasers and Sales Agreements
- Suppliers and Raw Material Supply Agreements (RMSAs)
- Project Finance as a Risk Management Technique
On the other hand, the contractor can still earn a bonus if the certified performance of the power plant is better than that specified in the contract with the SPV. The ownership structure of the service company may or may not be the same as in the SPV.
The Theory of Project Finance
Separate Incorporation and Avoidance of Contamination Risk
The reliability and trustworthiness of the company that will realize the new venture (often the most important factor). If the new project were to fail, its sheer scale would jeopardize the continuation of the company's other business and value of the remaining assets.
Conflicts of Interest Between Sponsors and Lenders and Wealth Expropriation
In scenario 2, project financing is the optimal solution because it avoids the harmful effect of contamination risk from project A. Project A is defaulted but not a new project.). In summary, in our case, the separation of the company and the project is always the optimal solution from the shareholders' point of view and may lead to the expropriation of creditors' assets.
Historical Evolution of Project Finance and Market Segments
Note in particular that in the sectors mentioned in cells II and I, the product in question can be sold at market prices on the basis of long-term contracts (take or pay agreements or oVtake agreements; see Chapter 3). In the latter case, in addition to these factors, the feasibility of financing depends largely on the level of government subsidies granted.
The Global Project Finance Market
A Closer Look at the European Market
Indeed, the former accounts for more than 95% of the total in the European market throughout the time frame analyzed. Although we cannot refer to nonmembers as ``developing nations'' in the strict sense, this phenomenon is further evidence of the shift from cell II to cell I highlighted in Figure 2-1.
PPP Development
In this case, the firm usually tries to implement internal procedures for controlling and preventing the risk. Each counterparty will bear the cost of the risk it can best control and manage.
Identifying Project Risks
Precompletion Phase Risks
The timing of the two activities (construction of the plant and start of power production) was critical for the economic sustainability of the project. Whether the banks are willing to accept construction risk or not also depends on the nature of the technology (innovative or consolidated) and the reputation of the contractor.
Postcompletion Phase Risks
In a project finance transaction, construction risk is rarely allocated to the SPV or its lenders. The result is that the contractor or even the sponsors themselves have to bear this risk.
Risks Found in Both the Pre- and Postcompletion Phases
Basically this risk appears when some financial flows from the project are declared in a currency other than that of the SPV. The forward rate agreement (or FRA) is one of the most widely used futures contracts written on interest rates.
Risk Allocation with Contracts Stipulated by the SPV
- Allocation of Construction Risk
- Allocation of Supply Risk: Put-or-Pay Agreements
- Allocation of Operational Risk: Operations and Maintenance (O&M) Agreements
- Allocation of Market Risk
The operational risk can be limited by the experience and reputation of the project executor. Figures 3-11 and 3-12 show the toll structure in the financial approach and the industrial approach, respectively. This is a way to transfer some of the 'market risk' of the project to the private player.
Summary of the Risk Management Process
A project financing transaction is destined to require the services of a whole host of advisers, specialists in unrelated disciplines whose activity has only one thing in common: All their inputs are related to the same project which must then be compiled on paper. Project financing is a form of financing in which costs are particularly high in relation to the size of the transaction in question. This is also why every project finance deal has a critical minimum size threshold below which structuring costs become excessive in relation to its forecasted income and cash flow.
The Role of Legal Advisors in Project Finance Deals
Legal Advisor, Legal Advisors, and Law Firms
In most cases, the latter means the law as interpreted in the State of New York; it is technically inappropriate to refer to the law of the United States of America. The choice of one or the other legal system depends on many factors, in most cases it is determined by the nationality of the sponsors, arranging banks and the location of the works to be carried out. In Europe, it is practice in the vast majority of cases to refer to British law, although approaches in some European countries vary widely.
Project Financing Development Stages and Impacts on the Role of Legal Advisors
Formation of the sponsor group Organization of the project company Sponsors' lawyers Statutes for. In case of conflicts of interest among sponsors, the purpose of the project consultancy is to remain neutral (clearly an embarrassing situation) and to act in the project's, i.e. (subjective) interest, for the project company. With the financial closure (ie when all set conditions have been met, thereby enabling the initial disbursement of finance for the construction of the facility or works), the project company is authorized to use the project finance facility.
The Role of the Independent Engineer in Project Finance Deals
- Initial Due Diligence Reporting
- Monitoring Realization of the Project (Engineering and Construction)
- Assistance at the Time of Plant Acceptance
- Monitoring Operations Management
Therefore, the independent engineer also plays an important role in the acceptance of the device. During the time between PAC and FAC, the independent engineer must continuously inspect the plant and analyze the regular maintenance reports prepared by the facility manager. Documents produced: During the testing phase, the independent engineer periodically prepares a monitoring report summarizing the evaluations of the specified variables.
Role of Insurance Advisors and Insurance Companies in Project Finance Deals
- Rationale for Using Insurance in Project Finance Deals
- When Should Insurance Products Be Used?
- Areas Where the Insurance Advisor Is Involved
- Types of Conventional and Financial Insurance Products Available for Project Finance Deals
- Integrated Insurance Solutions—Structure and Content
- Classification of Insurance Underwriters
The scope of the work to be carried out by the consultant naturally follows the development of the project based on the progress in structuring the financing. The pricing of the insurance package from the very beginning of project planning (feasibility study), then for the project implementation phase and throughout the entire operating period required to repay the debt. Initially studied for the needs of the construction industry, integrated insurance programs are now used in many project financing applications.
Analysis of Operating Cash Flows and Their Behavior in Different Project Life-Cycle Phases
Inputs for Calculating Cash Flows
As an example, Table 5-1 shows the timing on the Italy Water Project, specifying the start and end dates, the duration of the concession, and the construction period (divided into two work sections) and the operation period (again divided into two work sections). In PPP projects, the working capital requirement is linked to the average payment period of the public administration that granted the concession. In the Italy water case, the estimate of the average collection and payment periods is summarized in Table 5-9.
Defining the Optimal Capital Structure for the Deal
- Equity
- Senior Debt
- VAT Facility
- Stand-by Facility
- Identifying Sustainable Debt/Equity Mixes for Sponsors and Lenders
There is a trade-off that can occur regardless of the project's rate of return. The input data for the base object of the Italy Water Case is shown in Table 5-11. This evaluation should be done by comparing the IRR of the project calculated using cash flows from operations (IRRProject) and the WACC of the SPV.
Cover Ratios
What Cover Ratios Can Tell Us and What They Can’t
The final result in terms of the project's IRR for the sponsors would be extremely unfavorable, to the point that the project would not be economically viable. In this regard, the values collected from the project financing market are summarized in table 5-17. As can be imagined, the level of coverage ratios depends on the inherent risk of the project as perceived by the lenders.
OCF 1
Projects in the transport and telecommunications sectors, where long-term drawdown contracts cannot be implemented, can generally only be financed with higher coverage ratios. In terms of the current use of DSCR, many loans require a specific minimum average level in addition to minimum coverage ratios at certain intervals (ie, year after year). The average DSCR is nothing more than the average of the single DSCRs recorded in each operating year:.
Xsþn
Cover Ratios as an Application of the Certainty Equivalents Method
Two lenders (Alfabank and Betabank) are willing to accept 1.3 and 1.6 DSCRs respectively for all years of the loan repayment plan. Note at this point that in a given year of loan repayment, the operating cash flows generated by the project are multiplied by a number between 0 and 1. According to this method, an investment/financing project is characterized by a series of cash flows that are not known to the evaluator must be accepted or rejected priori based on the NPV criterion.
Sensitivity Analysis and Scenario Analysis
- Which Variables Should Be Tested in Sensitivity Analysis?
The result of the simulation depends to a large extent on the hedging policy chosen for interest rate risk. Simulations on single variables should not show excessive sensitivity to the results of the project, which were initially measured by DSCR, LLCR and IRR. In terms of the model, this means that the minimum DSCR level must be at least 1.
Advisory and Arranging Activities for Project Finance Funding
- Advisory Services
- Arranging Services
- Integration of Advisory and Arranging Services
At the global level, PricewaterhouseCoopers is the leader in one of the first two places in the league table during the four-year period considered. However, European banks are firmly entrenched at the top of the league and outnumber US brokers. For the top twenty positions, excluding 2002, the match between advisory and regulatory roles is always in the 50–60% range.
Other Roles in Syndicated Loans
Fee Structure
- Fees for Advisory Services
- Fees for Arranging Services
- Fees to Participants and the Agent Bank
- Example of Fee Calculation
The lead arranger then pays other banks in the pool by returning a portion of the fees received to them. Again, in this case the brokerage fee is set as a percentage of the debt (for the same reasons discussed with reference to advisory fees). The upfront administration fee also comes out of the event fee that sponsors pay to MLA.
International Financial Institutions and Multilateral Banks
- Multilateral Organizations
- Regional Development Banks
EIB members are EU member states that subscribed to the bank's equity capital. In the field of project financing, the bank can grant loans for the construction, expansion and modernization of plants in various sectors (except real estate and trade). As with other multilateral and bilateral agencies, the bank acts as a passive shareholder and does not interfere in the management of the SPV's affairs.
Bilateral Agencies: Developmental Agencies and Export Credit Agencies (ECAs)
- Developmental Agencies
