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Project Finance - Session 05

Project Finance - Session 05



Session 5 Presentation - Includes content related to Project Finance deals, in particular, Advising & Arranging Activities, Fee Structures, International Financial Institutions, Multilateral Banks ...

Session 5 Presentation - Includes content related to Project Finance deals, in particular, Advising & Arranging Activities, Fee Structures, International Financial Institutions, Multilateral Banks and Bilateral Agencies (ECA\'s).



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  • International Bank for Reconstruction & DevelopmentInternational Development AssociationInternational Finance Corporation Multilateral Investment Guarantee AgencyInternational Centre for Settlement of Investment Disputes

Project Finance - Session 05 Project Finance - Session 05 Presentation Transcript

  • Project Finance
    Session 5 – Financing the Deal (Part 1)
  • Agenda
    Project Finance Model
    Financing the Deal (Part I)
    Advising & Arranging Activities
    Fee Structure
    International Financial Institutions & Multilateral Banks
    Bilateral Agencies (ECA's)
    Case: Dahbol Power Project
  • Review – Project Finance Model
    Alternative Model
    (see MS Excel file)
    Wind Energy Financing Model
  • Financing the Deal
    Advising, Arranging & Lending Services
    & Fee Structures
  • Advising & Arranging Activities
    Advisory Services
    Modelling & Structuring the Deal
    Primarily the domain of … Investment Banks, Consulting Firms & Engineering Firms
    Arranging & Lending
    Commercial Banks
    Multilateral Institutions
    Bilateral Institutions
    Export Credit Agencies
  • Advisory Services
    The Advisors tasks include:
    Identify Alternative Solutions
    Evaluate Risks – Mitigate, Manage & Allocate
    Prepare & Negotiate Contracts
    Process Permits & Licenses
    Assist / Prepare the Business Plan
  • Advisory Services
    Information Memorandum
    The document with which the advisor contracts potential lenders and begins to negotiate the credit agreement and loan documentation.
  • Arranging Services
    Is covered by Commercial Banks
    International Coverage
    Large amount of Equity
    Mandate from the SPV to structure & manage the financing contract
    Mandated Lead Arranger (MLA)
    Underwriting Guarantee
  • Integration of Roles
    As the SPV (borrower) there are 3 alternatives for the structure of the Advisory & Arranging roles:
    Reduces conflict of interest
    Advisor doesn’t invest any money (the Sales Man)
    Duplication of Efforts
  • League Tables
    Source: Thomson Reuters, Global Project Finance Review, Q3 2009
  • Fee Structure
    Fees for Advisory Services
    Retainer Fee: Covers the advisor’s costs during the study and preparation phase of the deal.
    Success Fee: initiated at financial close; from 0.5% - 1% of the debt value.
    Incentivises the highest possible debt-to-equity ratio
  • Fee Structure
    Fee for Arranging Services
    Est. as a % of debt
    Range from 0.7 – 1% of the syndicated debt.
    Pure Arranging Fee
    Underwriting & Arranging Services
    Range from 0.5 – 0.8%
  • Fee Structure
    Participating Banks
    Lead Managers, Managers and Co-managers
    Up-front Management Fee 20 – 40 Basis points on Loan
    Commitment Fee
    Difference between maximum & disbursement to date
    Required to set aside capital for committed loans
    Agent Bank
    Fee based on scope of administrative tasks
    CF = (CL – Et) * cf * t/360
  • Fee Structure
    (… a simplified) Example
  • Fee Structure
    Which role has the best return?
    The Advisor!
    No commitment of capital
  • Financing the Deal
    Multilateral Organisations & the World Bank
  • Multilateral Organisations
    Leading role in project finance deals in developing countries
    Less Government / More Private Projects
    Tendency not to lend directly
    Support Private Sector through Guarantees
    World Bank Group
    Five Institutional Agencies
  • World Bank (Group)
    Formed at Bretton Wood Conference, 1944
    Headquartered in Washington D.C.
    Owned by 186 Member Countries
    Millennium Development Goals
    Goal 7. Ensure environmental sustainability
    Goal 8. Develop a Global Partnership for Development
    Last year, the World Bank provided $46.9 billion for 303 projects in developing countries worldwide
  • World Bank - IBRD
    Aims to reduce poverty in middle-income and creditworthy poorer countries
    Involvement in Project Finance
    Direct Loans
    Partial Risk Guarantees
    Partial Credit Guarantees
    Enclave Guarantees
    Mostly Government Related Projects
    No private financing available
    * Enclave = Revenues flow between entities outside the host country
  • World Bank - IDA
    Provides financial support the poorest countries (that fail to meet criteria for access to IBRD financing).
    Indirect Loans & Guarantees
    Very Long Loan, 35 – 40 years
    Grace Periods up to 10 years (service 0.75%)
    Same operations as IBRD (different financing)
    Funds from Governments of Developed Countries
  • World Bank - IFC
    Doesn’t require intervention of host government
    Private Projects in all sectorsin Developing Countries
    Loans & Equity
    Assists private companies obtain financing
    Provides consultancy services
    Hedging Policies / Guarantees
    $100 Million per individual project (25% total costs)
    Term of loans up to 20 years
    Equity stakes up to 35% (8 – 15 yrs)
  • World Bank - IFC
  • World Bank - IFC
  • World Bank - IFC
    * MSME = Micro, Small & Medium Enterprises
  • World Bank - MIGA
    Provides Political Risk Coverage to lenders & Investors
    All 163 World Bank Members
    Only WB agency that offers Political Risk Coverage
    Up to 95% of debt service
    Max. $200 Million
    Premiums range from 0.5 – 1.75%
    15 years duration
  • World Bank – ICSID
    Established in 1966 under the Convention on the Settlement of Investment Disputes.
    Arbitration on international investment disputes between foreign investors and host states
    143 Member Countries
    Total Cases Registered 292
    Cases Registered in (fiscal) 2009, 24
    E.g. Cambodia Power Company vs. Kingdom of Cambodia and Electricité du Cambodge
  • Financing the Deal
    Other Development Banks,
    Bilateral Agencies & ECA’s
  • EIB – European Investment Bank
    Owned by EU member countries
    EIB loans funded from capital markets (AAA)
    Within EU
    Up to 50% of project costs
    12 - 20 years
    No arranging fees
    Outside EU
    EIB takes on political risk (restricted)
  • AfDB – African Development Bank
    53 African nations, 24 non-African
    Promotes infrastructure projects, particularly PPP
    Loans, Guarantees < 1/3 Total Project Cost
    Equity < 25% of the SPV’s capital stock
    Total Project Costs < $9 Million
  • IDB – Islamic Development Bank
    Adheres to Islamic Law
    Prohibits the charging of interest on loans
    Loans < 7 Million Islamic Dinars
    Maturity ranging 15 – 25 years (grace 3 – 7 yrs)
    Leasing (ijara)
    Instalment Sales (murabaha)
    Equity, max 1/3 capital
  • Development Banks
    Handout Examples …
    EIB – (Poland) A1 Debt Structure Emerging
    IDB – (Brazil) IDB Approves Rodoanel Loan
    Source: Project Finance Magazine, Oct 2009 (ProQuest LLC)
  • Development Agencies
    Bilateral … pursue aims lined toforeign economic policy or commercial promotion of home country
    Commonwealth Development Corp. (CDC), UK
    invests in private equity funds focused on the emerging markets of Asia, Africa and Latin America
    E.g. US$35 Million, to Private Equity for Microfinance Projects
    Deutsche EntwicklungsGesellschaft (DEG), Germany
    E.g. financing of Olkaria III, a geothermal power station in Kenya
  • ECA’s – Export Credit Agencies
    Political Risk Coverage, total coverage & direct loans to exporting companies operating in their home country
    Enable exporters to be competitive, in otherwise high-risk endeavours.
    Direct Lending, for purchase from country of origin
    Indirect Lending, financial intermediary (commercial)
    Interest Rate Equalization, lower than market rates
    Activities of ECA’s is regulated by OECD Consensus
    85% of contract value
    Duration 8.5 – 10yrs (max.)
    Constant Repayments, 6 months (max.)
  • ECA’s – Export Credit Agencies
    Export-Import Bank, United States
    Export Credits Guarantee Department (ECGD), UK
    AuslandsGeschäftsAbsicherung (AGA), Germany
    CompañíaEspañola de Seguros de Crédito a la Exportación (CESCE), Spain
    Export Finance &Insurance Corporation (EFIC), Australia
  • ECA Activities
    MTS secures USD1 billion Credit Line
    Ex-Im Bank Increases Export Credit Support for Renewables
    MTS secures USD1 billion credit line according to Russian news agency Prime-Tass, the country’s largest cellco by subscribers, Mobile Tele Systems (MTS), has secured a credit line of USD1.07 billion to finance the purchase of network infrastructure equipment from Ericsson.
    The facility, backed by Sweden’s Export Credit Agency, has two tranches: the first, valued at USD429 million, has a maturity of June 2019, while the second tranche, worth USD646 million, is due to be repaid in October 2020. Mikhail Shamolin, President and CEO of MTS, said, ‘The terms and size of the loan that we were able to secure provide us with the necessary flexibility in our CAPEX plans going forward as we build out our networks to provide quality services to our subscribers.’…
    The Export-Import Bank of the United States has established a $250 million credit facility aimed at helping to promote and finance renewable energy exports, including solar, wind and geothermal energy products and projects.
    The move this week makes Ex-Im the world’s first Export Credit Agency to fashion that kind of credit assistance and also the first to adopt an actual “carbon policy” to guide the financial support of U.S. exports “in light of climate change concerns,” the agency says.
    In fiscal year 2009, which ended September 30, the Bank authorized more than $21 billion in support of U.S. exports and associated jobs, the highest financing level since it was established in 1934. The Bank, which is the official, independent export credit agency of the U.S., also set a record for financing of U.S. small business exports at $4.36 billion.
  • Case Review:
    Dahbol Power Project (India)
  • Case: Dahbol Power Project
    Project Description
    Describe the structure of the Project Company (SPV)
    What were the key external relationships related to the deal?
    What we the main risks (problems) of the project?
    How was the project financed?
    Describe the main contracts that were associated with the project?
    How did these contracts impact the viability of the project?