Project Finance - Session 05


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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

    1. 1. Project Finance<br />Session 5 – Financing the Deal (Part 1)<br />
    2. 2. Agenda<br />Project Finance Model<br />Financing the Deal (Part I)<br />Advising & Arranging Activities<br />Fee Structure<br />International Financial Institutions & Multilateral Banks<br />Bilateral Agencies (ECA&apos;s)<br />Case: Dahbol Power Project<br />
    3. 3. Review – Project Finance Model<br />Alternative Model <br />(see MS Excel file)<br />Wind Energy Financing Model <br />
    4. 4. Financing the Deal<br />Advising, Arranging & Lending Services<br />& Fee Structures<br />
    5. 5. Advising & Arranging Activities<br />Advisory Services<br />Modelling & Structuring the Deal<br />Primarily the domain of … Investment Banks, Consulting Firms & Engineering Firms<br />Arranging & Lending<br />Commercial Banks<br />Multilateral Institutions <br />Bilateral Institutions<br />Export Credit Agencies<br />
    6. 6. Advisory Services<br />The Advisors tasks include:<br />Identify Alternative Solutions <br />Evaluate Risks – Mitigate, Manage & Allocate<br />Prepare & Negotiate Contracts<br />Process Permits & Licenses<br />Assist / Prepare the Business Plan <br />
    7. 7. Advisory Services<br />Information Memorandum <br />The document with which the advisor contracts potential lenders and begins to negotiate the credit agreement and loan documentation. <br />
    8. 8. Arranging Services<br />Is covered by Commercial Banks<br />International Coverage<br />Large amount of Equity<br />Mandate from the SPV to structure & manage the financing contract<br />Mandated Lead Arranger (MLA)<br />Syndication <br />Underwriting Guarantee <br />
    9. 9. Integration of Roles<br />As the SPV (borrower) there are 3 alternatives for the structure of the Advisory & Arranging roles:<br />Separation<br />Reduces conflict of interest<br />Advisor doesn’t invest any money (the Sales Man)<br />Duplication of Efforts<br />Combined <br />Competition<br />
    10. 10. League Tables<br />Source: Thomson Reuters, Global Project Finance Review, Q3 2009<br />
    11. 11. Fee Structure<br />Fees for Advisory Services<br />Retainer Fee: Covers the advisor’s costs during the study and preparation phase of the deal. <br />Success Fee: initiated at financial close; from 0.5% - 1% of the debt value. <br />Incentivises the highest possible debt-to-equity ratio<br />
    12. 12. Fee Structure<br />Fee for Arranging Services<br />Est. as a % of debt<br />Range from 0.7 – 1% of the syndicated debt. <br />Pure Arranging Fee<br />Underwriting & Arranging Services<br />Co-arrangers <br />Range from 0.5 – 0.8%<br />
    13. 13. Fee Structure<br />Participating Banks<br />Lead Managers, Managers and Co-managers<br />Up-front Management Fee 20 – 40 Basis points on Loan<br />Commitment Fee<br />Difference between maximum & disbursement to date<br />Required to set aside capital for committed loans<br />Agent Bank<br />Fee based on scope of administrative tasks<br />CF = (CL – Et) * cf * t/360<br />
    14. 14. Fee Structure<br />(… a simplified) Example<br />
    15. 15. Fee Structure<br />Which role has the best return? <br />The Advisor!<br />No commitment of capital<br />
    16. 16. Financing the Deal<br />Multilateral Organisations & the World Bank<br />
    17. 17. Multilateral Organisations<br />Leading role in project finance deals in developing countries<br />Trends <br />Less Government / More Private Projects <br />Tendency not to lend directly<br />Support Private Sector through Guarantees<br />World Bank Group <br />Five Institutional Agencies<br />IBRD, IDA, IFC, MIGA & ICSID<br />
    18. 18. World Bank (Group)<br />Formed at Bretton Wood Conference, 1944<br />Headquartered in Washington D.C.<br />Owned by 186 Member Countries<br />Millennium Development Goals<br />Goal 7. Ensure environmental sustainability<br />Goal 8. Develop a Global Partnership for Development<br />Last year, the World Bank provided $46.9 billion for 303 projects in developing countries worldwide<br />
    19. 19. World Bank - IBRD<br />Aims to reduce poverty in middle-income and creditworthy poorer countries<br />Involvement in Project Finance<br />Direct Loans<br />Partial Risk Guarantees<br />Partial Credit Guarantees<br />Enclave Guarantees<br />Mostly Government Related Projects<br />No private financing available<br />* Enclave = Revenues flow between entities outside the host country<br />
    20. 20. World Bank - IDA<br />Provides financial support the poorest countries (that fail to meet criteria for access to IBRD financing).<br />Indirect Loans & Guarantees<br />Very Long Loan, 35 – 40 years<br />Grace Periods up to 10 years (service 0.75%)<br />Same operations as IBRD (different financing)<br />Funds from Governments of Developed Countries<br />
    21. 21. World Bank - IFC<br />Doesn’t require intervention of host government<br />Private Projects in all sectorsin Developing Countries<br />Loans & Equity<br />Assists private companies obtain financing<br />Provides consultancy services<br />Hedging Policies / Guarantees <br />Limits<br />$100 Million per individual project (25% total costs)<br />Term of loans up to 20 years<br />Equity stakes up to 35% (8 – 15 yrs)<br />
    22. 22. World Bank - IFC<br />
    23. 23. World Bank - IFC<br />
    24. 24. World Bank - IFC<br />* MSME = Micro, Small & Medium Enterprises<br />
    25. 25. World Bank - MIGA<br />Provides Political Risk Coverage to lenders & Investors<br />All 163 World Bank Members<br />Only WB agency that offers Political Risk Coverage<br />Up to 95% of debt service<br />Max. $200 Million<br />Premiums range from 0.5 – 1.75%<br />15 years duration<br />
    26. 26. World Bank – ICSID<br />Established in 1966 under the Convention on the Settlement of Investment Disputes.<br />Arbitration on international investment disputes between foreign investors and host states<br />143 Member Countries<br />Total Cases Registered 292<br />Cases Registered in (fiscal) 2009, 24<br />E.g. Cambodia Power Company vs. Kingdom of Cambodia and Electricité du Cambodge<br />
    27. 27. Financing the Deal<br />Other Development Banks,<br />Bilateral Agencies & ECA’s<br />
    28. 28. EIB – European Investment Bank<br />Owned by EU member countries<br />EIB loans funded from capital markets (AAA)<br />Within EU<br />Up to 50% of project costs<br />12 - 20 years<br />No arranging fees<br />Outside EU<br />EIB takes on political risk (restricted)<br />
    29. 29. AfDB – African Development Bank<br />53 African nations, 24 non-African<br />Promotes infrastructure projects, particularly PPP<br />Assistance<br />Loans, Guarantees &lt; 1/3 Total Project Cost<br />Equity &lt; 25% of the SPV’s capital stock<br />Total Project Costs &lt; $9 Million <br />
    30. 30. IDB – Islamic Development Bank<br />Adheres to Islamic Law<br />Prohibits the charging of interest on loans<br />Assistance<br />Loans &lt; 7 Million Islamic Dinars<br />Maturity ranging 15 – 25 years (grace 3 – 7 yrs)<br />Leasing (ijara)<br />Instalment Sales (murabaha)<br />Equity, max 1/3 capital<br />
    31. 31. Development Banks<br />Handout Examples …<br />EIB – (Poland) A1 Debt Structure Emerging<br />IDB – (Brazil) IDB Approves Rodoanel Loan<br />Source: Project Finance Magazine, Oct 2009 (ProQuest LLC)<br />
    32. 32. Development Agencies<br />Bilateral … pursue aims lined toforeign economic policy or commercial promotion of home country<br />Examples<br />Commonwealth Development Corp. (CDC), UK<br />invests in private equity funds focused on the emerging markets of Asia, Africa and Latin America<br />E.g. US$35 Million, to Private Equity for Microfinance Projects<br />Deutsche EntwicklungsGesellschaft (DEG), Germany<br />E.g. financing of Olkaria III, a geothermal power station in Kenya<br />
    33. 33. ECA’s – Export Credit Agencies<br />Political Risk Coverage, total coverage & direct loans to exporting companies operating in their home country<br />Enable exporters to be competitive, in otherwise high-risk endeavours. <br />Funding <br />Direct Lending, for purchase from country of origin<br />Indirect Lending, financial intermediary (commercial)<br />Interest Rate Equalization, lower than market rates<br />Activities of ECA’s is regulated by OECD Consensus<br />85% of contract value <br />Duration 8.5 – 10yrs (max.)<br />Constant Repayments, 6 months (max.)<br />
    34. 34. ECA’s – Export Credit Agencies<br />Examples<br />Export-Import Bank, United States<br />Export Credits Guarantee Department (ECGD), UK<br />AuslandsGeschäftsAbsicherung (AGA), Germany<br />CompañíaEspañola de Seguros de Crédito a la Exportación (CESCE), Spain <br />Export Finance &Insurance Corporation (EFIC), Australia<br />
    35. 35. ECA Activities <br />MTS secures USD1 billion Credit Line<br />Ex-Im Bank Increases Export Credit Support for Renewables<br />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.<br />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.’… <br />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.<br />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.<br />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.<br />
    36. 36. Case Review:<br />Dahbol Power Project (India)<br />
    37. 37. Case: Dahbol Power Project<br />Project Description<br />Describe the structure of the Project Company (SPV)<br />What were the key external relationships related to the deal? <br />What we the main risks (problems) of the project? <br />How was the project financed? <br />Describe the main contracts that were associated with the project?<br />How did these contracts impact the viability of the project? <br />Conclusions? <br />