Intelligent investors know how to explore and underwrite carefully selected and structured risks, as in true fianncial intermediation and hands-on lending. Investors chasing the illusion of "risk-free" from behind a computer screen cause a lot economic problems and distortions.

1. The Reluctant Investor
and European Project Financing
in Transition
Mariana Abrantes de Sousa
PPP Lusofonia
Lisboa 18-Jun-2013

2. Efficient financial intermediation
is key to competitiveness
Traditionally bank-centered, European financial
intermediation is likely to become influenced by investor
savings and direct investment decisions
• Although the real Govt bong “risk-free” rate has been
trending downwards towards zero
• And the BASEL-based illusion of “risk-free” Government
bonds was dashed by the Eurozone debt crisis
• Retail savers continue reluctant to take on risk to earn
higher returns
=> Professional investors have an important role to play in
selecting and investing in projects offering good risk/return

3. Source: Hirst, http://ftalphaville.ft.com/2014/06/13/1876272/guest-post-no-you-cant-
have-your-risk-free-returns-back/

4. Good financial intermediation adds value
Investment <> Savings
• Agregation of
investable savings
• Guarantee of
deposits
• Tenor
transformation,
short term deposits
into long term loans
• Risk diversification
• Project /client selection
• Appraisal and due diligence
• Deal structuring, arranging
• Project risk underwriting
– Construction risk
– Revenue risk , volume, price
– Operating performance risk
– Financial risk
• Pricing risk correctly
• Project monitoring, control
4http://ppplusofonia.blogspot.com

5. Casserly: Facing up to the risks
Risk management typology
Type of credit risk portfolio Risk underwriting approach
Small, granular, homogeneous , numerous SCORING and other statistical tools
- Housing, consumer loans
- SMEs
- Standardised loan contracts, securiy and
pricing
- Monitoring by exception
Large, straightforward, homogeneous Rating, internal or external (outsourcing
credit analysis)
- Large corporates - Simplified contracts, lower pricing, low
monitoring
Large, complex, unique, heterogeneous Credit analysts in-house, backstopped by
experienced credit committee
- Project finance, LBO, structured finance - Intensive due diligence and monitoring
- Tailored contracts, higher pricing
- Seniority, protection and control
5

6. Captial markets potential
Where the money is now
• Regulated (risk averse) investors
– Insurers
– Pension funds, USD 28 trillion
(19 in the US)
• Sovereign wealth funds
• Hedge funds and vulture funds
• Venture capitalists
• Specialist infrastructure funds
• … the ECB recycling to banks
6
Only the specialist
infrastructure funds have
real hands-on
investment/lending
capacity to
arrange/structure deals
and to and to evaluate,
price and
assume/underwrite traffic
risk, that is to add value
by INTERMEDIATING
between savers and
investors

7. Dealing with project risks in PPPs
• Study it, quantify it, under multiple
scenaries
• Reduce it, for example
– Modular investments
– Proven technology
• Mitigate it, at a cost, for example
– Redudant systems
– Corridor approach, add synergies
– Anchor clients
• Transfer it, at a price, adding
counterparty risk
• Diversify it, portfolio approach
• Price it (the residual RISK)
• Survive it (capital, resilience, recoveries)
Allocate risk to the
party best able to
Support it,
price it,
and absorb it

8. Expressed preferences of
Pension Funds as investors in PF bonds…
• Inflation linked debt to hedge inflation-indexed pension liabilities
• Brownfield assets in operational phase, generating cash flow, no construction
risk
• Good intrinsic value of project, value proposition in natural monopolies, well
regulated
• Good risk –adjusted returns or very stable returns (bond proxies)
• Long tenors
• Liquid secondary markets, negotiable
• Government guarantees
• No renegotiations
• Mostly passive / indirect investors in infrastructure (only 2% of assets as direct
investments )
• Most are lacking the know-how for hands-on envolvement in project finance
• Most prefer to rely on due diligence and monitoring expertise of “controlling
creditors”
8

9. Project revenue mechanisms
and external support
Examples of Credit Enhancements
• Standby liquidity facilities, stand by equity
• Minimum revenue guarantees from Govt Concedent
• Maturity payment guarantees from Govt Concedent
• Contingent, stand-by mezzanine debt
• Local government loan guarantees
• Partial Risk Guarantees, ex from MIGA
• Viability gap (investment) subsidies
• Output based / smart (operating) subsidies and
results-based financing
• …

10. Project risks versus counterparty risks
From distress project to distressed sovereign
• Each project contract which transfers certain project risks (ex. insurance )
risk to another counterparty adds the performance and credit risk of that
counterparty (ex. AIG)
• Multiple external credit enhancements can make a marginally feasible
project appear more bankable
• Multiple and overlapping project contracts can complicate credit
workout renegotiations in distressed project situations
• Excessive demands for external support is a warning to rethink a project
• Moving from user tariffs to availability payments, or to minimum
revenues guarantees, creditors may avoid project risks, but cannot avoid
the Concedent’s sovereign credit risk
Mariana ABRANTES de Sousa 1010

11. Excessive risk aversion leads to
risk naiveté and economic distortions
• The general trend of "de-risking" institutional portfolios is seen in the reduction of pension
fund assets allocated to global equities from about 60% in 2001-2006 to 47% in 2012
• Many institutional investors have increased "alternative assets" (including infrastructure)
• The impact of new rules on bank solvency and solvency of insurers reduces the supply of long-
term bank credit
• Accounting for impairment and risk-based regulation may increase risk aversion and pro-
cyclicality of credit supply
=> Recommendations
• Avoid inconsistencies (eg conflicts between the of long-term investment needs and regulation
based on risk aversion)
• Clarify fiduciary duties to investors in connection with investments "green" and sustainable
• Develop new instruments for long-term investment (eg obligations of projects and specialized
funds)
• Increase the role and risk absorption capacity of official development banks, especially in
"segments" of difficult market
Fonte : Adapted from G. Inderst , Private Infrastructure Finance and Investment in Europe, Working Papers BEI 2013/ 02

12. The hands-on role of “controlling creditor”
or fronting bank
• Project Finance is
“secured cash flow
lending”, which requires
– Security, perfected
charges over the project
– Protection in a robust
cash flow
– Control and monitoring
of collateral and
borrower performance
and decision making
• Meaningful creditor oversight
of complex contractual
arrangements
• Aplication of incentives and
controls
• Timely approval of drawdown
requests, waivers, consents,
amendments
• Handling project stresses and
coordinating inter-creditor
decision making
• Dealing with conflicts of
interest between senior and
subordinated creditors
12

13. Conclusions
• Rigorous project (traffic) due diligence is essential for
efficiency of financial intermediation and economic
resource allocation; avoid due diligence “light”
• Greatest innovation needed: PPP creditors must be
able to assess, assume and price, and then absorb,
project (traffic) risks, in order to contribute to good
project selection and continuing project management
• Creditors and investors must staff-up for hands-on
long term lending and prepare to take some the
inevitable losses with adequate capital
http://ppplusofonia.blogspot.com 13

14. Annexes

15. Domestic savings become more important

16. Agência
Curto Prazo
Notação
Longo Prazo
(LP)
Notação
Outlook
(LP)
Última
Alteração
de Rating (LP)
Última
Avaliação de
Rating (LP)
DBRS
R-2
(middle)
BBB (low) Estável
30-jan-2012
Downgrade
(BBB p/ BBB
(low)
26-mai-2014
Outlook
Estável
Fitch Ratings B BB+ Positivo
24-nov-2011
Downgrade
(BBB- p/ BB+)
11-abr-2014
Confirmado
Outlook
Positivo
Moody's Not Prime Ba2 Positivo
09-mai-2014
Upgrade
( Ba3 p/ Ba2)
09-mai-2014
Outlook
Positivo
Standard &
Poor's
B BB Estável
13-jan-2012
Downgrade
(BBB- p/ BB)
09-mai-2014
Outlook
Estável
NOTA: Alterações de Outlook não são consideradas alterações de notação de rating. http://www.igcp.pt/gca/?id=54,
retrieved 16-Jun-2014
Sorereign credit rating – Republica Portuguesa

17. Collapse in investment threatens competitiveness

18. Severe colapse in deficit countries