Project FinanceSession 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

DEBT ASSUMPTIONS

Operations Start Date 01/05/2009

Debt Total (000's) $340,392

Debt/Equity Ratio 64%

Percentage Swapped 100.0%

1st SWAP Rate as per #Bank# (4/9/09) 2.850%

SWAP Spread 22 bps

Total 1st Rate 3.070%

2nd SWAP Rate as per #Bank# (4/9/09) 4.080%

SWAP Spread 22 bps

Total 2nd Swap Rate 4.300%

Unhedged Rate 1.500%

Default Rate (Y9+) 0.000%

Margins  

Years 1-2 300 bps

Years 3-4 325 bps

Years 5-6 350 bps

Years 7+ 375 bps

100% Cash Sweep Assumed after Year 8

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) Syndication

Underwriting Guarantee

Integration of Roles

As the SPV (borrower) there are 3 alternatives for the structure of the Advisory & Arranging roles:

Separation

Reduces conflict of interest

Advisor doesn’t invest any money (the Sales Man)

Duplication of Efforts

Combined

Competition

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

Co-arrangers

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

Members of the Syndicate Role Fee Underwritten

Amount (EUR)Financed Amount

Bank A Advisor Success Fee N.a. N.a.Bank B Lead Arranger Arranging Fee 100,000,000 25,000,000 Bank C Co-arranger Arranging Fee 100,000,000 25,000,000 Bank D Manager Up-Front Fee N.a. 40,000,000 Bank E Manager Up-Front Fee N.a. 50,000,000 Bank F Manager Up-Front Fee N.a. 60,000,000

Deal Structure

Syndicated Amount EUR 200,000,000 Advisor Success Fee 0.75%

Arranging Fee 1.00%Coarranging Fee 0.80%

Up-Front Management Fee 0.20%

Fee Structure

 Fees Bank B Bank C Bank D Bank E Bank FArranging Fee

2,000,000 - - - - -

Co-arranging Fee 1,600,000 800,000 800,000 - - -

Up-Front Mgmt. Fee 400,000 50,000.00 50,000 80,000 100,000 120,000

Total Fees   850,000 850,000 80,000 100,000 120,000 Grand Total 2,000,000

Which role has the best return? The Advisor!

No commitment of capital

Total Debt Advisors Fee (%) Total Fee 200,000,000 0.75% 1,500,000

Financing the Deal

Multilateral Organisations & the World Bank

Multilateral Organisations

Leading role in project finance deals in developing countries

Trends Less Government / More Private Projects

Tendency not to lend directly

Support Private Sector through Guarantees

World Bank Group Five Institutional Agencies

IBRD, IDA, IFC, MIGA & ICSID

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 sectors in Developing Countries Loans & Equity

Assists private companies obtain financing

Provides consultancy services

Hedging Policies / Guarantees

Limits $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

Assistance

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

Assistance

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 to foreign economic policy or commercial promotion of home country

Examples

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 Entwicklungs Gesellschaft (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.

Funding 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

Examples

Export-Import Bank, United States

Export Credits Guarantee Department (ECGD), UK

Auslands Geschäfts Absicherung (AGA), Germany

Compañía Española de Seguros de Crédito a la Exportación (CESCE), Spain

Export Finance &Insurance Corporation (EFIC), Australia

ECA Activities

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.

MTS secures USD1 billion Credit LineEx-Im Bank Increases Export Credit Support for Renewables

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?

Conclusions?