PROJECT FINANCE

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PROJECT FINANCE
Simon Par Keeling,Société Générale Paris
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What do we mean by a Project?

• Investment made by a "sponsor ", either
• a company
• or often a joint-venture
• in a long term project / concession, which is
  either
• "greenfield" development
• or a sizeable increase in capacity or significant
  refurbishment/extension of an existing plant
• which will generate a well defined stable
  cash-flow

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Project Finance General Definition

• Financing of a specific investment, the
  reimbursement of which is linked to and based
  upon the future cash-flows of the project, with
  limited recourse to the Sponsors of the project
  company
• Project needs to be well defined conceptually and
  contractually
• For Banks, Project Risk is between Capital Risk
  and Asset or Corporate Financing

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How do companies finance their Projects?
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Types of Project where Project Finance can be used

• Private companies (well defined projects with
  appropriate counter party risks)
• Government / local authority privatisation
  (PFI/PPP type projects)
• roads
• waste collection
• water treatment

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Drivers for a Project

• Government / local authorities
• Budget considerations - Project passed to private
  sector via a long term concession
• Design, construction, financing operation
  passed to private sector (DBFO)
• An appropriate level of project risk passed to
  private sector
• Sponsors
• Equity investment and returns
• Construction and operating contracts
• Balance-sheet considerations

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Project Finance Structure
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Project Finance Features

• Debt service relies on future cash flows of a
  particular project instead of corporate
  operations ("limited recourse")
• Insulation of the "Project"
• Project Risks identification
• Project Risks allocation between sponsors,
  outside investors, banks, insurers, etc...
• For the banks, this leads to an "investor like"
  approach
• Project rationale analysis
• What are the most appropriate financing structure
  and instruments to reconcile various objectives ?
• Schedule / Cost optimization
• Banking due diligence

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Project Approach (1)

• Sponsors objectives and project's rational
• Risk analysis
• General risks country, economic, political
• Corporate risks financial and contractual
  obligations

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Project Approach (2)

• Specific risks
• regulatory
• technical
• construction completion (delays, cost overruns,
  performances)
• supply, reserves
• operations (performances, availability, operating
  costs)
• market (volume, price, traffic)
• financial risk (exchange, interest, liquidity,
  transferability risks)
• Force Majeure

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Project Approach (3)

• Overall contractual structure (required entities,
  fiscal optimization)
• Cash flow analysis and sensitivities
• Allocation of risks between parties
• contracts
• guarantees
• specific supports
• insurances
• Independent advisers
• Technical, Legal, Insurances

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Project Approach (4)

• Documentation
• Contracts, Agreements
• Security Agreements (pledge of shares, of
  revenues, assignment of contracts, mortgages,
  offshore project accounts, etc.)
• Cash flows allocation order
• Syndication

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Case by case approach, within a typical frame
Sub-contracts
Contractor
Construction Contract
Shareholders
OM Contract
Shareholders Agreement
Governmental Authority
Insurance Companies
Concession Agreement
Concession / Project Company
Revenues
Supplier
Credit Facilities
Securities
Support Agreements
Pledge of shares