SISTEMUL FINANCIAR

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Academia de Studii Economice - BucurestiFacultate
a Relatii Economice InternationaleAnul
IIIProfesor Misu Negritoiu
CURS 12 FINANTAREA INTERNATIONALA, PUBLICA SI
PRIVATA A PROIECTELOR DE INVESTITII
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Presentation Overview

• Project Finance Definition, Characteristics,
  Structure
• Risk Assessment and Allocation
• Evaluation of Project Economics
• Conclusions

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Overview (1)

• Project finance
• Creation of a legally independent project company
  financed with equity from one or more sponsoring
  firms and non-recourse debt for the purpose of
  investing in a capital asset
• Unique structural features
• Very concentrated equity ownership (2-3 sponsors)
• High leverage by design (average book value
  debt-to-total capitalization ratio is 70
  double the leverage ratio of a publicly traded
  company) forced distribution of cash flow
• Founded on a series of legal contracts (typically
  40 or more, uniting 15 parties in a vertical
  chain)
• Process of designing and negotiating
  infrastructure projects
• Counter-intuitive prima facie (greater
  transaction costs)
• Higher leverage gt higher probability of default
  life range 10-50 years
• But the extensive use of contracts restricts
  managerial discretion

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Overview (2)

• By creating a project company, sponsors can
  transfer risk to debtholders and related parties
  who can bear the risks at lower costs and/or
  manage specific activities more effectively than
  they can themselves
• Non-recourse debt debt repayment comes from the
  project only
• Structure matters (Modigliani Miller)
• Market imperfections (agency costs, financial
  distress, structuring executing transactions,
  asymmetric information, taxes)
• Primary focus on
• Structuring projects
• Financing issues
• Managing risky projects
• Valuation issues
• Pricing issues
• Market structure and regulatory issues

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Overview (3)

• Investment decision
• Organizational decision
• Off-balance sheet finance (not the case when only
  one sponsor)
• Financing decision
• Use of non-recourse debt
• Creditors have a clear claim on the project assets

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Characteristics

• Debt financing of a project which is primarily
  repaid from cash flow generated by the project
• Recourse for repayment of loans and security is
  limited to the project cashflows and assets
  financed, often referred to as limited or non
  recourse lending
• Lenders share project risks with the sponsors
  debt is often the larger part of the funding mix
• Lenders down-side risks are considerable - the
  loan may not be repaid
• Lenders up-side benefits are limited - the
  interest margin
• Detailed due diligence required

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General Structure

• Special purpose entities (SPEs) are vital to
  infrastructure project finance (the whole
  business financed this way is organized as an
  SPE). They are intended to restrict the lines of
  business and to protect against bankruptcy.

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Financing Concepts Direct Funding by Owners
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Financing Concepts Recourse to Owners/Government
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Financing Concepts Limited Recourse to
Owners/Government
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What is Project Finance
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Why Project Finance

• Maximize Debt Capacity
• Risk Sharing/Allocation
• Longer Tenor than Traditional/Full Recourse
  Financing
• Flexibility with respect to Repayment Profile
• Possibility to Achieve Off-Balance Sheet Treatment

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Project Finance Participants
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Risk Assessment and Allocation

• Cash Flow
• Completion
• Reserves
• Market/Price
• Performance
• Sponsor
• Financial
• Regulatory / Environmental
• Insurance
• Political

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Cash Flow Over Project Life
Risks
Cash Flow
Operating Costs
Capital Expenditures
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Completion

• Pre-Completion
• Delays, Cost Overruns
• Completion Tests
• Physical
• Financial

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Reserves

• Proven / P90 Reserves
• Production Profile
• Depletion
• Adequate Tail-End
• Crude / Product Quality
• Use of Proven Technology
• Reservoir Engineering Reports

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Market/Price

• Oil - Access to Market
• Gas - Credit Worthy Offtakers
• Price - Contracted/Spot

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Cash Flow vs. Reservoir and Price Risks
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Performance

• Operation and Maintenance
• Track Record, Cost Effectiveness, Resources of
  Operator
• External factors for Costs

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Sponsor

• Technical Ability and Track Record
• Financial and Management Resources
• Role - Sponsor / Operator

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Financial Risk

• Interest Rate Increases
• Exchange Rate Fluctuation
• Inflation
• Tax, Royalties

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Regulatory / Environmental Risk

• Development Approvals, Consents Licences
• Adherence to Development Plan
• Compliance with Current Future Environmental
  Legislation

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Insurance

• Independent Assessment
• Legal
• Environmental
• Business Interruption

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Political

• Expropriation, Civil Unrest
• Transfer Convertibility of Funds
• Lenders Country Limits
• ECAs, IFIs Risk Insurance
• Contract Frustration

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Evaluation of Project Economics

• Preparation of Project Financial Model
• Derive Lenders Base Case
• Determine Debt Amount and Repayment Profile under
  Base Case
• Evaluate Debt Service Capacity Sensitivity to Key
  Variables
• Debt Service Capacity Measures - Loan Life Cover
  Ratio and Project Life Cover Ratio
• Derive Financial Covenant Structure for
  Documentation