WHY THE BANKS MIGHT SOMETIMES LIKE TO SAY NO

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WHY THE BANKS MIGHT SOMETIMES LIKE TO SAY NO
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Introduction

• Moray Watt
• Director
• Quayle Munro
• Edinburgh based Merchant bank
• Provide corporate finance advice
• Private and Public Sector Clients
• Investor in SPVs (Special Purpose Vehicles)

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QM the Waste Sector

• Argyll and Bute Waste (Private Sector)
• - financial close September 2001
• Dumfries and Galloway Waste (Private Sector)
• - preferred bidder
• Highland Waste (Private Sector)
• - shortlisted bidder

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Summary of a Waste Project

• Accept waste from local authority
• Divert waste from landfill according to EU
  Division Targets.
• Monitor or exceed standards laid down by
  legislation and policed by SEPA
• technical solutions may include
• - recycling
• - composting
• - incineration
• - energy from waste plants
• Capital Investment requirement, typically 80/90
  funded by a senior lender.

riskier
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The Banks perspective

• Opportunities

Other Investment opportunities
Other Investment opportunities
PFI
Hospitals
Schools
Waste
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PFI historical funding
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PFI future funding

• Size and number of Projects means Banks have
  ample projects to choose from

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Scottish Executive proposed spend for Waste

• The size of the proposed projects suggest bank
  funding will be a requirement
• Question for the banks Why invest in Waste
  Projects?
• Starting point Risk Analysis

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Sector risks
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Risks specific to waste

• Technology risk
• Have these technologies proved themselves over a
  number of years
• How often do they break down
• How much do they really cost to maintain
• Can they cope with the proposed waste mix

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Risks specific to waste

• Legislative risk
• Change in law
• SEPA guidelines
• Landfill tax

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Risks specific to waste

• Demand risk
• Contracts to date have been based on price per
  tonne
• If waste volumes drop, the SPV company loses
  income. Can it then repay the bank debt?
• Performance Risk
• Broad range of performance measures which can
  result in deductions

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Overcoming the risks

• Continual involvement of senior lenders
• Pass down of risks to those best able to manage
  them
• Risks vs Returns
• Realistic expectations on both sides
• Sensible Payment Mechanism which incentivises the
  SPV to perform well but is not overly punitive

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The Ability to Repay Debt

• SPV has
• Revenues
• - Costs
• Cash available to repay bank debt
• What can go wrong?
• Revenues can go down
• Costs can go up
• Deductions under payment mechanism for poor
  performance or unavailability

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Payment Mechanism

• Methodology to incentivise the SPV to perform
  well and to standard
• Should not expect 100 performance would be too
  expensive
• Maximum deduction of 100 of the Unitary Change
  ie the SPV may not get paid anything when
  delivering a very poor performance
• Deductions for
• Not accepting waste
• Not diverting from landfill
• Not meeting SEPA standards
• Banks will look carefully at how the payment
  mechanism will impact on the SPVs ability to
  repay debt.

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When a Bank Might Like to Say Yes

• Provider track record
• Comfortable bank ratios i.e. the SPV will be able
  to repay the senior debt
• Parent Co Guarantees
• Returns to match increased risk profile
• Risk transfer to those best able to manage
• Protection against demand risk
• Contractual protection (e.g. planning consent
  failure)
• Proven technology

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Success!

• Argyll Bute
• Landfill sites re-engineered and capped
• Transfer stations constructed and accepting
  waste, composting facilities coming on stream
• Diverting more and more waste away from landfill
• Limited Performance Deductions

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Contact details

• Moray Watt
• Director
• Email moray.watt_at_quayle.co.uk
• Tel [phone]
• 8 Charlotte Square
• Edinburgh
• EH2 4DR

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