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Understanding Critical Factors To Create A "Bankable" Project
Understanding Critical Factors To Create A "Bankable" Project
WHOS INVOLVED
The key to a long lasting and successful business relationship is mutual understanding of your business partners strengths, weaknesses and needs.
Floating Production Contractor
Banks
WHOS INVOLVED
Banks
Banks lend many times their available capital and borrow the cash to lend from other people. There is a mismatch between lending and borrowing long vs short
DEBT
Short term
CAPITAL
US$ Money Market funds have pulled back from lending to banks
Short term
LENDING Short term Banks appetite and ability to lend long term is likely to be more constrained
Long term Long term CAPITAL The European Central Bank estimates that Europes banks need 270,000,000,000 of new Capital 5
Compare the firepower: Contractor with $1bn cash ($1bn equity / shareholders funds), or Contractor with $4bn cash ($1bn equity / shareholders funds and $3bn debt)? Compare the cost: Equity Investors target returns between 15% and 30% per annum Senior debt providers charge a margin based on credit risk eg. 2% to 4% Debt is tax deductible
The power of debt:-
Debt multiplies the power of Equity Take on more Projects Debt turbocharges the Return on Equity Project IRR of 12%. Debt cost 7% 100% Equity Equity IRR 12% 50% Equity / 50% Debt Equity IRR 17% 20% Equity 80% Debt Equity IRR 32%
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Equity Investor
Bank
Construction/ Conversion
JV Partners
Shipyard
WHO PAYS? HOW MUCH DO THEY PAY? WHEN DO THEY PAY? CAN THEY AFFORD TO PAY? or WHERE WILL THEY GET THE CASH
TO PAY?
WHAT CAN CAUSE THEM TO STOP PAYING? WHAT CAN BE DONE TO AVOID THEM STOPPING PAYING? WHO ELSE CAN PAY? HOW CAN I GET THEM TO PAY? IF ALL ELSE FAILS, WHAT CAN BE DONE TO RECOVER THE MONEY?
RISK ASSESSMENT
When assessing whether to lend to a project banks look to the overall project risks, review all the Contracts, and examine who is taking what risks and why.
Contractor LIMITED RECOURSE Shipyard Non-Recourse Stabalisation / Regular Operation Offshore Commissioning / First Oil / Final Acceptance Off Hire / Termination 9 Recourse Field Operator
EFFECTIVE PARTNERSHIPS
A difficult business Heavy Industrial Engineering Projects with long timelines Its about People Project Management and Contracting Strategies Quality Suppliers and sub-contractors (eg. Shipyards) Building is hard, operating safely and efficiently can be just as challenging History tells us a lot .the devil is in the detail.
Use experienced bankers who know the sector and its history
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Too often the Contract presented to the Contractor has history Take a couple of old contracts Add your nightmares Hammer the Contractor Present THE CONTRACT Risk / Reward balance has to be realistic especially in challenging economic
times
Experienced Banks have seen a lot of contracts the good, the bad and the ugly The problem is when does a bank get to see the Contract? IS IT BANKABLE?
Are we coming to the time when a Standard Contract is needed? Even if just to cover basic principles and boilerplate provisions.
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THANK YOU
Questions?
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