Giddy/ABS

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Asset-Backed Securities

Project Financing
Prof. Ian Giddy
Stern School of Business
New York University

Asset-Backed and Project Financing

Collateralized debt
l Securitized loans
l Non-recourse project debt
l Basic question: Why should a company
segregate the cash flows from a
particular business, and make it selffinancing?
l

Copyright 1996 Ian H. Giddy

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Project Financing
Stand-alone, non-recourse, multi-stake,
"production payment financing"
l Structure?
l Participants?
l Funding sources?
l Risks?
l

Copyright 1996 Ian H. Giddy

Project Financing 5

Project Financing (Summary)

l

Stand-alone, non-recourse "production payment

financing"
Sponsor's vehicle company structures multi-stake
finance
Sources: govt development financing, IBRD/IFC,
sponsor loans, supplier credits, customer credits,
institutional investors, banks, lease financing,
equity
Risks: resource quantity, input costs, technical,
timing, pre-completion, demand, operating, force
majeure, political
Risk sharing and mitigation

Copyright 1996 Ian H. Giddy

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Financing Sources
Banks, Institutional Investors, Leasing Companies

Stakeholder
credits

Sponsor
n Loans

n Suppliers

n Equity

n Purchasers

Govt Development Financing, IBRD/IFC, Eximbanks

Copyright 1996 Ian H. Giddy

Project Financing 10

Project Financing
Definition
l

Lending to a single purpose entity

for the acquisition and /or
construction of a revenuegenerating asset with limited or no
recourse to the sponser
Repayment of the loan is solely
from the revenues generated from
operation of the asset owned by
the entity
Security for the loan
u the revenue generating asset
u all shares and interests in the
entity
u real property
u all contacts, permits
u authorizations, etc.; and,
u all other instruments necessary
for continuing project
operations

Copyright 1996 Ian H. Giddy

Steps
Project Identification
& Resource Allocation
Risk Allocation &
Project Structuring
Bidding & Mandating
Contracts
Due Diligence &
Documentation
Execution & Monitoring
Construction Monitoring
Term Loan Conversion
& Ongoing Monitoring
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Benefits of Project Financing

Limitation of Equity Investment to
Projects Economic Requirement Enhanced Returns
l Risk Sharing and Diversification
l Accounting Treatment Preserves
Corporate Borrowing Capacity
l Access to Long Term Financing
l Tax Benefits
l Political Risk Mitigation

Copyright 1996 Ian H. Giddy

Project Financing 13

The Risks
Political
l Resource & input
l Technical
l Construction
l Legal
l Economic
l

n
n
n

Copyright 1996 Ian H. Giddy

Cost overruns
Completion delays
Mounting
interest expenses

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Eurotunnel: The Risks and the Remedies

Category

Nature

Remedy

Political

Nationalization
Govt interference
Taxes & the like

Legal
Treaty ratified

Technical

Process
Effect on completion
Repairability

Use existing technology

Construction Delays
Overruns
Repairability

Use top experts

Performance bonds

Legal

Access to control in default

Fire, injury, etc liability

Security interests
Default defn

Economic

Price competition
Rail links

Market studies

Copyright 1996 Ian H. Giddy

Project Financing 15

Sample Structure
Arranging
Bank

Sponsors /
Shareholders
SINGLE PURPOSE
PROJECT COMPANY
Equipment
Supplier

Warranties and
Supply Agents

Contractor

Turnkey
Construction

Feed Stock
(e.g., fuel)
Supplier

Long Term
Agreement

Offtake (e.g,
power purchase)
Agreement

Syndicate
Banks

Other Project
Participants:

Purchaser

Currency and Interest

Rate Hedge Providers
Multilaterals and EDAs

Operator
Copyright 1996 Ian H. Giddy

Operations &
Maintenance Mgmt

Legal Counsel
Technical Consultants
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Asset-Backed and Project Financing

Collateralized debt
l Securitized loans
l Non-recourse project debt -- future
payments rather than assets are the
collateral in the SPV
l Basic question: When is an asset worth
more to investors outside the company
than inside it?
l

Copyright 1996 Ian H. Giddy

Project Financing 18

Case Studies
Ras Laffan Qatar/Korea
l YPF Argentina/Oil Trading Corp
l West Java Power Project
l

Questions:
u Who

is the issuer?
u What assets does it have?
u What are the risks, and how are they
handled?
Copyright 1996 Ian H. Giddy

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Ras Laffan
l

Who is the issuer?

u Ras

Laffan LNG Co. Ltd. (Qatar)

u But Security Trustee (IBJ) plays unusually
major role
l

What assets does it have?

u Natural

gas reserves;
u LNG take-or-pay Sale and Purchase
Agreement with Korea Gas;
u Security Trust Agreement; Project
Coordination Agreement; loan refund
agreement, etc.
Copyright 1996 Ian H. Giddy

Project Financing 20

Ras Laffan
l

What are the risks, and how are they

handled?
u Qatar/regional

interference
u Qatar legal system
u Default on Agreements
u Completion/timing
u Operating
u Economic (LNG market)

Copyright 1996 Ian H. Giddy

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Ras Laffan: Natural Gas Project Finance

Ras Laffan
Liquified Natural Gas
LNG
Korea Gas
LNG
payments
Security Trustee
Debt service
payments

Copyright 1996 Ian H. Giddy

Project Financing 22

Mobil QM
(Mobil Corp.)

Contractors
Contractors
Contractors

Joint venture agreement

30%

Qatargas
(State of Qatar)

70%

Ras Laffan
Liquified Natural Gas
LNG

Contract
payments

Korea Gas

Residual
payments

LNG
payments
Security Trustee
(New York)

Ras Laffan

Debt service
payments

Debt service
payments
Bondholders

Banks

Export Credit
Agencies

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YPF Argentina/Oil Trading Corp

l

Who is the issuer?

u Oil

What assets does it have?

u No

Trading Corp, Cayman Is. SPV

oil, just purchase and sale agreements

What are the risks, and how are they

handled?
u Seller:

Political, production
u Buyer: Credit, legal
u Economic
Copyright 1996 Ian H. Giddy

Project Financing 24

YPF/Oil Trading Corp.

Major Latin
American Oil
Producer

Sales
agreement
Oil Trading Co.
Cayman Islands

Notes

Purchase
agreement

Oil

US$
Highly rated payments
US oil buyer

Copyright 1996 Ian H. Giddy

Investors

Oil
Debt interest
and principal

Trust

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West Java Power Project

l

Who is the issuer?

u Pratama

What assets does it have?

u Loan

SPV

to Dayalistrik Pratama

What are the risks, and how are they

handled?
u Political;

Engineering; Coal supply; Default

on Purchase Agreement; Economic

Copyright 1996 Ian H. Giddy

Project Financing 26

West Java Project Financing

Project stage:
l Uncompleted coal-fired power plant,
generating power
l Has multi-year power purchase
agreeement with utility
l Currently has bank financing
l Sponsors seeking to extend financing
and reduce cost by tapping the debt
securities market
Copyright 1996 Ian H. Giddy

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West Java Project Financing

Proposal:
l Sponsor

issues infrastructure revenue bonds

to refinance bank loans
l Bonds to be issued with 19 year maturities longer than the term on the bank loans
l May have fixed rate; distributed in US, Euro or
domestic bond market
l Int. and principal secured by contract revenues
l May have 100% guarantee from monoline
insurance company
Copyright 1996 Ian H. Giddy

Project Financing 28

West Java Power Project

Supplier, Contracor,
Operator Agreements

US$ payments
on term loan

Banks

Guarantee
PD Dayalistrik
Pratama
Purchase
agreement

US$ Interest
and principal
on loan
Rupiah payments
for electricity

PLN
Indonesia
Govt of
indonesia

Copyright 1996 Ian H. Giddy

SPV

Investors
US$ Interest
and principal
on bonds

Guarantee
of interest
and principal
ASIA Ltd

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Summary
Collateralized debt
l Securitized loans
l Non-recourse project debt
l Basic question: Why should a company
segregate the cash flows from a
particular business, and make it selffinancing?
l

Copyright 1996 Ian H. Giddy

Project Financing 30

Other Future Flow Securitizations

Credit card voucher receivables
l Remittance receivables
l Export receivables
l Airline ticket receivables
l Net international telephone settlement
receivables
l

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Ian H. Giddy
Stern School of Business
New York University
44 West 4th Street, New York, NY 10012, USA
Tel 212-998-0332
ian.giddy@nyu.edu
http://giddy.org

Copyright 1996 Ian H. Giddy

Project Financing 33