Definition of Project Finance:

A financing which is repaid solely out of cash

flows from a specific asset and secured by just
that asset and its contracts. Lenders do not
have recourse to the owners of the project for
repayment of the debt. It entails allocation of
risks to entities best equipped to handle that risk.

 The developer leads the deal. As the finance

person, the developer is your client
The developer must believe you are there to
help get the project done
You have to sell yourself and your ability to get
the project financed
Help identify issues and fatal flaws
More important, help identify ways to address
issues and fix fatal flaws
Go to your potential lenders for help, get their
ideas

 Allocate risks to those best

equipped to take them
Protect your balance sheet
Provide capital for financially
constrained partners
Keep debt off balance sheet
Increased access to capital
Obtain political risk cover

What can be Project Financed?

Power plants
Oil & gas development
projects
Pipelines
Refineries/other industrial
plants
LNG facilities and tankers
Toll roads and airports
Hospitals
Desalination plants
Others

Team player
player
Experience

What makes a
a good project
project finance
finance person?
person?

Positive, objective but with a

with a healthy skepticism
skepticism
Good salesperson
Ability to think like a lender
lender
Economics and
documentation
Thorough understand all
understand all aspects of the
of the deal
Commercial skills

1.
2.
3.
4.
5.
6.
7.
8.
9.

Work with the lead developer to structure

the deal
Model the economics including financing
assumptions
Study the debt market
Partnering
Pick a financial advisor, lenders, law firms
and outside consultants
Negotiate and draft term sheet
Negotiate and draft loan documentation
Obtain necessary consents, approvals,
opinions etc.
Close financing and fund

What can get done in the US is different from Europe,

which is different from Asia, which is different from ____
The debt market moves, sometimes dramatically in a
short period of time
Potential lenders will talk. Listen to them, especially the
ones that have experience and credibility in the market
you are accessing
You must talk to many potential lenders, some will tell
you they can do a deal when they cant, and some will
tell you a deal cant get done when it can
A lenders job is to win deals, you need to make sure
they can deliver what they promise

The majority of projects involve partners, you

may or may not have a choice of who your
partners are

Do not exclude parties with a strategic or

economic interest in the project, if you do
they can become a serious obstacle
Ideally, you pick who you want and they bring
an expertise you dont have
It may just be a financial partner, they bring money
and you do all the work
It may be a political partner that provides
insulation
Negotiating the partnership agreement is always a
difficult task
Generally, the fewer the better. But, dont exclude
someone you need to help make the deal happen

You may or may not need one (or more). It depends upon:

Your experience and expertise on the particular type of project

The size and complexity of the deal
How you plan to finance it and where
How many partners you have and their experience
The advisor(s) may also be a lender, there are pluses and minuss
to this
You may have a beauty contest or pick an obvious choice
Make sure the individuals you pick will stay on the transaction
through closing

 Make sure lenders thoroughly understand the

transaction. They can not bid effectively if they dont
understand the deal
Experience in the specific type of transaction you are
doing is essential
You are picking an institution(s) and individuals within
the institution. Make sure those individuals are
committed to staying through financial closing.
Before you pick, ask them what the difficult issues will
be. Go with the institution(s) that correctly identify
the real issues

There are different processes for picking the lender(s):

If the deal is fully baked, you can have banks bid on
a detailed term sheet
Remember, a fully underwritten loan does not really
exist today -- you have to be comfortable that it can
get syndicated
If the deal is still being put together, pick lenders you
know and trust, and work closely with them to put a
financeable deal together

 Its not necessarily the law firm, its the

specific lawyers assigned to your deal
Pick firms with whom you have past
experience or future leverage (i.e. future
business)
Experience in the specific type of
transaction you are doing is essential
The project finance world is a small
universe -- ask around to check on
expertise and reputations
Get the A Team and get a firm
commitment that the A Team stays with the
deal until closing

This goes for both your counsel and lenders counsel

(you pay for both). Its easier to control your
counsel
Try to get a cap on legal expenses, but note that if
you do it may be very soft
At the least, get an estimate in writing and use
moral suasion
Insist on being billed monthly and promptly
Make sure the right-priced lawyers are performing
the right functions
Dont be afraid to say thats outrageous,
unnecessary and I am not paying for it
If they know you are watching closely they will
watch costs. If you dont pay attention, legal costs
can spiral out of control

Generally needed for Financial Advisor, Legal Counsel, Lead

Arranger or Underwriter and Third Party Experts

Make it as loose as you can

Make as much of the cost as possible contingent on success
Try to get caps on expenses
Do not accept obnoxious terms

Generally needed (by lenders) for a variety of

functions which typically include:

Market Study
Insurance Advisor
Independent Engineer
Environmental Consultant
Others (depending on the type of deal you
are putting together)

 Be very prepared
Coordinate and align with partners prior to every
meeting
Try to get inside your lenders heads
Determine what your must have, would like to
have and can give on deal points are
Deal with the big issues first, and get as many
settled as possible before you move on to the
lesser issues
Make sure the decision makers are in the room
Dont sweat the last basis point, it doesnt matter
Dont let the lawyers take over, their job is legal
not business
Negotiate in good faith, dont play games and
dont tolerate bad behavior from your lenders or
their lawyers

This is the starting point. A term sheet is a

summary of the terms and conditions under
which you borrow the money and pay it
back.
You can generate your own (with or without
a financial advisor) and put it to the market
for bid
You can work with your lead arranger and
negotiate one together
Decide on the appropriate level of detail in
your term sheet

 Bank Market
Capital Markets
Public offering
Private offering to institutional
lenders
144-A
Subordinated Debt and High Yield
(Junk) Debt
Multi-lateral and bi-lateral debt

Bank market
Generally quicker
Often shorter tenor
More covenants, less flexibility
Pay off or refinance whenever you want
Easier to get amendments
Capital Markets
Longer tenor
Fewer covenants
Need a rating get an advisor who works
with the rating agencies every day
Expensive make whole premium for early
repayment

Multi and bi-laterals

They bring varying degrees of political risk cover
They bring in additional political/social policy issues
Execution time is often slower than other lenders
In difficult countries they are often essential to getting a
deal done
Sub Debt and High yield (Junk)
Expensive
Onerous covenants
Higher leverage, you may be
capital constrained
Jacks up IRR

You may or may not need to get the

financing rated
The main rating agencies are S&P,
Moodys, Duff & Phelps and Fitch
Generally the goal is to get at least
investment grade (BBB-, Baa3)
Insurance companies look to NAIC for
ratings
Ratings will bring you better liquidity
and pricing
If you need a rating, you need a
financial advisor
Rating agencies are very sophisticated
and can be difficult to work with

Political risk
environment

Tenor needed

Depends on
many factors
including:

Location

Size of
the deal

Generally needed in developing countries

Basic Coverages are:
Political violence
Expropriation
Inconvertibility
Contract frustration (less common)
Providers of PRI include:
World Bank IFC, MIGA and World Bank Project Finance
Asian Development Bank, Inter-American Development
Bank, EBRD, African Dev. Bank
OPIC and Export Credit Agencies US Ex-Im, JBIC,
Hermes, Coface, SACE etc.
PRI can be provided in two ways
Direct insurance purchased to cover the risks listed above
Indirect (umbrella) coverage by lending under the A loan B loan structure

 Usually necessitates PRI cover

Most of these are large-scale gas or product
pipelines
Government-to-government agreement usualy
needed to
Guarantee security
Non-interference
Tax and regulatory stabilization or equalization

Sweeny Cogen
325MW cogeneration power plant located in
Sweeny TX, total cost $180 MM
Contracted to supply 80MW of power and
1.8 mmlbs per hour of steam to major oil
company refinery
Same oil company supplied the gas, much of
it residual gas by-product produced by the
refinery
Remaining power was merchant sold into the
Texas grid
Contracts were structured so plant had
artificially low heat rate (steam sales
absorbed large quantities of MMBTUs)
It was built on balance sheet and operational
before we took it to lenders for project
financing

Sweeny Cogen
Issues and Risks to be Mitigated
Risk Burning residual gas
Mitigant Guarantee from turbine maker with liquidated
damages
Risk Price of merchant power
Mitigant Extremely low heat rate made it the most
efficient gas fired power plant in the country
Risk Construction and Completion
Mitigant Owners constructed and completed on balance
sheet and then project financed it

Sweeny Cogen
Financing in 1998
Borrowed $152 MM or 85% of the construction cost
22 year tenor with bank tranche lending the first 16 years
and institutional tranche filling the last 6 years
Interest rate of LIBOR + 1 rising to LIBOR + 1.5 after
year 13
Financing Today
Extremely difficult to project finance a merchant power
plant today
If it could get done, 15 years max tenor with institutional
lender. Banks will not go past 7-8 years
Pricing would 2-3% over LIBOR
Debt of 50% of capital cost

 Structure of transaction
Legal Agreements
Commercial Agreements
Financing Agreements
Security Package
Cash flow waterfall

ABC Oil & Gas financing

Project Contractual
Overview

Liquidity Facility

Foreign Govt
Approval

Participants
Agreement

Government

Contractors

PRI Lender

National Oil Co.

Finance Agreement

10%

EPC

Production Sharing
Contract

Joint Operating
Agreement

Trust Agreement

Inter Creditor
Inter Creditor
Gas Revenue

Shareholder Loans
UIHII
Mauritius
100%

Debt Service

Bank

Debt Service ($450M)

UML
ABC Field

Crude Offtaker
Agreement

ue
R e ve n

Shareholder Loan
Agreement

Finance Agreement
Finance Agreement
UIST

UCL
USA
Consent to
Assignment

Ex Im

Funding & PRI

Guarantee Agreement
Regulator

UML Guarantee

Sponsor Guarantee
Operation
Completion
Offtaker
Gas Volume

Ex Im

Collateral
Agreement
Placement
Agreement

Bank
Subordination Agreement
All Security Agreement

Power Project Example

Principal Agreements

EPC contract
Partnership agreement
O&M agreement
Fuel supply agreement
Fuel transportation agreement
Power sales agreement
Power wheeling agreement
Various permits, consents,
opinions

Major agreements include:

Credit agreement
Sponsor support agreement
Security agreements various
Collateral agency agreement
Asset pledge agreements
Depository agreements

Consents, opinions,
certificates, resolutions,
permits

What a security package does is give lenders control

over the money flow and the legal right to take
ownership of the assets in a default situation.
The security package given to the lenders will usually
include:

Pledge of the project assets

Pledge of stock or ownership interest in project entity
Pledge of all bank accounts
Pledge of all commercial agreements
Pledge of all permits

Gross
Revenue

A typical cash waterfall

would look like this:

$
O&M
expense

$
Debt
Service

$
Reserve
Accounts

$
Cap Ex

$
Dividends to
owners

Currency
Force majeure
Debt service reserve
International arbitration
Choice of law
Regulatory regime
Coverage ratios
Off-taker credit and credit
support
Debt-to-equity ratio

 For a long-term infrastructure deal to be sustainable

it must be a win - win for both sides
Deals like Enrons Dabhol project in India would
likely not be financed today, and arguably should not
be done again
If a deal gets out of market, forget the contracts -it will get renegotiated
If a transaction is not economically sustainable over
time, dont do it

CASE STUDY
DABHOL POWER PROJECT, INDIA
Original contractual and financial structure
Sponsors: Enron, General Electric and Bechtel
Phase 1: 740 MW IPP
Equity - $435 million; Debt - $620 million

Phase 2: 1400 MW IPP w/ LNG terminal

Equity - $454 million; Debt - $1.4 billion

Meltdown
Phase 1 power purchase agreement dispute
Naphtha price spike
Contract payment defaults and repudiation

Calls on Government guarantees & support agreements

Impact on Phase 2 - financing, construction, LNG supply and
transportation contracts

CASE STUDY
DABHOL POWER PROJECT (Continued)
Ensuing legal claims:

International arbitration
Claims under government guarantees and support undertakings
Political risk insurance claims
LNG supplier & transporter responses
Competing claims of numerous onshore and offshore Phase 1
and Phase 2 lenders and offshore LNG shiplenders ($165 million
credit facility)
Settlement with offshore project lenders
Redeployment of the LNG tanker

Sale of the project

Rebirth under GAIL

BTC PIPELINE
BTC stands for Baku, Tbilisi and Ceyhan
1,768 km oil pipeline that will run from Baku, Azerbaijan
on the Caspian, through Georgia, to Ceyhan Turkey on the
Mediterranean
Main crude transported will be ACG (Azeri-ChiragGunashli) fields in Caspian, est. 5 billion barrels
Full completion expected 4rth quarter this year
Design capacity of one million bpd
Total capital cost approx. at US$4 billion
Up to US$2.6 in debt

 Huge Caspian oil discoveries and limited export routes

Bosphorus Straits are crowded and there are
environmental risks shipping through them
Political considerations with exporting through Russia
and/or Iran
Political, cultural and environmentally sensitive project
11 owners, 3 countries and dozens of issues to be
solved
30 year PSA for ACG field signed in 1994, first oil
flowed in 1998, BTC Pipeline first oil in late 2005

Amerada Hess
BP
ConocoPhillips
Eni
INPEX
ITOCHU
SOCAR
Statoil
TOTAL
TPAO
Unocal/Chevron

2.3%
30.1%
2.5%
5.0%
2.5%
3.4%
25.0%
8.7%
5.0%
6.5%
8.9%

One project company was formed and is owned by the different

sponsors at their respective percentages
The project company is the borrower
The key document that supports the financing is the
Transportation Agreement
- All sponsors with production have a ship and pay obligation
- The agreement is structured so that the tariff adjusts, depending
upon the number of barrels throughout, to give a set return on
investment
- The result is a consistent revenue stream that means strong
coverage ratios for the lenders

This project was financed for two main reasons:

1) Some partners could not fund with equity and
needed to borrow
2) Political Risk Insurance needed for both the debt
and equity
Major obstacle to financing was finding enough PRI
coverage. This was solved by sponsors providing a
significant portion of the debt.

Up to $ US 2.6 billion in debt

Target debt/equity ratio of 70:30
Final debt payment in Dec. 2015
Certain sponsors provided up to $ US 923 million of the
$ 2.6 billion in debt, paid the same as lenders
Certain guarantees provided to lenders by sponsors but
those will fall away with the occurrence of certain events

IFC A Loans
EBRD A Loans
Commercial Bank B Loans
JBIC ECA Loan
JBIC OIL Loan
NEXI Loan
US Exim Loan
ECGD Loan
Hermes Loan
Coface Loan
SACE
OPIC
Sponsor Loans
Total

$125
$125
$250
$180
$300
$120
$150
$106
$90
$90
$30
$100
$923
$2,589

Political- Mitigated by treaty between the 3 governments and massive

involvement of PRI providers. Also, all three governments
financially incentivized to keep project operation
Completion - Sponsors have provided a completion guarantee to lenders
for up to 120% of construction budget.
Reserves The reserves have been certified by an independent petroleum
reserves certification firm. One of the fields has been producing for
several years so there is history. Even if production does not meet
forecasts, the self-correcting nature of the tariff ensures steady
revenue.
Funding If a sponsor defaults on its funding obligation the other
sponsors are obliged to fund the shortfall.
Environmental Project was constructed with exacting environmental
standards (World Bank) designed to ensure the
environmental impact has been mitigated or minimized.

Definitions
144-A Rule 144-A of the Securities and Exchange Act of 1933. Allows private sale of securities to
sophisticated investors without onerous SEC filings.
Basis Point 1/100th of a percentage point or .01%
Bi-Lateral Agency An institution owned by one country that can lend to or insure investments in other
countries. Examples are OPIC and US Ex-Im.
Coverage Ratio Cash available for debt service divided by debt service. Usually measured quarterly
and annually. A minimum is needed (1.3 for example) for dividends to be distributed to sponsors.
EPC Engineering, Procurement and Construction. Usually used in the term EPC Contract, a turnkey
construction of a project.
Heat Rate measures the efficiency of a power plant, how many mmbtus does it take to produce a
KWH of electricity.
High Yield Debt Also known as junk debt, non investment grade debt that caries a high coupon
relative to other debt.
LIBOR London Interbank Offered Rate, the rate at which banks in London will lend to each other and
is the most widely used benchmark or reference rate for short term loans.
LNG Liquefied Natural Gas, natural gas that is cooled to minus 260 F to take a liquid form that
condenses it to 1/600th of its previous volume. Condensing it makes it economic to transport by
specialized ships.
Make Whole Premium the penalty paid by borrowers when they pay back long term debt, in the form
of bonds, early.
MMBTU Millions of British Thermal Units, A standard unit of measurement used to denote both the
amount of heat energy in fuels and the ability of appliances and air conditioning systems to produce
heating or cooling. A BTU is the amount of heat required to increase the temperature of a pint of
water (which weighs exactly 16 ounces) by one degree Fahrenheit.

Definitions (cont)
Merchant Power power that is sold into the market place at market rates without a long term contract.
Multi-Lateral Agency An institution owned by many countries that provides loans and PRI for projects
in developing countries. Examples would be World Band and Asian Development Bank.
O & M Operations and Maintenance, the cost for operating and maintaining a project on an ongoing
basis. This in distinguished from capital costs, which is the up front cost to get a project up and
running.
PRI Political Risk Insurance, insurance that protects lenders from losses as a result of certain political
events. The main coverages are expropriation, inconvertibility, political violence and contract
frustration.
PSA Production Sharing Agreement, this is the most typical type of contract that governs the terms and
conditions under which a private oil company extracts oil and gas in a country.
Rating Agencies companies like Moodys and Standard & Poors that give a quality rating to debt.
Subordinated Debt Debt that is by agreement subordinated to senior debt but superior to equity.
Senior debt gets paid first, then subordinated debt and then equity.
Underwritten When debt is underwritten, one lender or a small group of lenders agree to lend all the
money and take the risk that they can sell down, or syndicate, to other lenders.