Bankability- The Financial Perspective

Amie Calthorpe
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 Moderated by:

Anne-Sophie Eveno, Senior Associate, Aviva Investors

Speakers:

Isaac Vaz, Director, Aviva Investors

Adam Goldsmith, Associate, Aviva Investors

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STRUCTURING THE DEAL WEBINAR
SERIES – THE FINANCIAL PERSPECTIVE
Speakers :
• Isaac Vaz, Aviva Investors, Infrastructure Equity
• Adam Goldsmith, Aviva Investors, Infrastructure Debt
Moderator :
• Anne-Sophie Eveno, Aviva Investors
15 November 2018

This document is for Professional Clients, institutional/qualified investors and Advisers only. It is not to be distributed to or relied on by retail clients.
AGENDA

1. A QUICK INTRODUCTION TO AVIVA INVESTORS

2. DEBT AND EQUITY DYNAMICS
3. REASONS TO LEVERAGE
4. STRUCTURING AN INFRASTRUCTURE DEAL – CASE
STUDY
5. ASSET MANAGEMENT OF A LEVERAGED ASSET
 Aviva Investors
A Globally Integrated Asset Manager

Our clients benefit from the diversity of our capabilities, with investment professionals in various
locations sharing knowledge and ideas

1,500 +
Employees

438
Investment professionals

19
Financial centres

£346bn
Assets

Source: Aviva Investors as of 30 September 2018 For the investor

Aviva Investors: Public 6

 Specialists in Real Assets
Who We Are

Our Real Assets business is one of the largest pan-European Real

Real Estate Debt
Assets houses, building solutions across the full range of assets to 8%
meet our client objectives. 6% 21%
Long Income Assets

We are value-orientated investors with disciplined underwriting 16%

Asset Types
Direct Real Estate
10%
processes; investing only where we have strong conviction, thereby Infrastructure Debt and Equity
helping to reduce future losses.
Private Corporate Debt

Our focus is on direct investments where we can exert maximum 39%

Structured Finance
influence through managing assets to deliver long term returns
while managing risk for our clients

£41bn 320+ In-house

Transaction
Assets under Employees Expertise
Management

Aviva Investors as at 30 September 2018 For the investor

Aviva Investors: Public 7

 Aviva Investors
Infrastructure at a Glance

Combined debt and equity team of 40 persons

Track record going back to 1998

Manage over £9bn of investor commitments to infrastructure

Financing over 250 projects in 10 countries

Largest provider of UK project finance in 2017

Example of infrastructure Example of infrastructure

equity transaction : debt transaction :
Investment of c. £300m in a portfolio of 7 Financing c. £800m of senior debt
onshore UK wind farms / 72 turbines across three transactions
For the investor

Aviva Investors: Public 8

 Debt and Equity Dynamics
Risk/Return Trade-off

Project IRR Volatility in Three Gearing Scenarios

IRR (% pa)
15% 12%
10%
10% 8%

5%

0%

-5%

-10%

-15% Volatility up by 200%

Volatility up by 575%
-20%
Unleveraged equity Investment Grade Sub-investment Grade
IRR volatility Base Case Equity Returns Downside Case Equity Returns

Leverage enhances equity returns in base case scenarios but magnifies losses in the downside
For the investor

Aviva Investors: Public 9

 Debt and Equity Dynamics
Pros and Cons of Leverage

Pros Cons

Investment in Larger Projects Restrictions in Asset Management

Increase Valuations Competitiveness Enhanced reporting and oversight

Recycle of Capital Returns become more inelastic

Tax-shield Protection Change of control limitations

The implementation of leverage will depend on the investors’ requirements for risks and returns.
For the investor

Aviva Investors: Public 10

 Typical Reasons to Leverage
Key Considerations from both Equity and Debt Providers

Refinancing an
Financing a Acquiring an
owned operating
construction project operating project
project

• Speed of execution is key, • Competitive debt terms is

• Construction budgets
E E reduced # of Lenders E key – larger # of Lenders
with contingencies
• Debt can boost valuations • Cash recycle or support
• Limited # of lenders who
• Refi option in the future further growth
accept construction risk

• Fixed price and date • No construction risk • Operating history

certain D D • Most aggressive debt
D • Likely a limited operating
• Delay risk terms and structuring
history
• Buffer for over-runs • Less need for our earlier
Restrictions on • Better debt rating
• assumption “buffer”
counterparties

The type of debt, cost and covenants restriction depends on what stage is the project in its life-cycle
For the investor

Aviva Investors: Public 11

 Structuring an Infrastructure Deal – Case Study
Financing a Greenfield Onshore Wind-farm

Typical Transaction Structure of Construction

Seller

Top Co
(“TARGET”) Equity
Aviva Investors managed wind-farm

Key information (illustrative only)

Sector Onshore wind-farm in the UK Mid Co
100MW comprised of 40 2.5MW
Asset
WTG
Status Construction
Renewable Obligation Certificates & Project Co Debt
Revenue basis
Power sales
Average asset life 20+ years
BBB- rated
Debt terms Tenor – Construction Period + the
20-year subsidy less a 6m tail For the investor

Aviva Investors: Public 12

 Structuring an Infrastructure Deal – Case Study
Building an Investment Case

Higher Level Considerations

Legal Contractual
Framework Structure

Contractual Construction Technical and

Counterparties Risk Operational
Risk

Macro Other

For the investor

Aviva Investors: Public 13

 Structuring an Infrastructure Deal – Case Study
Sizing the Debt
Debt Sizing Criteria
Revenue mix (lowest risk - higher risk)
120.00

100.00

80.00

60.00

40.00

20.00

0.00
P90 Subsidy P90 - Power Sales
+P50 Subsidy +P50 Power Sales

• Achieve Debt Service in the “worst year” • Increase our “risk buffer” over time
• Structure against verifiable assumptions • Structure to keep equity motivated
Debt repayment profiling examples
Flat Debt Service Indexed Debt Service Sculpted Debt Service

For the investor

Aviva Investors: Public 14

 Structuring an Infrastructure Deal – Case Study
Typical Debt Covenants

Covenants

ADSCR
LLCR
Lock-Up’s
Default
Gearing
Control

For the investor

Aviva Investors: Public 15

 Structuring an Infrastructure Deal – Case Study
Typical Sensitivities
IRR sensitivities

Capex + 10% / -10%

Delay construction 3 months

Generation -10% / +10%

Generation P90

Power Price Low Case/High Case

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

For the investor

Aviva Investors: Public 16

 Asset Management of Leveraged Asset
Key Considerations from both Equity Owner and Lender(s)

E: Participate in
the day-ahead /
BM markets?
E: How to
improve WTG D: Impact on
availability? CFADS
predictability?
D: Equity
upside E: Replace the
O&M provider?

E: Upgrade D: Impact on
substation to counterparty risk,
avoid track record and
curtailment? credit support
E: Install Battery
D: Source of Park?
funding? New
construction D: Impact on
risk gearing levels,
loss of
subsidies?

For the investor

Aviva Investors: Public 17

 Structuring THE Deal Webinar Series – Financial Perspective
Wrap Up

1 Fully understand the equity and debt dynamics

2 Project’s Life Cycle influences deal structure and pricing

3 Robust Business Case and strong sensitivities are key

For the investor

Aviva Investors: Public 18

Q&A
 Biographies

Isaac Vaz Adam Goldsmith

Director, Infrastructure Equity Associate, Infrastructure Debt

Joined investment industry: 2006 Joined investment industry: 2011

Joined Aviva Investors: 2013 Joined Aviva Investors: 2017

Main responsibilities
Main responsibilities
Adam supports the activities of the Infrastructure Debt team focussing on UK renewables,
Isaac supports the activities of the Infrastructure Equity team in leading on the execution of
transport and transmission sector ranging from the classic investment grade, long term
private equity infrastructure transactions, construction of renewable energy projects and
institutional style debt products, as well as shorter term, sub investment grade products which
oversight of asset management activities.
Aviva invests in through its multiple debt funds.

Experience and qualifications Experience and qualifications

Prior to Aviva Investors, Isaac worked at Brookfield Asset Management where he was part of
the investment team focusing on global transportation and utilities infrastructure. Previous
experience includes Ernst & Young, where he advised and valued a wide range of infrastructure
transactions, and as a management consultant producing cost-benefit analyses and economic
research on PPPs/PFIs for the World Bank and the European Commission.
Isaac holds a Masters in Finance from London Business School and an Executive Master in
Corporate Finance from ISCTE Business School in Lisbon. He holds the Investment
Management Certificate (IMC) having also completed executive education programmes at Said
Business School (Oxford University) and ESSEC Business School in Paris.
Prior to Aviva Investors, Adam worked for ANZ Bank for 5 years in the Corporate and
Commercial Banking team in New Zealand. Adam covered a range of sectors and industries
and responsibilities included the credit assessment of the Bank’s exposures, debt and deal
structuring, client relationship management and deal origination. Adam has a Bachelor of
Business Studies majoring in finance and Bachelor of Science majoring in Statistics from
Massey University in Auckland, New Zealand.

For the investor

Aviva Investors: Public 20

 Risks

Where funds or mandates are invested in real assets such as real estate or infrastructure, investors may not be able to switch or cash
in an investment when they want because the assets may not always be readily saleable. If this is the case we may defer a request to
realise an investment. Investors should also bear in mind that the valuation of real assets is generally a matter of valuers’ opinion
rather than fact.

The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount
invested.

For the investor

Aviva Investors: Public 21

 Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at
13 November 2018. Unless stated otherwise any opinions and future returns expressed are those of Aviva Investors and based on Aviva
Investors internal forecasts. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva
Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the
investor may not get back the original amount invested.

The contents of this document are not to be construed as investment, legal or tax advice and do not consider the particular
circumstances specific to any individual recipient to whom this document has been sent. The information within this document is
based on our current understanding of taxation. The basis and rates of tax may change in the future. Investors should also bear in
mind that the valuation of real estate is generally a matter of valuers’ opinion rather than fact.

This document should not be taken as a recommendation or offer by anyone in any jurisdiction in which such an offer is not
authorised or to any person to whom it is unlawful to make such an offer or solicitation.

Where a fund is closed-ended investors should be prepared to maintain their interest for the life of the fund as transfers and
redemptions of interests may not be permitted and/or may be subject to restrictions.

Where funds are invested in real estate/infrastructure, investors may not be able to switch or cash in an investment when they want
because real estate/infrastructure may not always be readily saleable. If this is the case we may defer a request to switch or cash in
units. Investors should also bear in mind that the valuation of real estate is generally a matter of valuers’ opinion rather than fact.

Issued by Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St Helen’s, 1 Undershaft,
London, EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority (Firm Reference No. 1191780).

For the investor

Aviva Investors: Public 22

 A recording of this webinar will be made available
on the IPFA website

Thank you for joining us!

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