BOOT: PROJECT FINANCE PRIMER

LEARNING OBJECTIVES

1 What is Project Finance?

2 Corporate Finance vs Project Finance

3 Characteristics of a Project Finance Transaction

4 Project Finance Terminology

 WHAT IS PROJECT FINANCE?
Project finance
• Financing large, long term infrastructure projects
• Off-balance sheet, with no recourse
• Debt lent paid back solely off strength of project
cashflows, rather than collateral (e.g. assets)
 WHAT IS PROJECT FINANCE?
CORPORATE (SPONSOR) Project finance
• Financing large, long term infrastructure projects
Existing
Existing equity • Financing them off-balance sheet, with no recourse to
assets
Existing debt the corporate
• Debt lent paid back solely off strength of project
SPV cashflows, rather than collateral (e.g. assets)

New equity
New project

New debt
 WHAT IS PROJECT FINANCE?
Project finance
• Financing large, long term infrastructure projects
• Off-balance sheet, with no recourse
• Debt lent paid back solely off strength of project
cashflows, rather than collateral (e.g. assets)

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Yr 16 Yr 17 Yr 18 Yr 19 Yr 20 Yr 21 Yr 22 Yr 23 Yr 24 Yr 25 Yr 26 Yr 27 Yr 28 Yr 29 Yr 30 Yr 31 Yr 32 Yr 33

Distributions Debt service Capex Tax Operation cost

 WHAT IS PROJECT FINANCE?
Project finance
• Financing large, long term infrastructure projects
• Off-balance sheet, with no recourse
• Debt lent paid back solely off strength of project
cashflows, rather than collateral (e.g. assets)
 WHAT IS PROJECT FINANCE?
Project finance
• Financing large, long term infrastructure projects
• Off-balance sheet, with no recourse
• Debt lent paid back solely off strength of project
cashflows, rather than collateral (e.g. assets) No terminal
value

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Yr 16 Yr 17 Yr 18 Yr 19 Yr 20 Yr 21 Yr 22 Yr 23 Yr 24 Yr 25 Yr 26 Yr 27 Yr 28 Yr 29 Yr 30 Yr 31 Yr 32 Yr 33

Distributions Debt service Capex Tax Operation cost

 PROJECT vs CORPORATE FINANCE
CORPORATE FINANCE PROJECT FINANCE
CORPORATE (SPONSOR)
CORPORATE
Existing
Existing Existing equity
Existing equity assets
assets Existing debt
Existing debt

SPV
New equity
New equity
New project
New project
New debt
New debt
 PROJECT vs CORPORATE FINANCE
CORPORATE FINANCE PROJECT FINANCE
CORPORATE (SPONSOR)
CORPORATE
Existing Existing
Existing assets
Existing equity assets return Existing equity WACC
Existing debt
assets
Existing debt

New equity
SPV
Cost of new
New project debt
Project New equity
return
New project Cost of new
New debt
equity
New debt
 PROJECT vs CORPORATE FINANCE
CORPORATE FINANCE PROJECT FINANCE
CORPORATE (SPONSOR)
CORPORATE
Existing Existing
Existing assets
Existing equity assets return Existing equity WACC
Existing debt
assets
Existing debt

New equity
SPV
Cost of new
New project debt
Project New equity
return
New project Cost of new
New debt
equity
New debt
 PROJECT vs CORPORATE FINANCE
CORPORATE FINANCE PROJECT FINANCE
CORPORATE (SPONSOR)
CORPORATE

Existing assets
Existing equity
Existing debt
WACC: average return
stakeholders expect to get

New equity
WACC Valuation
New project Project
return
New debt New project

New debt
 PROJECT vs CORPORATE FINANCE
CORPORATE FINANCE PROJECT FINANCE
CORPORATE (SPONSOR)
CORPORATE
Existing Existing
Existing assets return Existing equity WACC
Existing
assets return WACC assets
Existing equity
assets Existing debt
Existing debt
Cost of new SPV
equity Cost of new
Project New equity
return equity
Project New equity
New project Cost of new return
debt New project Cost of new
New debt
debt
New debt
 PF CHARACTERISTICS
1 Projects financed “off-balance sheet” → SPV

2 Non-recourse financing

3 → Well developed risk sharing mechanism

4 → High transaction costs → large projects

5 High level of debt (70% - 90% geared)

 PF MECHANICS
CONTRACTING
SPONSOR BANK
AUTHORITY

LAND LEASE
EPC
SPV
MANAGE-
MENT ASSETS
SITE O&M
SECURITY

PERMITS
FEED SUPPLY OFFTAKE
(e.g. gas) (e.g. PPA)
 PF TERMINOLOGY
SPV
PPP
CFADS
DSCR
EPC
Offtaker
Contracting
PPA Authority

DSRA
P90/P50
 PF TERMINOLOGY
SPV Special Purpose Vehicle
PPP • The project company - a (separate) legal entity with no
activity other than those connected with its borrowing
CFADS
• Primary roles: Borrower of debt, counterparty to
DSCR
contracts underpinning the project & owner of project
EPC cashflows
SPV
Offtaker
Contracting
PPA Authority
New equity
New project
DSRA
New debt
P90/P50
 PF TERMINOLOGY
SPV Public-Private Partnership
PPP • For projects involving both the government (Contracting
Authority) and the private sector
CFADS
• Typically large infrastructure projects that perform a
DSCR
public service (e.g. schools, hospitals, roads)
EPC • Government typically own the infrastructure, while the
Offtaker Private sector can perform many different roles
Design
Contracting
PPA Authority Build
O
w Finance
DSRA n Maintain
P90/P50 Operate
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
DSCR
EPC
Offtaker
Contracting
PPA Authority

DSRA
P90/P50
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
Revenue
DSCR
EPC
Offtaker
Contracting
PPA Authority

DSRA
P90/P50
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
Revenue
DSCR
(-) Expenses
EPC
Offtaker
Contracting
PPA Authority

DSRA
P90/P50
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
Revenue
DSCR
(-) Expenses
EPC
(+/-) Net
Offtaker Working Capital
Contracting
PPA Authority

DSRA
P90/P50
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
Revenue
DSCR
(-) Expenses
EPC
(+/-) Net
Offtaker Working Capital
Contracting
PPA Authority (-) Capex

DSRA
P90/P50
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
Revenue
DSCR
(-) Expenses
EPC
(+/-) Net
Offtaker Working Capital
Contracting
PPA Authority (-) Capex

DSRA (-) Tax

P90/P50
 PF TERMINOLOGY
SPV Cashflow Available for Debt Service
PPP • The cashflows that (senior) lenders have claim to. These
are senior to cashflow to sub-debt or equity holders
CFADS
Revenue
DSCR
(-) Expenses
EPC
(+/-) Net
Offtaker Working Capital
Contracting
PPA Authority (-) Capex

DSRA (-) Tax

P90/P50 = CFADS
 PF TERMINOLOGY
SPV Debt Service Coverage Ratio
PPP • CFADS / Debt Service CFADS
Interest +
CFADS Principal

DSCR • Lenders want the project to demonstrate a cash cushion

EPC • The more project risk, the bigger the cash cushion!
Project sector Average DSCR
Offtaker Water (regulated) 1.20x – 1.30x
Contracting Wind farm 1.30x – 1.50x
PPA Authority Telecom 1.35x – 1.50x
DSRA Power with offtaker 1.50x – 1.70x
Power with no 2.00x – 2.50x
P90/P50 offtaker
 PF TERMINOLOGY
SPV Engineering, Procurement & Construction
PPP • A form of contract – the contractor who designs & builds
the project
CFADS
• A way of assigning the third party risk of construction to
DSCR
specifications
EPC CONTRACTING
SPONSOR BANK
AUTHORITY

Offtaker LAND LEASE

EPC
SPV
Contracting MANAGE-
PPA Authority
MENT ASSETS
SITE O&M
SECURITY
DSRA
PERMITS
FEED SUPPLY OFFTAKE

P90/P50 (e.g. gas) (e.g. PPA)

 PF TERMINOLOGY
SPV Offtaker
PPP • The counterparty that buys the output from the SPV
CFADS • Offtake contract specifies the long term pricing formula

DSCR
EPC CONTRACTING
SPONSOR BANK
AUTHORITY

Offtaker LAND LEASE

EPC
SPV
Contracting MANAGE-
PPA Authority
MENT ASSETS
SITE O&M
SECURITY
DSRA
PERMITS
FEED SUPPLY OFFTAKE

P90/P50 (e.g. gas) (e.g. PPA)

 PF TERMINOLOGY
SPV Power Purchase Agreement
PPP • The agreement that governs the purchase of electricity,
for projects that generate power, e.g. wind farms, gas
CFADS
power plants etc
DSCR
• Generally broken into a fixed component (e.g. land
EPC rental, debt service) + variable (e.g. cost of fuel used to
produce energy)
Offtaker
Contracting Fixed Capacity charge
PPA Authority

DSRA Variable Energy charge

P90/P50 Other charges

 PF TERMINOLOGY
SPV Contracting Authority
PPP • In PPP deals, they give the SPV the right to construct the
project & earn revenues
CFADS
• Central Government / Regional or State Government /
DSCR
Country / Municipality / Other Public Agency
EPC
CONTRACTING
SPONSOR BANK
Offtaker AUTHORITY

LAND LEASE
EPC
Contracting SPV
PPA Authority
MANAGE-
MENT ASSETS
SITE O&M
DSRA SECURITY

PERMITS
FEED SUPPLY OFFTAKE
P90/P50 (e.g. gas) (e.g. PPA)
 PF TERMINOLOGY
SPV Debt Service Reserve Account
PPP • A cash account held on the balance sheet of the project
company (SPV)
CFADS
• Why? – The project relies on cashflows to pay it’s debt
DSCR
service. To avoid one weak period of cashflows, there’s a
EPC cash buffer which is usually funded on construction

Offtaker • Cash balance should be enough to cover a few periods

Contracting
of debt service – typically 6 months, but by negotiation
PPA Authority

DSRA
P90/P50
 PF TERMINOLOGY
SPV Annual Exceedance Probabilities
PPP • Apply to renewable energy projects – which rely on
uncertain power sources like the wind or the sun
CFADS
• P90 means there’s a 90% chance that the power plant
DSCR
will produce more than the specified amount of energy.
EPC
Offtaker
Contracting
PPA Authority

DSRA
P90/P50