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Managing Director, Project & Export

September 30, 2005


Public Sector

Concession agreement 



Investors Equity
  Securities Agreement

Lawyers Construction

Insurer Design Builder Service

Sub-contractors Sub-contractors





‰ A company constructed with a ‰


limited purpose or life 

‰ Frequently serves as conduits or ‰ Export Credit Agencies (ECAs),
pass-through organizations or multilateral agencies
‰ Mezzanine / subordinated debt
‰ In relation to securitization, the
entity which holds legal rights over ‰ Equity investors
assets transferred by the originator

‰ Equity investors (the ³Sponsors´) typically want non-recourse or limited recourse

‰ The financier therefore has to rely on the SPV¶s cash flow as (primary) source of
repayment and its assets as security



‰ Business valuation ‰ Technical bank

‰ Due diligence ‰ Modeling bank
‰ Risk assessment
‰ Insurance bank
‰ Bid preparation
‰ Hedging bank
‰ Negotiation
‰ Security trustee
‰ Documentation
‰ Facility agent
‰ Structure financing
‰ Intercreditor agent
‰ Market financing
‰ Escrow agent
‰ Coordination / manage timetable



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‰ Assess how industry outlook ‰ Scale and technology
might impact lender appetite ‰ Low cost and strategic producers
‰ Markets for products

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‰ Match option with Sponsor
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‰ Completion and EPC contract
‰ Feedstock, offtake & other operating risks
‰ Recommend approach to ensure
optimal solution is successfully
|+-/ ‰ Financial modelling & sensitivity analysis
completed ‰ DSCR vs. tenor and downsides

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‰ Offshore vs. Onshore debt ‰ Optimal Debt: Equity ratio
‰ Clean vs. ECA debt ‰ Quantum of Recourse
‰ Capital Market Alternatives ‰ Contingent Support
‰ Other liquidity sources ‰ Impact on financing costs


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Time to Financial Close Recourse to Sponsors

Maximise Return on Equity High Debt Service Coverage

Simplified Process 

Proper Risk Mitigation



Competition Among Lenders Capital Recovery

Maximise Certainty of Financing Adequate Due Diligence

Less Onerous Covenants Lend at Attractive Margins

‰ Level of leverage is determined by:

‰ Project cash flows / projected debt service coverage
‰ Level of sponsor / sovereign support
‰ Quality of risk mitigation
‰ Sector outlook (particularly for cyclical industries)
‰ Industry benchmarks and precedent transactions
‰ Liquidity in the market
‰ Country limits for banks


‰ Level of recourse to sponsors

‰ Conditions precedent for funding

‰ Cash flow waterfall

‰ Repayment mechanisms

‰ Controls on the management of the SPV

‰ Monitoring project performance

‰ Security

‰ Default scenarios and remedies



‰ Relationship dynamic:
‰ Level of sponsor support may determine availability of financing, debt
capacity, tenor, pricing and/or other terms and conditions
‰ Types of recourse to the sponsors include:
‰ Completion guarantee
± Contingency equity commitment to cover cost overruns / construction
± Falls away upon technical and financial completion tests
‰ Cash deficiency support during operations
± Triggered by debt service coverage ratio tests
‰ Sponsor guarantees during the operational phase of the project



‰ Relationship dynamic:
‰ All the arrangements for a functioning project has to be in place
‰ Lenders must be comfortable with the economics and operating
environment of the project
‰ Examples of conditions precedent (³CPs´)
‰ Satisfactory fixed-price, turnkey EPC contract with appropriate liquidated
damages (³LDs´)
‰ Satisfactory operations and maintenance (³O&M´) agreement
‰ Satisfactory reports from independent technical advisors, market
consultants, legal counsel
‰ Financing and security documents signed and in full force and effect
‰ Satisfactory insurance arrangements
‰ Satisfactory environmental impact assessment (³EIA´) or management
‰ Banks¶ approval of base case financial projections
‰ Confirmation that no event of default has occurred or is continuing
‰ Valid ^overnment licenses, consents and waivers


‰ Relationship dynamic:
‰ SPV typically must deposit revenues directly into lender-managed escrow
accounts, so that lenders can control distribution of cash flow according to
a strict ³cashflow waterfall´
‰ Example of a cashflow waterfall
w Operating costs, maintenance capital expenditures taxes, statutory duties
and levies
wInterest payments
wPrincipal repayments
wTransfer to Debt Service Reserve Accounts (DSRA)
wDebt service for working capital facilities or other
permitted indebtedness
wDividend to shareholders (must satisfy financial
tests prior to distribution)

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‰ Relationship dynamic:
‰ Set aside excess cash flow for repayment purposes for a rainy day
‰ Compensation received from third parties if things go wrong is
immediately applied to repayment of debt
‰ Accelerate repayment when project does well so that lenders can recover
capital more quickly
‰ Examples of repayment mechanisms
‰ Debt Service Reserve Accounts (e.g., forward looking 6 months¶ debt
‰ Mandatory prepayment upon receipt of liquidated damages from
contractors, insurance proceeds, etc.
‰ ³Cash sweep mechanism´



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‰ Relationship dynamic:
‰ Establish controls on the management of the SPV to ensure that lenders¶
interests are adequately protected
‰ Undertakings will be structured to take into account administrative convenience
± covenants typically have thresholds attached
‰ SPV can seek lenders¶ consent to waive restrictions on a case-by-case basis
‰ Examples of control provisions
‰ SPV to use the debt facilities solely for purposes stated in the facility
‰ No change of shareholding / mergers
‰ No additional indebtedness
‰ No new investments or acquisitions (except permitted capital expenditures)
‰ No sale or disposal of assets
‰ No creation of liens on property or assets / assignment of incomes or rights to
third parties
‰ No change to SPV constitutional documents
‰ No material change to key contracts
‰ Arms-length transactions with related parties

‰ Relationship dynamic:
‰ Financiers must be kept up to date with the project¶s operational and
financial performance, so as to spot potential problems early on
‰ SPV typically has to undertake to provide technical and financial
information to the lenders periodically
‰ SPV must inform lenders of any material change in business conditions /
key contracts / legal disputes
‰ Examples of ³informational covenants´
‰ SPV¶s annual projections based on the financial model, compiled using
assumptions acceptable to lenders
‰ SPV¶s unaudited quarterly financials and audited fiscal year-end financial
‰ SPV¶s corporate information (e.g., minutes of board meetings)
‰ Updates to technical and market consultants¶ reports
‰ Notice of proposed revisions to key contracts
‰ Notice of adverse events (e.g., legal disputes, labor disputes, damage to
assets, event of default)
‰ Relationship dynamic:
‰ Financiers need to have all the rights, title and interests to the SPV¶s
‰ Typical example of security structure:
‰ Rights to the SPV¶s rights to the project site
‰ Rights to key project documents, including the Concession, the EPC
contract, product sales contracts, etc.
‰ Pledge over the SPV¶s shares
‰ Charge over SPV assets, property and fixtures, plant and equipment, etc.
‰ Floating charge over current assets
‰ Assignment of all insurance policies
‰ Charge over all benefits accruing under hedging or risk management



‰ Relationship dynamic:
‰ Financiers will structure ways to accelerate repayment / exercise step-in-
rights / enforce security if things go wrong with either the project /
shareholders / key project parties
‰ Most defaults scenarios include a ³cure period´
‰ Waivers can be sought subject to agreement by lenders
‰ Typical events of default include:
‰ Non-payment of debt service
‰ Misrepresentation
‰ Illegality
‰ ³Cross-default´
‰ Termination of core project documents
‰ Revocation of licenses or permits
‰ Insolvency events
‰ Failure to maintain adequate debt service coverage levels
‰ ³Material adverse change´
‰ Nationalization / ^overnment default on Concession ± financiers would
recognize this is extremely unlikely in the case of Hong Kong!

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‰ The earlier a financier gets involved the better
‰ Advise on project and contract structures to ensure bankable financing

‰ Interests of financier and SPV are often aligned

‰ Both want risks to be properly mitigated and transferred to parties that are
best positioned to address them
‰ Risk allocation and monitoring has to be fair and sustainable to ensure a
working relationship
‰ Has to be commercial to incentivize everyone to comply
‰ Has to balance monitoring needs vs. practicality / administrative
‰ Transparency, open communication and good human dynamics are key
‰ Financing relationship lasts as long as 10 to 15 years

‰ A well-structured and well-maintained financier-SPV relationship is conducive

to a successful PPP program


Managing Director Head of ^lobal Corporates & Public Sector
Head of Oil & ^as and Petrochemicals, Asia Client Relationships, Wholesale Banking



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