Project Finance Course

EDHEC MSc Corporate Finance & Banking & MSc Accounting & Finance
Nice, January - February 2023

Lecture No 1 : introducing on Project Finance

Sylvaine CHUBERT
EDHEC Faculty member
Managing Director, SC Training & Consulting Sarl
 Tip:
Optimise your concentration in class by
disconnecting from all your electronic devices
 Lecture overview

Introduction on Project Finance: market overview & current

trends

Project Finance fundamentals: about non recourse, cash

flow financing
Presenting the project legal and contractual framework with
key participants to projects

About Concessions, Public Private Partnerships (PPP’s)and

emphyteotic leases

Seminar: structuring the financing of a sportshub on a PPP

basis
Intro: Global Infrastructure Finance overview
Recent top transactions and key market trends
Source: IJGlobal
 Project debt origination and refinancings
volumes affected by crises
At the end of 2022 primary financing deals overall continued to hold
steady although there has been a significant drop in refinancings.
Q3 2022 numbers ($219.6 billion) show a drop of 39% compared to
the same period in 2021 with the average deal size 13% lower for
this quarter – which can be attributed to market instability because
of recent geopolitical events.
Though the market successfully navigated the pandemic, it is now
faced with the ongoing Ukraine conflict as rising inflation continues
to impact markets.
Data shows a slump in the value of deals in infrastructure finance
with Latin America and Europe the most impacted. While project
finance transactions were less impacted, the number of deals to
close are also down. There has also been a continued drop in
commercial lending by around 32% though Japanese banks
continuing to dominate with SMBC and MUFG leading and
Santander taking third place.
Sector-wise, while there has been a decline in value and in number
of deals closed, renewables appears to be the least impacted.
The capital markets continue to decline, again put down to the
ongoing conflict in Ukraine and recent Central banks’
Rates hikes.
Key trend: Financing less Oil & Gas and…..
more Renewables
 Infrastructures?
Infrastructure investments, because of their high costs, often have a high
entrance ticket.
They often operate on concentrated markets, with relatively few players
per industry.

Distinguish:
« Economic » assets => the project’s operator receives a revenue which
is directly correlated to the level of use of the asset
Ex: Toll roads & Utilities projects (water, electricity, gas)
Versus « Social » assets =>a public body remains service provider
against a pre-agreed remuneration of the private contractor (constructor
and possibly operator).
Ex: schools, hospitals, prisons, government buildings.

« Greenfield projects » include a construction risk for the investors

versus « brownfield projects» where the project cycle is reduced to the
operation and maintenance of an existing asset, possibly upgraded
 The era of « Infrastructure 4.0 »
source: Vauban Infras Partners (1/2)

. Like many other businesses, infrastructures have been widely impacted

through the past decade by the following three intertwined transitions:
1.A societal / demographic transition, whereby new, digital-native generations,
with more fragmented life and job patterns, tend to cluster in denser cities,
while the population, overall, is aging. Infrastructures, in particular transport,
energy and utilities, have to adapt to these patterns;
2. An environmental transition whereby concerns on climate change and
environmental risks force businesses to adapt their operations to meet carbon
neutral targets and higher environmental standards, under growing political and
social pressure. As far as infrastructures are concerned, climate and
environmental actions constitute both an opportunity, and, for some sub-asset
classes, a problem to be solved; Ex: airport infras
3.A technological transition, whereby the increasing reliance on digital
technologies, data and AI can be both a facilitator and a question mark for the
aforementioned transitions. While infrastructures can be enhanced through data
and AI, their business models can also be jeopardized by the “softwarization of
hardware” or the emergence of new players.
 The era of « Infrastructure 4.0 »
source: Vauban Infras Partners (2/2)

Example A: road infrastructure with smart

lighting, smart traffic lights, automated vehicle
counting and tolling, traffic signs, etc.);
Example B: EV charging infras added to car
parks
Example C:the electricity market with meter
management systems, micro-grids and self-
consumption systems
Targetting an optimal funding mix for
infrastructure assets
Project Finance
fundamentals

About non – recourse lending, SPV’s

and cash flow financing
 Project Finance: what it is and….
what it is not
Project Finance - What it is:

• A financial engineering method for raising

non recourse debt for major long-term
projects,
• whereby lending is granted to a project
against forecasted cash flows generated by
the project
• The latter is structured as stand-alone
entity: the Project SPV.
• Its financing relies on a detailed
evaluation of the project’s construction,
operating and revenue risks and their
contractual allocation between investors,
lenders and other parties.”
 Project Finance: what it is and…. what it is not
What it is not:

• An asset finance (LTV lending) with a

market value easily assessable because
of liquid secondary market
• A Sovereign - State financing

• An On Balance sheet financing of an

industrial Corporate

• The financing of an existing company’s

affiliate. The SPV is rarely the
(consolidated) subsidiary of a single
corporate
 Differences with ‘Plain vanilla’ Corporate
Finance

Corporate borrowers « exist » ie

with historical data and (often) a
rating

Corporate Investment loans are

for «general purposes»

Credit analysis, Deal Structuring

& documentation are simpler

Commercial (bank) spreads and

fees are lower and more interest
than fee-based
 Why choose Project Finance?
 Higher leverage
“Cash flow is king” and the
D.S.C.R. is a vital monitoring
tool for lenders
Asset externalisation =>Off Debt Service Cover Ratio (DSCR) =
Balance Sheet structure via
Free Cash Flow of Project Co
SPV _______________________________
Tax efficiency Debt Service (P + I + F)
Limited to non-recourse
financing <-> pre-/post-
completion of project
Risk allocation is crucial,
with political risk often borne
by lenders (backed by
insurers) and multilateral
development banks
 Distinguish 2 phases = > different risk profiles
1 Pre – completion phase
(Construction &
Commissioning)
Highest risk for the lenders!
Possibly (but not always) with
some level of recourse of the
banks on the EPC company via
contractual clauses (penalties’
schemes such as LD’s )
2 Post – completion phase
(Operations have started)
Non-recourse lending
Distinguish the « Ramp-up» phase
(the first months/years of operations
until the asset productivity reaches
optimal level)….
followed by the remaining operation
period
« Debt sculpting » may be a way for
the sponsors to cope with the ramp
up (if any)
 Possible drawbacks of Project Finance

• Time – consuming structuring (six months

to three years)
• High costs (SPV registration and
administration, bank and advisors fees).
• Project have negative cash flows with
certainty followed by …uncertain positive
cash flows
• High commercial spreads
(LIBOR/EURIBOR + 150 bps to 300 bps)
• The financial structuring may reduce the
sponsors and offtakers maneuvering
Presenting the project legal and contractual
framework
Reviewing the key participants to projects: a complex structuring
around a stand-alone SPV
 Project finance: A complex structuring
• Potentially 20 to 30 participants in a Project Financing deal
• Structure built around a Special Purpose Vehicle (SPV) incorporated
for a specific project.
• This SPV serves as borrower to leverage Debt.
• The SPV attracts equity and gathers support from the Sponsors pre-
Completion.
• A variety of structures apply: joint ventures (JV’s), partnerships, trusts
etc…
• JV’s are very common and usually team up foreign and local sponsors.
• These sponsors are primarily industrial partners to build, operate and
maintain the project
• Financial sponsors may join from scratch or at a later stage
• The following scheme shows these relationships for a typical build-
operate-transfer (B.O.T) project
Financial structuring schemes: from BOT concessions to
Public Private Partnerships (PPP) and Emphyteotic leases

Public
Concessions Private
Partnerships Emphyteotic
leases
(PPP)

P.22
 Schematic diagram of a typical Project Finance
Arrangement on a B.O.T. concession basis

State/
Project Lenders Offtaker Conces
sion
 Non recourse
Debt
Grantor
 Assignment of key contracts* Revenue
 Security interest in project assets
(except with a concession
agreement) and shares in SPV

Concession

Project Equ Equity

Borrower /SPV
Sponsors ity
 Equity subscription
 Contingent Equity (depending
on nature of project) Constructor/
O&M
EPC

 Completion guarantees - Performance

(depending on nature of project) penalties
 Delay penalties
Lender’s security  Cost overruns
 Latent Defects

* Includes direct agreements with key contract parties, equity + contingent equity
subscription agreements
 Your checklist when structuring a project
Distinguish the industrial scheme:
Development, Engineering &
design of the project
Construction of the project’s
asset (« building Co. »)
Operations and maintenance (O
&M) of the project
Offtake (ie sale) of the project’s
output = the project’s CASH
FLOWS!
…and the financial &
institutionnal scheme
Concession: Host
country / concession grantor
Equity providers (non –
industrial): Investment
funds, Private Equity,
Sovereign funds, DFI’s
Debt providers
Derivatives’ providers
Advisors: Financial, legal,
fiscal, technical and ESG
Project finance: here’s the global picture!
 The SPV’s contractual agreements
Three key contractual documents structure the relationship between the
main parties of the project:
1. Concession contract: Permits – Licenses, Land plot, fiscal & legal
regime etc..;
2. Construction or EPC Contract (often Turnkey) = CAPEX
3. Offtake Contract: Sale of the project’s output = Cash Flows!
NP: in electricity generating projects, the offtake contract is a
Power Purchase Agreement (PPA)

Completed by:
• Shareholders’ Agreement
• Operation and Maintenance (« O & M ») Contract
• Supply and sub – contracting Agreements (materials, equipments &
services), possibly covered by Export Credit Agencies (ECA’s) if
exported for international projects
 Missions of the concession grantor (/host
country)

• Grants an exclusive licence to build and operate a project’s asset during

a certain (pre-defined) lapse of time.
• Owns/ Acquires the land and transfers the property to the project
company
• Gets authorisations and permits
• Conducts an environmental impact study (often under the key
requirements of a multilateral agency, MLA)
• Approves the legal framework of the project
• Constructs surrounding infrastructures
• Approves the fiscal treatment of the project company
• Accepts to pay certain penalties in case of Change in law or defaults
from both parties
• Defines the conditions of termination of the project
• Fixes the amount of royalties received by the host country from the
project Co
The parties involved: The Government/ host
country

The State is grantor of the concession or signatory of the

PPP contract
Many Project Financings involve a government, an agency, a
ministry, or regulatory authority either directly through the
concession or indirectly through the provision of services,
consents, or state company involvement.
Governments can also be involved in tax and foreign
exchange arrangements, financial or performance guarantees
to state or quasi-state entities, infrastructure/access rights, or
as an intermediary with local governments/landowners.
Some developments are conducted under legislation specific
to that project. International treaty obligations may require
government action.
 For these local authorities, the project represents income
sources: either directly from the customers or from the
Grantor (shadow tolls…)
 The sponsors
Participants who may procure:
Technology,
Land,
Construction,
Operations management,
Local Connections (as local member of the JV),
Transportation,
Supply/Resources,
Offtake of the project’s output
and… Equity
They team up to develop projects, often trying to earn extra
equity or leverage additional debt from the provision of their
(perceived) strength.
Next to these industrial sponsors, they may be purely financial
sponsors (P.E. Investment funds , DFI’s Institutional investors ,
Family offices etc)
Partners involved: the industrial sponsors
The construction company (often as EPC) may be involved at
each of the following phases of the project:
Engineering & Design
Procurement
Construction (itself)
Management (of construction)
Completion/Commissioning
These activities are usually coordinated by a project general
engineer or representative who works with the construction
company’s project manager.
Under a turnkey contract, this entity is providing Completion
support via Liquidated Damages ("LDs"), Retentions,
Performance Bonds, and Delay-in-Startup ("DIS") insurances.
 Who finances Infrastructures?
A variety of funders…….. in Debt or Equity
Commercial banks: specialized teams (PF, export fin, leasing) with LT
market involvement
Multilateral Agencies (MLA’s-DFI’s): World Bank (with affiliates
IBRD,IFC, MIGA), EIB, EBRD, AfDB..

National institutions: ECA’s, Special Funds (Environment, Sector

funds…), Long Term lenders (KfW in Germany…)
Institutional investors: sovereign funds, insurance companies, pension
funds acting as potential buyers of project bonds

Private equity funds including and the strongly growing Sustainable –

ESG focused funds.
Such funds are capitalized either by the same institutional investors and
(growingly) family offices and private individuals
 For banks, Project finance is a profitable
“cross selling” business

Arranging - Structuring
Underwriting and Syndication of the debt
Swap providers (IR + FX)
Guarantors, L/C providers
Trust services
Cash management/Payments
Leasing

Once the Project Finance structure has been worked out, it is common to mandate an
Arranger or Lead Underwriter group to pull the documentation and funding together.
Usually one or two leaders carry the negotiations
Through syndication, other participants become involved such as Managers, Co-
Managers, and Participant Banks whose rank is solely related to the amount of
financing provided
For Underwriters (Lead Arrangers), syndicating a loan is a way to get higher
fees, share credit risk and hence comply more easily with the Basel 3 capital
and solvency requirements
 Project Finance Mandated Lead Arrangers.
League tables source: IJGlobal
Global Project Finance MLAs
Rank Q3 2022
. Rank Q3 2021 Name Value ($m) Q3 2022 Value ($m) Q3 2021
1 1 SMBC 11 425 11 187
2 2 MUFG 9 550 9 121
3 5 Santander 8 336 6 465
4 8 ING 7 677 5 631
5 4 Societe Generale 7 428 7 972
6 6 Mizuho 6 832 6 140
7 7 Credit Agricole 6 100 5 883
8 3 Natixis 5 265 7 986
9 18 Bank of China 4 182 2 511
10 9 BNP Paribas 3 994 5 575
11 12 HSBC 3 850 2 870
12 29 BBVA 3 743 1 635
13 45 Bank of America 3 629 1 023
14 10 CIBC 3 605 3 337
15 44 Scotiabank 3 350 1 067
16 24 NordLB 3 283 1 827
17 15 Intesa Sanpaolo 3 152 2 709
18 99 Goldman Sachs 3 093 293
19 25 KeyBanc Capital Markets 2 913 1 814
20 32 Citigroup 2 666 1 565

P.33
 Project Finance Mandated Lead Arrangers. League tables for
Europe source: IJGlobal
Europe Project Finance MLAs
Rank Q3 2022 Rank Q3 2021 Name Value ($m) Q3 2022 Value ($m) Q3 2021
1 1 Santander 3 679 3 397
2 5 Credit Agricole 3 390 2 431
3 6 Societe Generale 3 169 2 131
4 12 ING 3 148 1 599
5 15 NordLB 2 544 1 226
6 16 Intesa Sanpaolo 2 263 1 084
7 17 BBVA 2 077 962
8 7 BNP Paribas 1 972 2 071
9 14 Natixis 1 826 1 527
10 13 UniCredit 1 712 1 554
11 30 NatWest 1 696 479
12 19 SEB 1 361 891
13 10 KfW-IPEX 1 338 1 682
14 34 ABN AMRO 1 325 330
15 43 Banco BPM 1 081 271
16 49 MUFG 1 029 226
17 11 SMBC 1 000 1 613
18 #N/A Starwood Capital 986 #N/A
19 152 Aviva 929 5
20 59 LBBW 860 187
 Implications of Basel 2 & 3 and Q.E. on
Project finance

Banks have been required to boost their Equity (when necessary by

reducing their B/S and hence their loan portfolios)
Increased Liquidity requirements and strict ALM on banks’ B/S’s
put pressure on (Long Term) loan tenors
Life Insurers and pension funds (with their LT resources)
compete with banks as « new project funders »
Risks increasingly scrutinized and Compliance as key issue
Basel 2’ Credit Risk Mitigants (CRM) apply and make Export
Credit Agencies and Multilaterals much welcome financing
partners.
QE programs pump liquidity in the financial markets, hence fueling
competition between project funders and pushing bank pricing
(/spreads) downwards. Also on more risky projects! This time is
now over with high inflation and rates rises
 Underwriting versus Club deals
Underwriting Club deal

Bank 1 MLA + agent All debt Bank 1 MLA + agent Final take
Participant Final take
Bank 2
Participant Final take
Syndication Bank 3
Participant Final take
Bank 4

Bank 2 Participant Final take

Bank 3 Participant Final take
Bank 4 Final take
Participant  No / Low syndication risk
 Common in financial markets with low

liquidity
 Strong syndication risk to be assessed
 Maximise fees

 Possibility to sell down large part of

exposure for MLA

36
 Financial advisers have banking or management
advisory backgrounds
Global Project Finance Financial Advisers
Rank FY 2021 Rank FY 2020 Name Value ($m) FY 2021 Value ($m) FY 2020
1 11 Societe Generale 29 227 13 828
2 14 Rothschild 25 293 10 400
3 N/A Greengate 22 578 N/A
4 12 HSBC 21 579 13 537
5 N/A Portland Advisers 21 188 N/A
6 17 EY 20 369 9 483
7 31 PwC 19 408 3 171
8 4 ING 16 683 22 422
9 18 JP Morgan 15 805 8 210
10 10 Macquarie 15 680 14 322
11 23 SMBC 15 532 6 538
12 19 Santander 14 348 8 062
13 62 Banque Saudi Fransi 12 768 675
14 56 Standard Chartered 12 068 800
15 3 Mizuho 11 774 24 473
16 123 Lazard 10 098 54
17 8 Citigroup 9 224 15 971
18 N/A Capella Capital 8 912 N/A
19 34 Credit Agricole 7 867 2 894
20 13 Bank of America 7 782 10 812
 Banks and sponsors growingly work with advisors for their
projects cash flow model auditing
Global Infrastructure Model Auditors
Rank FY Rank FY
2021 2020 Name Value ($m) FY 2021 Value ($m) FY 2020

1 4 BDO 51 323 20 179

2 3 Mazars 14 273 26 088

3 1 Operis 8 516 28 868

4 5 EY 3 649 2 738

5 6 Deloitte 2 024 2 282

6 2 PwC 1 144 27 421

7 7 KPMG 278 1 903

8 11 H3P 161 121

9 10 Grant Thornton 150 207

10 8 DWPF 138 1 374

Financial structuring schemes: from BOT
concessions to Public Private Partnerships (PPP) and
Emphyteotic leases

Public
Concessions Private
Partnerships Emphyteotic
leases
(PPP)

P.39
 Concession versus emphyteotic lease
• Concessions are signed when a public party is involved as the grantor,
which may be a ministry, state authority, the region or the city.
• Emphyteotic leases are lighter contractual arrangements than concessions.
They are very long-term agreements (up to 90 years)
• Can be signed with public parties or (often) private landowners: companies
or individuals.
• Very common in renewable energy projects, these leases are usually signed
for a long period, often in line with the economic life of the project (30
years).
• They guarantee project developers that the land on which the project is to be
built will be available until the project is dismantled or reorganised.
• Important! For lenders, these long leases enable them to fix a legal mortgage
on the land plot on which the project is constructed
• For project developers: along such lease agreement, they are not committed
to build, if their permitting is not consolidated

40
 Contractual structuring with emphyteotic lease
Each contract can have
Offtaker
(want strong offtaker with
many nuances with
ability to honour contract) penalties, bonuses,
default clauses,
termination.
EPC Contractor
(want strong Price Risk or
record and Volume Risk or Public authority
finances) Both or None (often
(Availability) municipality)
or private land
EPC: Fixed Price
owner as Lessor
Contract with LD Emphyteotic of land plot
lease

Special
Supplier O&M
Purpose O&M
(needs to Supply Contractor
Vehicle Agreement
understand Agreement (want strong
(Bond Rating
economics and record)
of BBB-)
supply curve)

Loan
Shareholder Agreement –
Sponsors
Agreement Draws; Debt
(want Compound
Service Lenders
Annual Growth
Rate, Equity IRR (want DSCR, 41
through Invest with paid in cap; Invest with drawdowns; LLCR, PLCR)
dividends etc) payback dividends payback debt service
Financial structuring schemes: from BOT concessions to
Public Private Partnerships (PPP) and Emphyteotic leases

Public
Concessions Private
Partnerships Emphyteotic
leases
(PPP)

P.42
Another project contractual structure: Public
Private Partnerships

In PPP’s the Public sector becomes the user / tenant,

paying a rent for using the infrastructure that is
constructed and operated by a private company

Private sector partners (often the EPC, constructor,

facility manager, O&M company ) join in a consortium
and register the project company as SPV,

The SPV bears any cost overruns in respect of the

construction and maintenance of the asset and the
provision of services,

In some cases the public payments (rents) may be

realigned to prevalent market rates (“benchmarking”)
 Two potential PPP revenue structures …or a mix of the two: “User –
pay” or “Availability –Pay”
In PPPs where users pay directly for the
service (“user-pay PPPs”), the
Authority and its advisers need to
examine the capacity and willingness of
users to pay, especially if tariffs need to
be increased from current levels.
In many PPPs, the public sector will
need to subsidise the service in order to
make it affordable.
The use of public subsidies can impact
the value for money of a PPP
arrangement, requiring that the
efficiency savings from the PPP option
be large enough to compensate for the
use of public funds.

From the lender’s point of view, such

scheme aggregates two revenue sources
: public partner and private users.
 A typical « Availability- pay » PPP
• In PPPs where the Authority makes the
payments (“authority-pay or
availability – based PPPs”), the
assessment of affordability is a key
consideration in the design of the
transaction.
• The public Authority will enter into
payment obligations over the life of the
PPP contract (the so-called “service
fee” or “rent”), which represent long-
term commitments. 
• This can influence the design of the
transaction and therefore its value.
• Risk – wise, such scheme is putting all
revenue risks on the Public party, who
bears the traffic – usage risk.
PPP volumes tend to decline although there is much regional
diversity
Case study: Financing Singapore Sports Hub on a
PPP basis