Project Finance

Session 5 Financing the Deal (Part 1)

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Agenda

Project Finance Model Financing the Deal (Part I)

Advising & Arranging Activities Fee Structure International Financial Institutions & Multilateral Banks Bilateral Agencies (ECA's)

Case: Dahbol Power Project

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Review Project Finance Model

Alternative Model
DEBT ASSUMPTIONS Operations Start Date Debt Total (000's) 01/05/2009 $340,392 64% 100.0% 2.850% 22 bps 3.070% 4.080% 22 bps 4.300% 1.500% 0.000%

(see MS Excel file) Wind Energy Financing Model

Debt/Equity Ratio Percentage Swapped 1st SWAP Rate as per #Bank# (4/9/09) SWAP Spread Total 1st Rate 2nd SWAP Rate as per #Bank# (4/9/09) SWAP Spread Total 2nd Swap Rate Unhedged Rate Default Rate (Y9+) Margins Years 1-2 Years 3-4 Years 5-6 Years 7+ 100% Cash Sweep Assumed after Year 8

300 bps 325 bps 350 bps 375 bps

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Financing the Deal

Advising, Arranging & Lending Services & Fee Structures

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Advising & Arranging Activities

Advisory Services

Modelling & Structuring the Deal Primarily the domain of Investment Banks, Consulting Firms & Engineering Firms

Arranging & Lending

Commercial Banks Multilateral Institutions Bilateral Institutions Export Credit Agencies

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Advisory Services

The Advisors tasks include:

Identify Alternative Solutions Evaluate Risks Mitigate, Manage & Allocate Prepare & Negotiate Contracts Process Permits & Licenses Assist / Prepare the Business Plan

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Advisory Services
Information Memorandum

The document with which the advisor contracts potential lenders and begins to negotiate the credit agreement and loan documentation.

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Arranging Services

Is covered by Commercial Banks

International Coverage Large amount of Equity

Mandate from the SPV to structure & manage the financing contract Mandated Lead Arranger (MLA)

Syndication Underwriting Guarantee

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Integration of Roles

As the SPV (borrower) there are 3 alternatives for the structure of the Advisory & Arranging roles:

Separation

Reduces conflict of interest Advisor doesnt invest any money (the Sales Man) Duplication of Efforts

Combined Competition

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League Tables

Source: Thomson Reuters, Global Project Finance Review, Q3 2009

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Fee Structure

Fees for Advisory Services

Retainer Fee: Covers the advisors costs during the study and preparation phase of the deal. Success Fee: initiated at financial close; from 0.5% - 1% of the debt value.

Incentivises the highest possible debt-to-equity ratio

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Fee Structure

Fee for Arranging Services

Est. as a % of debt Range from 0.7 1% of the syndicated debt.

Pure Arranging Fee Underwriting & Arranging Services Co-arrangers

Range from 0.5 0.8%

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Fee Structure

Participating Banks

Lead Managers, Managers and Co-managers Up-front Management Fee 20 40 Basis points on Loan

Commitment Fee
Difference between maximum & disbursement to date CF = (CL Et) * cf * t/360

Required to set aside capital for committed loans

Agent Bank

Fee based on scope of administrative tasks

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Fee Structure

( a simplified) Example
Deal Structure Syndicated Amount Advisor Success Fee Arranging Fee Coarranging Fee Up-Front Management Fee Members of the Syndicate Bank A Bank B Bank C Bank D Bank E Bank F Role Advisor Lead Arranger Co-arranger Manager Manager Manager Fee Success Fee Arranging Fee Arranging Fee Up-Front Fee Up-Front Fee Up-Front Fee Underwritten Amount (EUR) N.a. 100,000,000 100,000,000 N.a. N.a. N.a. EUR 200,000,000 0.75% 1.00% 0.80% 0.20% Financed Amount N.a. 25,000,000 25,000,000 40,000,000 50,000,000

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60,000,000

Fee Structure
Fees
Arranging Fee Co-arranging Fee Up-Front Mgmt. Fee Total Fees

Bank B
2,000,000 1,600,000 400,000 800,000 50,000.00 850,000

Bank C
800,000 50,000 850,000

Bank D
80,000 80,000

Bank E
100,000 100,000 Grand Total

Bank F
120,000 120,000 2,000,000

Which role has the best return?

The Advisor! No commitment of capital

Total Debt 200,000,000 Advisors Fee (%) 0.75% Total Fee 1,500,000

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Financing the Deal

Multilateral Organisations & the World Bank

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Multilateral Organisations

Leading role in project finance deals in developing countries Trends

Less Government / More Private Projects Tendency not to lend directly Support Private Sector through Guarantees

World Bank Group

Five Institutional Agencies IBRD, IDA, IFC, MIGA & ICSID

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World Bank (Group)

Formed at Bretton Wood Conference, 1944 Headquartered in Washington D.C. Owned by 186 Member Countries Millennium Development Goals

Goal 7. Ensure environmental sustainability Goal 8. Develop a Global Partnership for Development

Last year, the World Bank provided $46.9 billion for 303 projects in developing countries worldwide

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World Bank - IBRD

Aims to reduce poverty in middle-income and creditworthy poorer countries Involvement in Project Finance

Direct Loans Partial Risk Guarantees Partial Credit Guarantees Enclave Guarantees

Mostly Government Related Projects

No private financing available

* Enclave = Revenues flow between entities outside the host country 4/16/12

World Bank - IDA

Provides financial support the poorest countries (that fail to meet criteria for access to IBRD financing). Indirect Loans & Guarantees Very Long Loan, 35 40 years Grace Periods up to 10 years (service 0.75%) Same operations as IBRD (different financing)

Funds from Governments of Developed Countries

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World Bank - IFC

Doesnt require intervention of host government Private Projects in all sectors in Developing Countries

Loans & Equity Assists private companies obtain financing Provides consultancy services Hedging Policies / Guarantees

Limits
$100 Million per individual project (25% total costs) Term of loans up to 20 years Equity stakes up to 35% (8 15 yrs)

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World Bank - IFC

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World Bank - IFC

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World Bank - IFC

* MSME = Micro, Small & Medium Enterprises

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World Bank - MIGA

Provides Political Risk Coverage to lenders & Investors

All 163 World Bank Members

Only WB agency that offers Political Risk Coverage

Up to 95% of debt service Max. $200 Million Premiums range from 0.5 1.75% 15 years duration

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World Bank ICSID

Established in 1966 under the Convention on the Settlement of Investment Disputes.

Arbitration on international investment disputes between foreign investors and host states

143 Member Countries Total Cases Registered 292 Cases Registered in (fiscal) 2009, 24

E.g. Cambodia Power Company vs. Kingdom of Cambodia and Electricit du Cambodge

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Financing the Deal

Other Development Banks, Bilateral Agencies & ECAs

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EIB European Investment Bank

Owned by EU member countries EIB loans funded from capital markets (AAA) Within EU

Up to 50% of project costs 12 - 20 years No arranging fees

Outside EU

EIB takes on political risk (restricted)

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AfDB African Development Bank

53 African nations, 24 non-African Promotes infrastructure projects, particularly PPP Assistance

Loans, Guarantees < 1/3 Total Project Cost Equity < 25% of the SPVs capital stock

Total Project Costs < $9 Million

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IDB Islamic Development Bank

Adheres to Islamic Law

Prohibits the charging of interest on loans

Assistance
Loans < 7 Million Islamic Dinars Maturity ranging 15 25 years (grace 3 7 yrs) Leasing (ijara) Instalment Sales (murabaha) Equity, max 1/3 capital

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Development Banks

Handout Examples

EIB (Poland) A1 Debt Structure Emerging IDB (Brazil) IDB Approves Rodoanel Loan

Source: Project Finance Magazine, Oct 2009 (ProQuest LLC)

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Development Agencies

Bilateral pursue aims lined to foreign economic policy or commercial promotion of home country Examples

Commonwealth Development Corp. (CDC), UK

invests in private equity funds focused on the emerging markets of Asia, Africa and Latin America E.g. US$35 Million, to Private Equity for Microfinance Projects E.g. financing of Olkaria III, a geothermal power station in Kenya

Deutsche Entwicklungs Gesellschaft (DEG), Germany

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ECAs Export Credit Agencies

Political Risk Coverage, total coverage & direct loans to exporting companies operating in their home country Enable exporters to be competitive, in otherwise highrisk endeavours. Funding

Direct Lending, for purchase from country of origin Indirect Lending, financial intermediary (commercial) Interest Rate Equalization, lower than market rates

Activities of ECAs is regulated by OECD Consensus

85% of contract value Duration 8.5 10yrs (max.) Constant Repayments, 6 months (max.)

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ECAs Export Credit Agencies

Examples

Export-Import Bank, United States Export Credits Guarantee Department (ECGD), UK Auslands Geschfts Absicherung (AGA), Germany Compaa Espaola de Seguros de Crdito a la Exportacin (CESCE), Spain Export Finance &Insurance Corporation (EFIC), Australia

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ECA Activities
Ex-Im Bank Increases Export Credit Support for Renewables
The Export-Import Bank of the United States has established a $250 million credit facility aimed at helping to promote and finance renewable energy exports, including solar, wind and geothermal energy products and projects. The move this week makes Ex-Im the worlds first Export Credit Agency to fashion that kind of credit assistance and also the first to adopt an actual carbon policy to guide the financial support of U.S. exports in light of climate change concerns, the agency says. In fiscal year 2009, which ended September 30, the Bank authorized more than $21 billion in support of U.S. exports and associated jobs, the highest financing level since it was established in 1934. The Bank, which is the official, independent export credit agency of the U.S., also set a record for financing of U.S. small business exports at $4.36 billion.

MTS secures USD1 billion Credit Line

MTS secures USD1 billion credit line according to Russian news agency Prime-Tass, the countrys largest cellco by subscribers, Mobile Tele Systems (MTS), has secured a credit line of USD1.07 billion to finance the purchase of network infrastructure equipment from Ericsson. The facility, backed by Swedens Export Credit Agency, has two tranches: the first, valued at USD429 million, has a maturity of June 2019, while the second tranche, worth USD646 million, is due to be repaid in October 2020. Mikhail Shamolin, President and CEO of MTS, said, The terms and size of the loan that we were able to secure provide us with the necessary flexibility in our CAPEX plans going forward as we build out our networks to provide quality services to our subscribers.

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Case Review:

Dahbol Power Project (India)

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Case: Dahbol Power Project

Project Description Describe the structure of the Project Company (SPV) What were the key external relationships related to the deal? What we the main risks (problems) of the project? How was the project financed? Describe the main contracts that were associated with the project? How did these contracts impact the viability of the project? Conclusions?

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