Advanced Project Financing

Advanced Project Financing

Structuring Risk

Second Edition

Richard Tinsley

Contents

P r e f a c e t o 2 n d E d i t i o n

P r e f a c e t o 1 s t E d i t i o n

A u t h o r b i o g r a p h y

L i s t o f c a s e s t u d i e s

L i s t o f e x h i b i t s

I n t r o d u c t i o n

Project Finance’s origins Project Finance defined Project-Finance structuring

Off balance sheet (OBS)

1. Deconsolidation

2. Portfolios

3. Defeasance

4. Non-recourse

5. Completion test and option conditions

6. Limited recourse Advantages Capital shortage Risk transfer Deal sequestration Ratings management

Securitised Project Financings Better [equity] returns Consortium control Tailoring

Covenant busting Flexibility

Workouts Privacy Project validation Simple arithmetic Disadvantages Documentation Extra cost Too long Lender control Higher insurance costs Higher legal bills Greater Risk to lenders Recourse

Summary

Chapter 1: Structuring stages

Technical feasibility stage

Financial feasibility stage Market feasibility stage

Approach to banks

Approach to bond underwriters Board paper

Takeout (re)financing Piercing the sovereign ceiling Use in mergers and acquisitions

Equity/mezzanine Project concept Summary

C h a p t e r 2 : F u n d i n g S o u r c e s

Local-currency funding Banks Bilateral Agencies Multilaterals 1. PRI Developers Mezzanine Merchant financing Islamic lending Public-private partnerships (PPPs) Leasing Commodity-based lending Equity Summary

C h a p t e r 3 : C a s h f l o w s

Modelling aspects Interest bases Spreads Reserve Styles Cashflow controls Operations summary Operating cashflows

Gross revenues Opex Financing reports Financing costs Capex Modelling cashflows Approaches Typical sensitivities Liquidated damages (LDs) Model periodicity Input sheet Model shortcomings Summary

C h a p t e r 4 :

F i n a n c i a l A d v i s e r s

Advantages and disadvantages Need for an adviser

Advisory costs

Who are the Financial Advisers? Summary

C h a p t e r 5 :

C r e d i t R a t i o s

Debt Service Cover Ratio (DSCR) Residual/Tail

Interest Cover Ratio (ICR) Principal Cover Ratio (PCR) Present value (PV) ratios Loan Life Ratio (LLR) Project Life Ratio (PLR) Residual Life Ratio (RLR) Debt:Equity ratio (D:E) Payback

Discount rate Leveraged IRR Choice of discount rate Multi-tranche ratios Accounting ratios Telecoms Summary

C h a p t e r 6 :

R i s k

S y s t e m s

Insurance Statistical Risk modellers Benchmark Checklist Contractual/Jigsaw Project Finance Summary

C h a p t e r 7 :

S e c t o r P r o f i l e s

Sector features Analysis by sector Power cashflows Tollways cashflows Railways cashflows Resources cashflows Telecoms cashflows Satellites cashflows Prisons/hospitals cashflows Airports/ports cashflows

Water [supply]/Waste water [sewage] cashflows Stadiums/theme parks cashflows Summary

C h a p t e r 8 :

S t r u c t u r e s

Risk 1. Contract 2. Trigger 3. Financed 4. Studied 5. Avoided Risk division Document matrix Interest Principal Drawdown styles 1. Certification 2. Benchmarks 3. Anticipated-cost-to-complete 4. Up-Front -- banks 5. Up-Front -- bonds SPV Company

Unincorporated joint venture (UJV) Partnership Trusts Mezzanine Subordinated debt Working capital Bridge loans Multi-tranche Commodity funding

Contract structures Supplier credits Buyer credits Pre-export financing 1. Prepayment 2. Advanced payment Leasing 1. Leveraged leasing 2. Wrap lease 3. [Bermuda] Captives 4. Double-dip 5. Hire purchase 6. Lease tranches Trigger structures Deferral

1. Inverse order of maturity 2. Current order of maturity

3. Banked deferral Clawback Mandatory prepayments Equity kickers Financed structures Equity 1. Dividend reserve 2. Subordinated debt

3. Convertible debt/initial public offering (IPO) Securitisation

1. Collateralised loan obligation (CLO)

2. Revenues Joint financing Study structure Ratings 1. Methodology 2. Default 3. Deal Pricing 4. Covenants 5. Terms 6. Pricing Avoided

Off balance sheet (OBS)

1. Deconsolidation 2. Diamond 3. Defeasance 4. Derivatives 5. Puts/calls/indemnities 6. Comfort letters Summary

C h a p t e r 9 :

D u e d i l i g e n c e

Systematic review

The feasibility process Selection of experts/engineers Customary reviews

Traffic studies

Construction cost audit Power

Resources

Telecoms subscriber studies Common sense

C h a p t e r 1 0 :

S u p p l y R i s k

Contract structures Supply agreements Supply undertakings Tolling contracts Supply assurance Trigger structures Insurance Hedging Financed structures Collateral Study structures Supply studies 1. Traffic 2. Telecoms 3. Water

4. Oil and gas

5. Mining

6. Power

7. Processing

Weighting

1. Borrowing base [Reserve-based lending]

2. Physical tail 3. Depletion protection Summary

C h a p t e r 1 1 :

M a r k e t R i s k

Market-price Contract structures Sales contracts Take-or-pay

Capacity [availability] contracts Throughput agreements Buy-back contracts Minimum-quantity contracts Market-preference contract Requirements contract Tolling agreements Advanced sales contracts Production payments Contract monetisation

Market-price hedging Contract base pricing

Additional sales contract options Force majeure

Priority

Capacity [availability] charges Trading-company Customer Trigger situations Hedging Contract-for-differences (CFD) Make-up/deficiency agreements Insurances Study techniques Market forecasts Summary

C h a p t e r 1 2 :

F o r e i g n E x c h a n g e ( F X ) R i s k

What percentage to structure? Contract structures Forward contracts Parallel loans Barter [countertrade] Trigger structures Currency swap

Exchange rate agreements Study

Purchasing-power parity Exchange rate forecasts Avoided Natural hedge Commodity lending CPI lending FX tariff Summary

C h a p t e r 1 3 :

O p e r a t i n g R i s k – T e c h n i c a l c o m p o n e n t

Contract structures Technology management Quality assurance Technology guarantee Trigger structures

Fleet assurance [shared spares] Business interruption insurance Technology insurance Financed structure Performance bond Study structures Independent certification Alternative technology Technology curve Summary

C h a p t e r 1 4 :

O p e r a t i n g R i s k – C o s t c o m p o n e n t

Contract structures Cost guarantee Sales contracts Trigger structures Economic test Financed structures Cost subordination Study structure Cost curves Avoided Waiver Summary

C h a p t e r 1 5 :

O p e r a t i n g R i s k – M a n a g e m e n t c o m p o n e n t

Contract structures Management contract Labour contracts Training agreements Trigger structures Key-person insurances Study Personal screen Summary

C h a p t e r 1 6 :

E n v i r o n m e n t a l R i s k

 Emissions  Catastrophe  Contextual  Contamination  Sustainability Contract structures Environmental management Rehabilitation management Trigger structures Rehabilitation release Emergency response Environmental warranty Environmental insurances Financed structures Rehabilitation guarantee Pollution-control bonds Rehabilitation reserve Study

Environmental impact Statement (EIS) Environmental plan Equator compliance Avoided Regulatory waiver Physical waiver Regulatory purchase/trade 1. sulphur 2. carbon Summary

C h a p t e r 1 7 :

I n f r a s t r u c t u r e R i s k

Contract structures

Infrastructure contract Government commitments Pooled infrastructure agreements Financial Structure

Tax-fee status Studies

Transport [freight] studies Avoided f.o.b offtake Summary

C h a p t e r 1 8 :

F o r c e M a j e u r e

R i s k

 Acts of nature  Acts of man(kind)  Acts of government  Impersonal acts Trigger structures Deferral Insurance Negotiation Studies Risk Manager Safety measures Summary

C h a p t e r 1 9 :

C o m p l e t i o n R i s k

Completion test (Type 1) Contract structures

Turnkey Construction Contract (TCC) (Type 2) Multi-party contracts

Partnering charters/alliance contracting Trigger structures Liquidated damages (LDs) Delay-in-startup (DIS/DSU) 1. Force majeure 2. Change of a law 3. Efficacy 4. General provision Financed structures Default agreement Bonding/guarantees 1. Retention 2. Performance bonds 3. Maintenance bond Completion guarantee Completion undertaking Overrun-standby facilities Debt:Equity subscription

Study approach

Independent completion engineer Completion tests

Sector completion protocols Tollroads/bridges Rail/light rail Ports/airports Prisons/hospitals

Water supply/sewage treatment Power

Telecoms Oil and gas Mining Summary

C h a p t e r 2 0 :

E n g i n e e r i n g R i s k

Design/calculations Trigger structure Insurance Study Independent certification

C h a p t e r 2 1 :

P o l i t i c a l R i s k

Definitions

1. War and insurrection (W&I)

2. Currency inconvertibility and transfer (CIT) 3. Expropriation and creeping expropriation

a. Regulatory creep

b. Financial creep

c. Physical creep

4. Landowner/indigenous peoples’ disturbances

5. Terrorism and sabotage

6. Wilful breach of contract/Deprivation

7. Change of government 8. Corruption 9. Unions 10. Environmental activists 11. Approvals/bureaucratic risk 12. Conflict of authority

13. United States of America (USA)

14. Religious fundamentalism/ethnic tension 15. Interest withholding tax increases

16. Change in law

17. Partisanship

18. Xenophobia

19. Political independence of the courts 20. Regional blocs

Government supports Direct undertaking Offtake guarantee

Direct assurance to the lender Counter indemnities

Contract structures Concession agreement Cofinancing Multi-party structures Market tie Countertrade [Barter} Trigger structures

Political risk insurance (PRI) Currency inconvertibility agreements Partial Risk Guarantees (PRG) Partial Credit Guarantees (PCG) Foreign-exchange (FX) devaluation Debt:equity swaps

Tax indemnification Financed structures

War and insurrection residual Cash escrow

Prepaid PRI premiums Study sources

Prince chart Avoided

Offshore proceeds account Summary

C h a p t e r 2 2 :

P a r t i c i p a n t R i s k

Sponsor pre-completion (Type 1) SPV

1. Company

2. Unincorporated joint venture (UJV)

3. Partnerships 4. Trusts Trigger structures Deficiency agreement Share pledge Board control Call option Study route Bankruptcy remoteness Avoided Pre-assignment Summary

C h a p t e r 2 3 :

I n t e r e s t - R a t e R i s k

Contract structures Supplier credits Leasing Hedging/swaps Trigger structures Alternate funding Interest-protection agreement Interest make-up agreement Back-ended interest Summary

C h a p t e r 2 4 :

S y n d i c a t i o n R i s k

Roles

Choice of banks and placements parties

 Pricing  Disclosure Contract structures Club underwriting Broad syndication UN syndication Study structures Information memorandum Avoided Equator syndicate Syndicate Excel model

Project Development Plan (PDP) Loan administration Summary

C h a p t e r 2 5 :

L e g a l R i s k

Legal regime Concept of law  Enforcement  The courts  Solicitors/lawyers Contracted structures Direct agreements Legislation Trigger structures Title insurance Study structures Title searches Legal opinions Due-diligence ‘books’ Avoided

Parallel security structure Offshore security structure Pre-transfer agreements Summary

A p p e n d i x 1 :

D i f f e r i n g D e f i n i t i o n s

Mergers & Acquisitions (M&A) Project Financiers

Summary

A p p e n d i x 2 : T y p i c a l o w n e r - c o n t r o l l e d i n s u r a n c e p r o g r a m m e ( O C I P )

Section 1 Owner’s project company insurance coverages – construction phase

1. Contractors-all-risk etc including delay-in-start-up (DIS/DSU)

2. Marine cargo and delay in start-up (DIS/DSU)

3. Umbrella/excess liability – construction

4. Workers’ compensation and employer’s liability

5. Business auto liability

6. Any other statutorily required coverages

Section 2 Contractor’s insurance requirements – construction phase

1. Contractor equipment

2. Marine liability 3. Aircraft liability

4. Workers’ compensation and employer’s liability

5. Business auto liability

6. Professional errors and omissions (E&O) –design liability 7. Umbrella excess liability – construction

8. Liquidated damages/efficacy (to be provided by equipment supplier)

9. Any other statutorily required coverages 10. Any other elective coverages

Section 3 Owner’s project company insurance coverages – operational phase

1. Industrial all-risk property damage

2. Operational boiler and machinery coverage

3. Industrial all-risk – loss of profits 4. Business auto liability

5. Third-party liability primary cover 6. Umbrella/excess liabilities

7. Any other statutorily required insurance coverages 8. Any other elective [insurance] covers