Market fot Project Finance

FUNDING OPTIONS: MEZZANINE FINANCING AND SUBORDINATED DEBT Debt and equity capital offer their contributors opposite frameworks as regards in- centives and remuneration. The former is a combination of ___ risk and ____ return; the latter is closer to a ___-risk/__-return type of approach. An ____ solution between these two extremes is mezzanine financing, which can also attract lenders who are more open to risk but whose investment guidelines or articles of incorpora- tion don't allow them to contribute equity. But mezzanine finance can also be used by sponsors themselves to reduce their ____ commitment partially.

Debt and equity capital offer their contributors opposite frameworks as regards in- centives and remuneration. The former is a combination of low risk and low return; the latter is closer to a high-risk/high-return type of approach. An intermediate solution between these two extremes is mezzanine financing, which can also attract lenders who are more open to risk but whose investment guidelines or articles of incorpora- tion don't allow them to contribute equity.

Macro regions active on PPP initiatives

East Asia South Asia LAC

FUNDING OPTIONS: EQUITY What does it mean?

Equity is the means to support and finance the planning, study, and feasibility analysis stages up to preparation of the business and financial plans to be submitted to lenders.

Equity makes the project safer for l_____. The greater the equity, the higher the __borne by _____; this means less risk for ___. An increase in equity improves the ____ ratio level required by lenders (see Section 5.3), although it has a negative impact on the sponsors' __ __ __

Equity makes the project safer for lenders. The greater the equity, the higher the risk borne by sponsors; this means less risk for lenders. An increase in equity improves the cover ratio level required by lenders (see Section 5.3), although it has a negative impact on the sponsors' internal rate of return (IRR) (see Section 5.2.5.1).

FINANCING ACTIVITES: concerns lending activities and consists of _____ loans and, sometimes, providing ____ based on indications in the feasibility study prepared by consultants.

FINANCING ACTIVITES: concerns lending activities and consists of grant- ing loans and, sometimes, providing equity based on indications in the feasibility study prepared by consultants.

FINANCING SERVICES Granting B___ financing U________ bank financing Granting p_____ financing (lending) Granting l____ for plant Contributing to e_____ Contributing to me____ finance Issuing guarantees and letters of credit Managing relationship with the SPV from a technical standpoint Agency, maintaining documentation, monitoring use of funds by the borrower

FINANCING SERVICES Granting bridge financing Underwriting bank financing Granting pool financing (lending) Granting leasing for plant Contributing to equity Contributing to mezzanine finance Issuing guarantees and letters of credit Managing relationship with the SPV from a technical standpoint Agency, maintaining documentation, monitoring use of funds by the borrower

From a historical perspective, then, project finance came into use in well-defined _____ having two particular characteristics: 1. A _____ market, created by means of l____-t____contracts at p___ prices signed by big, financially solid buyers (off-takers). 2. A _____ level of technological risk in plant construction and little technological innovation for a reasonably long period of time.

From a historical perspective, then, project finance came into use in well-defined sectors having two particular characteristics: A captive market, created by means of long-term contracts at preset prices signed by big, financially solid buyers (offtakers). A low level of technological risk in plant construction and little technological innovation for a reasonably long period of time.

PROBLEMS BEING JUST THE ADVISOR (no arranger ) SPECIALIZATION PROBLEM

However, the specialization model has its significant drawbacks. First of all the pure advisor doesn't invest money in the deal, and so banks called on to support the project have no credible points of reference, such as an underwriting commitment. For this reason banks may fear that the advisor is trying to sell them an excessively risky deal. This in turn means the borrower will find it difficult to source the neces- sary funds. Furthermore, the advisor may handle the mandate in a particularly prudent manner and structure the security package in favor of lenders, with the aim of making it easier to sell participation in the loan during the syndication phase. This would natu- rally be a disadvantage for the borrower because the cost of borrowed funds would be higher, making the deal less profitable for sponsors. As a third point, the decisive dis- advantage of the specialization model is that duplication of roles is in any event costly for borrowers, even if the issues mentioned earlier were to be resolved.

If the arranger should fail to place the loan in the market, the w_____ of the entire commitment would have to be b_____ by its financial _____, with the consequence that it would have to back it up with e______.

If the arranger should fail to place the loan in the market, the weight of the entire commitment would have to be borne by its financial state- ments, with the consequence that it would have to back it up with equity.

In ADVISORY SERVICES: the sponsors themselves carry out a large part of the studies concerning t____, l____, and f____ aspects. They then contact the a____ bank for the sole purpose of o______ financing terms and conditions.

In ADVISORY SERVICES: the sponsors themselves carry out a large part of the studies concerning technical, legal, and financial aspects. They then contact the arranger bank for the sole purpose of organizing financing terms and conditions.

In the 19__0s, project finance spread to Europe as well, again in the ___ and ___ sector. It became the financing method for extracting _____ off the English coast.

In the 1970s, project finance spread to Europe as well, again in the oil and gas sector. It became the financing method for extracting crude off the English coast.

In the second part of the 2000s, _____ finance covered about ____-____- of all the infrastructure investments across the European Union. The remaining ____-thirds, with some notable exceptions in certain sectors, came from _____ finance mainly in the form of project financing and PPP initiatives based on concession agree- ments in an attempt to optimize the "user pays" model of infrastructure financing.

In the second part of the 2000s, public finance covered about one-third of all the infrastructure investments across the European Union. The remaining two-thirds, with some notable exceptions in certain sectors, came from private finance mainly in the form of project financing and PPP initiatives based on concession agree- ments in an attempt to optimize the "user pays" model of infrastructure financing.

MULTILATERAL ORGANIZATIONS - multilateral organizations - regional development banks - development agencies - export credit agencies

MULTILATERAL ORGANIZATIONS - multilateral organizations - regional development banks - development agencies - export credit agencies

Fees for arranging services PURE ARRANGING FEE The arranger _______- to sponsors that best efforts will be made to ______ the loan but without _______ a market response sufficient to cover fully the financing requirements for the project. FEE FOR UNDERWRITTING AND ARRANGING SERVICES in this case there is the g_____e that the necessary funds will be made available in the event it becomes impossible to find intermediaries interested in participating in the deal.

PURE ARRANGING FEE In this case, the MLA operates on a best-effort basis. The arranger commits to sponsors that best efforts will be made to syndicate the loan but without guaran- teeing a market response sufficient to cover fully the financing requirements for the project. FEE FOR UNDERWRITTING AND ARRANGING SERVICES the mandated lead arranger oper- ates on a committed basis. That is, as in the previous case, every effort will be made to syn- dicate a pool of lenders. However, in this case there is the guarantee that the necessary funds will be made available in the event it becomes impossible to find intermediaries interested in participating in the deal.

ROLES of banks in syndicated loans: - Lead m_____r, m_____r, c____r: These are banks that grant part of the loan struc- tured by the arranger. The difference between the various categories is based on the :_____ of participation. Usually a m_____ l____ c_____ (ticker) is established to acquire the status of lead manager, manager, or comanager. - Participant: This is a bank or financial intermediary that l____ an amount below the thresh- old established for the lending commitment. It plays no other role than to make funds avail- able in accordance with the agreed contractual terms.

ROLES of banks in syndicated loans: - Lead manager, manager, comanager: These are banks that grant part of the loan struc- tured by the arranger. The difference between the various categories is based on the amount of participation. Usually a minimum lending commitment (ticker) is established to acquire the status of lead manager, manager, or comanager. - Participant: This is a bank or financial intermediary that lends an amount below the thresh- old established for the lending commitment. It plays no other role than to make funds avail- able in accordance with the agreed contractual terms.

TOP global finance deals by amount

TOP global finance deals by amouny 2012 Ichtthys LNG Pty Ltd 16KM Austrlia 2015 Taiwan High Speed Rail Corp 12 KM

SYNDICATION

The arranger (or mandated lead arranger—MLA—as it is often known) must therefore be able to contact the widest possible number of banks interested in participating in the deal and must then be the coordinator representing all lenders.

The ratio between the amount of project finance loans and global syndicated loans rose from _.72% in 200_ to a remarkable _.02% in 20__, demonstrating the_____ of infrastructure lending even in periods of severe financial ___

The ratio between the amount of project finance loans and global syndicated loans rose from 4.72% in 2006 to a remarkable 9.02% in 2010, demonstrating the resilience of infrastructure lending even in periods of severe financial stress

Services offered for project finance deals by financial intermediaries fall into one of two major categories: a_____ services or f______ services (also known as arranging)

advisory services arranging services

ARRANGING SERVICES (FINANCING) consists of a mandate from the SPV borrower to s____ and m____ the financing contract. The arranger (or __andated __ead __rranger—MLA—as it is often known) must therefore be able to contact the widest possible number of b_____ interested in participating in the deal and must then be the coordinator representing all lenders.

consists of a mandate from the SPV borrower to structure and manage the financing contract. The arranger (or mandated lead arranger—MLA—as it is often known) must therefore be able to contact the widest possible number of banks interested in participating in the deal and must then be the coordinator representing all lenders.

FINAL BOND PROSPECTUS AND what informatio?

details must be established and in- cluded in the final bond prospectus, also known as the bond offering circula - price - vairable pr fixed coupon - maturity - yiel (IRR) - covenants

When syndication deal is very large grant the mandate a _____ composed of a M____ L____ A_____ and colead arranger (each with an specific role)

grant the mandate a team composed of a MANDATE LEAD ARRANGER and colead arranger (each with an specific role)

Role of the independent engineer in project finance deals

plays a super partes role and is asked to ex- press an opinion as to the project's feasibility, make a survey to evaluate it, and act as consists of a critical analysis of all technical aspects of the deal, with reference to proj- ect, contractual, and financial data that are usually already quite well defined.

asvisory services include: soft services used to define the r___ profile for a deal, its ______ schedule, and its s___ in order to make it b______, that is, to MODEL the deal so that it can be proposed to POTENTIAL LENDERS

soft services used to define the risk profile for a deal, its time schedule, and its size in order to make it bankable, that is, to model the deal so that it can be proposed to potential lenders.

PROJECT BONDS the principal and interest on project bonds are also repaid to investors from the project's cash flows. From an SPV's standpoint, issuing bonds is similar to contracting debts with banks. The borrower obtains resources in the form of a ____-____debt. The main difference between a project loan and a project bond is that a bond issue can count on a much w____ base of parties potentially interested in financing the deal (so-called bond purchasers or bondholders) his group will include not only banks but also institutional investors, such as pension funds and insurance companies or mutual funds specialized in infrastructure investments.

the principal and interest on project bonds are also repaid to investors from the project's cash flows. VFrom an SPV's standpoint, issuing bonds is similar to contracting debts with banks. The bor- rower, in fact, obtains resources in the form of a long-term debt. The main difference between a project loan and a project bond is that a bond issue can count on a much wider base of parties potentially interested in financing the deal (so-called bond pur- chasers or bondholders)

, the 2011-12 eurozone sovereign debt crisis dramatically reduced public finance investments in infrastructure The European Union 2020 Project Bond Initiative, activated in February 2011, identified the relaunch of the project bonds market as a possible solution for sourcing the additional capital needed to reach the 2020 goals set by the EU.

, the 2011-12 eurozone sovereign debt crisis dramatically reduced public finance investments in infrastructure: The European Union 2020 Project Bond Initiative, activated in February 2011, identified the relaunch of the project bonds market as a possible solution for sourcing the additional capital needed to reach the 2020 goals set by the EU.

Global PF market 3 periods after 2008 crisis 200_ - 201_ 201_ - 201_

- 2006 to 2010, is characterized by the effects of the Great Financial crisis of 2008 with a deep reduction in the amount of syndicated bank facilities and a simultaneous increase in the weight of project finance loans on total syndicated lending. - 2011 to 2016, shows a robust rebound of global syndi- cated lending and project financing that stabilizes its weight on the total amount. With the exception of 2016, the trend is always positive and the market has returned to precrisis levels.

WHEN SHOULD PROJECT BONDS BE USED? - Alternative to _____ loan only in ceratin situations & markets: - not based on contracts, but on _______ that are ___ easy to customize - more difficult to find ______- - bond investors less likely to run ____field investment risks - MORE APPROPIATE FOR ------ DEALS that have already succesfully compelted construciotn phase

- Alternative to syndicated loan only in ceratin situations & markets: - not based on contracts, but on securities that are less easy to customize - more difficult to find investors - bond investors less likely to run green field investment riskts - MORE APPROPIATE FOR REFINANCING DEALS that have alreadu succesfully compelted ocnstruciotn phase

Different between bonds and loans: - Investor target: - tenor of financing - Sponsor flexibility - credit polities and market sneitent - fixing financing terms and conditions - confidentiality - covenants

- Investor target: INVESTORS QUALIFIED TO EVALUATE THE RISKS AND FORECAST RETURN - tenor of financing: LONGER FOR BONDS - Sponsor flexibility: ponsors don't have to use their undrawn credit lines from banks, which would otherwise deplete the unusual portion of credit facilities - credit policies and market sentiment: bond markets are much MORE SENTITIVE to short-term macroeco- nomic and company trends - fixing financing terms and conditions: bonds at a more later stage - confidentiality: contracts are confidential - covenants: renegotitaion when project performance falls shor or covenantsa have been broken(MORE DIFFICULT FOR BONDS)

PArties on a syndicated loan or bond issues: - M______ Banks - E____ C____ Agencies - Banks - B____ Investors

- Multilateral Banks - Export Credit Agencies - Banks - Bond Investors

Fees for advisory services - R_____ fee: This covers the advisory's costs during the study and preparation phase of the deal. Justification for the advisor's request for a retainer fee is based on the need to use analysts' time to study the feasibility of the deal - S____ fee: This fee is paid by sponsors once the study and planning mandate has led to a successful conclusion

- Retainer fee: This covers the advisory's costs during the study and preparation phase of the deal. Justification for the advisor's request for a retainer fee is based on the need to use analysts' time to study the feasibility of the deal - Success fee: This fee is paid by sponsors once the study and planning mandate has led to a successful conclusion

MULTILATERAL ORGANIZATIONS - Take financial ______-- in countries with a high political risk - Played a leading role in privatization policies - promote financing in the private sector

- Take financial commitments in countries with a high _____ risk - Played a leading tole in _____ policies - promote financing in the private sector

1980s to the early 2000s two trends:

-Since room in the market in their home countries was gradually diminishing, these entrepreneurs offered project finance to governments in developing countries as a quick way to reach a decent level of basic infrastructure with a greater contribution of private capital. -The second trend in the project finance market emerged in those advanced econo- mies that initially tested the technique in more traditional sectors. In fact, these nations began to use project finance as an off-balance-sheet technique for realizing: - projects with less market risk coverage; there is no single large buyer such as toll roads, real estate leisure facilities and city parking lots - projecs in which the public administration participates in promoting works for the public good

When syndication deal is not very large grant the mandate to #____arranger (s)

1 arranger

The European Union 2020 Project Bond Initiative: providing credit enhancement to infrastructure projects financed by the private sector with two possible alternatives:

1. EIB providing a subordinated loan tranche to the SPV, thereby guaranteeing senior project bond investors

THREE OPTIONS TO PAY EQUITY

1. Paying in the remaining capital before starting to draw on the loan granted by banks 2. Paying in the remaining capital after the loan facility has been fully utilized. 3. A clause establishing pro-rata payments.

Three alternatives for the role of arranger - advisor:

1. maintain a clear-cut division between the roles of financial advisor and ar- ranger: The borrower decides not to allow its financial advisor to participate in the loan pool once this is structured (specialization model). 2. the borrower decides before- hand that the chosen financial advisor will also be the arranger in the second phase (integra- tion model). 3. situation lies somewhere between the previous two, namely, where the borrower decides to allow its financial advisor to compete with others for the role of arranger.

19__0s, the technique was utilized to finance ___ field ____ and later well drilling in Texas and Oklahoma.

19__0s, the technique was utilized to finance oil field exploration and later well drilling in Texas and Oklahoma.

A combination of _____ country risk (projects were developed in advanced economies with strong political stability) and ____ exposure to technology risk guaranteed a stable and foreseeable _____ f_____ for a long period of time.

A combination of low country risk (projects were developed in advanced economies with strong political stability) and low exposure to technology risk guaranteed a stable and foreseeable cash flow stream for a long period of time.

WHY WOULD SPONSOR PREFER MEXXANINE DEBT?

A subordinated loan requires payment of interest after senior debt service but before divi- dends. This means the sponsors' remuneration is more certain than just relying on dividends and also reduces volatility of returns on total funds contributed to the project. Interest paid on subordinated debt is frequently tax deductible in many countries. Greater financial leverage generates a higher tax saving that benefits sponsors of the venture directly.

ADVISORY SERVICES The gathering and initial processing of basic information forms the foundation of input for the business plan. In essence the advisor must t____ information gathered into f_____ to evaluate what impact the many variables will have on c____ f___, p_____, and the e_____ structure of the SPV.

ADVISORY SERVICES The gathering and initial processing of basic information, forms the foundation of input for the business plan. In essence the advisor must translate information gathered into figures to evaluate what impact the many variables will have on cash flows, profit- ability, and the equity structure of the SPV.

ASVISORY SERVICES TASKS ARE: - To understand fully the sponsors' o_____ and then to identify alternative s____ to achieve these - To evaluate r____ inherent in the project and to attempt to find strategies to m_____, m____, and a___ these risks -To assist sponsors in preparing and negotiating major contracts concerning the project -To assist sponsors as regards certification of all p____, licenses, and authorizations obtained - To assist sponsors in preparing the b____ p____ or by reviewing the plan already prepared by them - To highlight problems sponsors have not considered but that must be resolved to ensure the deal's success

ASVISORY SERVICES TASKS ARE: - To understand fully the sponsors' objectives and then to identify alternative solutions to achieve these - To evaluate risks inherent in the project and to attempt to find strategies to mitigate, manage, and allocate these risks -To assist sponsors in preparing and negotiating major contracts concerning the project -To assist sponsors as regards certification of all permits, licenses, and authorizations obtained - To assist sponsors in preparing the business plan or by reviewing the plan already prepared by them - To highlight problems sponsors have not considered but that must be resolved to ensure the deal's success

Advisory (Consultancy Services) = GOAL PRELIMINARY VALUATION OF THE FINANCIAL FEASIBILITY AND INITIAL ASSUMPTIONS) - Analyzing technical aspects (together with technical advisors) - Analyzing regulatory and legislative aspects (together with lawyers) - D__ diligence reporting on parties involved in the deal - Developing a____ for r___ allocation - Preparing the b____ plan and s_____analyses - Establishing financial r___ and m____ to fund the above - Identifying m____ to obtain debt and equity capital - Organizing and negotiating terms of financing (arranging) - Organizing and negotiating terms of bond issues (global coordination)

Analyzing technical aspects (together with technical advisors) Analyzing regulatory and legislative aspects (together with lawyers) Due diligence reporting on parties involved in the deal Developing assumptions for risk allocation Preparing the business plan and sensitivity analyses Establishing financial requirements and methods to fund the above Identifying methods to obtain debt and equity capital Organizing and negotiating terms of financing (arranging) Organizing and negotiating terms of bond issues (global coordination)

Arranging always means that sponsors are given an u_____ g______ of availability of funds, even if ____ lenders are found who are interested in supporting the project.

Arranging always means that sponsors are given an underwriting guarantee of availability of funds, even if no lenders are found who are interested in supporting the project.

PARTIES INVOLVED IN A PROJECT BOND ISSUE

Bond paying agent and trustee Funds deriving from placement of the issue with investors are only transferred to the SPV indirectly. First they are channeled to the bond-paying agent, usually a bank, which then transfers them to the SPV. It is also this party's task to receive sums due from the SPV to cover payments on the debt and to credit them to the bondholders. And so it could be said that this role equates to that of an agent bank in the case of a bank loan (see Section 6.2).V

4 quadrants of PJ and what happens on quadrant IV and why there CF is more appropiate?

Cell IV shows a risk combination that is not suited to project financing. In fact, high uncertainty, an extremely rigid contract structure, and high financial leverage make it difficult for management to respond quickly or to adapt to change. In these cases, a corporate finance loan is a more appropriate solution.