PROJECT FINANCE

Simon Par Keeling,Société Générale Paris

What do we mean by a Project?

Investment made by a "sponsor ", either:a companyor often a joint-venture

in a long term project / concession, which is either:"greenfield" developmentor a sizeable increase in capacity or significant

refurbishment/extension of an existing plant which will generate a well defined stable cash-flow

Project Finance : General Definition

Financing of a specific investment, the reimbursement of which is linked to and based upon the future cash-flows of the project, with limited recourse to the Sponsors of the project company

Project needs to be well defined conceptually and contractually

For Banks, Project Risk is between Capital Risk and Asset or Corporate Financing

How do companies finance their Projects?

"CORPORATE"FINANCING

Internal cashgeneration

Raise equity Bonds Loans

Banks is financing a corporateto do a project

Financial analysis of thecompany

"PROJECT"FINANCING

Equity Quasi equity Loans (limited

recourse)

Bank is financing a project andnot the sponsors developingthe project

Nature of project cash flows Credit rating of mayor project

counter–parties Contractual structure Project's risks evaluation

Types of Project where Project Finance can be used

Private companies (well defined projects with appropriate counter party risks)

Government / local authority privatisation (PFI/PPP type projects)roadswaste collection water treatment

Drivers for a Project

Government / local authoritiesBudget considerations - Project passed to private sector via a

long term concessionDesign, construction, financing & operation passed to private

sector (DBFO)An appropriate level of project risk passed to private sector

SponsorsEquity investment and returnsConstruction and operating contractsBalance-sheet considerations

Project Finance Structure

PROJECTCOMPANYBANKS

AWARDINGAUTHORITY

Concession Contract

FinancingContracts

SPONSORS

EquityContracts

CONSTRUCTOR OPERATOR

ConstructionContracts

OperationContracts

Project Finance Features

Debt service relies on future cash flows of a particular project instead of corporate operations ("limited recourse")

Insulation of the "Project" Project Risks identification Project Risks allocation between sponsors, outside investors, banks,

insurers, etc...

For the banks, this leads to an "investor like" approach Project rationale analysis What are the most appropriate financing structure and instruments

to reconcile various objectives ? Schedule / Cost optimization Banking due diligence

Project Approach (1)

Sponsors objectives and project's rational Risk analysis :

General risks : country, economic, politicalCorporate risks : financial and contractual

obligations

Project Approach (2)

Specific risks :» regulatory

» technical

» construction completion (delays, cost overruns, performances)

» supply, reserves

» operations (performances, availability, operating costs)

» market (volume, price, traffic)

» financial risk (exchange, interest, liquidity, transferability risks)

» Force Majeure

Project Approach (3)

Overall contractual structure (required entities, fiscal optimization)

Cash flow analysis and sensitivities Allocation of risks between parties

contractsguaranteesspecific supportsinsurances

Independent advisersTechnical, Legal, Insurances

Project Approach (‘4)

DocumentationContracts, AgreementsSecurity Agreements (pledge of shares, of revenues,

assignment of contracts, mortgages, offshore project accounts, etc.)

Cash flows allocation order

Syndication

Construction Companies

Case by case approach, within a typical frame

Contractor

OperatorShareholders

Governmental Authority

Consumers / Offtaker

Performance Bond Banks

Concession / Project

Company

Lenders

Insurance Companies

Sub-contracts

Pledge of shares

Revenues

Concession Agreement

Construction Contract

Support Agreements

Credit FacilitiesSecurities

O&M Contract

Supplier

Shareholders Agreement