Global Banking and Capital Markets

Loan Syndication and Project Finance

Prof. Ingo Walter

Financing alternatives available to major Euro-zone corporations

Inte

rest

rat

e sw

ap

Fixed

DEBT

Floating

Curr

ency

sw

ap

Non-Euro

Bank debt

Privateplacement

Public offering

StrippedUnstripped

Straight

With warrants

CallableIndex-linkedConvertible

Real estate

Unsecured

LeasingAsset backed

Project financeTerm LoanRevolving facilites

VRN

MTNFRN

EurobondE-zone

Bank debt

US CP

ARPEuro CP

Subsidized fundsEuro

Short term

Full rights

Restricted

Private

Public offeringDomestic

International

Private

Long term

Hybrid

EQUITY

Firm Continuum and sources of capital

Private Placement

Insider Seed Money

Sources of Capital

Commercial Paper

MediumTermNotesMezzanine

FundFinancing

Public Debt

Intermediate-Term Commercial Loans

Very small firm, possibly with no collateral

and no track record.

Small firm, possibly with high growth

potential but often with limit track record.

Medium-sized firms.Some track record.Collateral available,

if necessary

Large firms ofknown risk and

track record.

Firm SizeInformation Availability

Venture Capital Public Equity

Short-Term Commercial Loans

What form of financing?Match needs and motivations to available sources

Permanent or Flexible

Frequent Borrower?

Commercial paper or Short term bank debt

Permanent

No

Yes

NoIs availability insurance needed?Flexible

YesBank credit facility

Medium term notes

Size?

Credit Problems?

Tax Problems?

Capital availabilityProblems?

No

Disclosure Problems?

No

Private placementSmall

LargeYes

Term loan

NoYes

Leasing

Asset backed financingYes

Project finance

YesEurobond

Domestic or foreignbondNo

Bank Loan Origination

Borrower-Bank

Search

Credit

Analysis

Borrower-Bank

Negotiation

Bank

Funding

Typically throughreferrals

Bank conductsloan evaluation

Terms negotiated

Bank funds loan

Revolving Credit Facilities: Illustrations

Top 20 Arrangers of Syndicated Loans1

1997-99 (US$ million)Pos. Bank Amount No. % Share

1 Chase Manhattan Corp. 755,416.4 2,535 212 Bank America Corp. 683,733.4 3,462 193 Citigroup Inc. 447,172.4 1,567 134 JP Morgan & Co. 312,773.3 708 105 Deustche Bank AG 229,355.5 1,128 66 Barclays 127,105.6 559 47 ABN AMRO Bank NV 115,780.7 846 38 Fleet Boston Financial 114,127.7 1,173 39 Credit Suisse First Boston 99,843.6 373 3

10 UBS Warburg 90,089.3 297 311 Bank of New York 88,362.9 399 212 First Union Corp. 85,520.2 800 213 Scotia Capital 61,343.1 360 214 HSBC 60,598.3 341 215 Goldman Sachs & Co. 53,883.3 165 216 Greenwich Natwest 47,712.8 196 117 Banque National de Paris 47,465.4 283 118 Societe Generale 47,384.4 443 119 Toronto Dominion Bank 47,063.1 213 120 Dresdner Bank 41,722.3 216 1

Total 3,556,454 16,064 100

1 Euromarket, Asiamarket and U.S. Market combinedSourc: Euromoney Publications PLC.

Syndicated Loans

Project Finance

The arrangement of debt, equity and credit enhancement for the construction or refinancing of a specific facility/ plant in a capital intensive industry;Financiers must based their credit appraisals on the merits of the project and projected revenues from the operations of the facility;a ndFinanciers must rely on the assets of the facility (including its revenue producing contracts and cash flow) as collateral.

Industrial Distribution of Project Finance and All Syndicated Loans

Project Finance Loans Project Finance LoansIndustrial Category # of Loans Total Value of Percent of # of Loans Total Value of Percent of of Borrower Amount Loans US$ Million Total Value Amount Loans US$ Million Total Value

Commerical & Industrial 3,136 386,862 61.0 59,612 8,391,648 63.1Chemicals, Plastic & Rubber 105 8,891 1.4 2,340 321,100 2.4Communications 241 51,126 8.1 2,237 510,242 3.8Construction/ Heavy Engineer 222 15,477 2.4 1,434 75,751 0.6Forest Productions/ Packaging 135 15,219 2.4 1,988 299,979 2.3Hotels & Leisure 298 20,628 3.3 1,992 255,184 1.9Mining & Natural Resources 300 28,030 4.4 1,452 191,219 1.4Motorway Operator 117 14,642 2.3 342 28,636 0.2Oil & Gas 631 119,513 18.8 6,061 1,165,320 8.8Petrochemicals 147 24,975 3.9 470 89,359 3.9Steel & Aluminium 215 23,488 3.7 2,098 199,275 3.7

Utilit ies 1,063 140,609 22.2 4,644 808,306 22.2Electrical/ Energy Utility 1,009 136,520 21.5 3,942 714,073 21.5

Financial Institutions 167 21,828 3.4 14,051 2,461,411 3.4Transportation 143 48,677 7.7 5,781 711,028 7.7

Transport (ex. Airlines, Ship) 112 46,788 7.4 1,870 319,180 7.4Government/ Agencies 399 30,602 4.8 3,979 674,869 4.8

Government/ Authority 302 23,333 3.7 2,463 488,359 3.7

Other 48 5,844 0.9 2,716 251,211 0.9

Total, All Items 4,956 634,422 100.0 90,783 13,298,473 102.1

Financial Details of the Fifteen Largest Project Finance Deals Since 1980

Project Finance Relationshipsc) a) c) e)

Lender:Bank & Inst.

Investors

Govt.Insurance Co.

Derivatives & L/cs

(Supra-)National

Institutes

Equity

Profit

Fee

Guarantees

Guarantees

Co-Financing

BOT AgreementState

Guarantee

LoansDebt-Service

O&MAgreement

Turn-KeyContract

Buy-Back

Equity/ Quasi Equity

Supply-or-PayContract

Take-and-PayContract

c) e)

Contractor

Project Operator

Customer

c) e)

Agent (Bank) Suppliers

Structuring Contract

Sponsor c) e)a) c)

c) e)

d) f) d) e)Dual-Tranche-Financing a) Sponsor b) Project

c) Contractor d) Lendere) Guarantor f) Operator

Maui Gas Field, New Zealand

A) Contract covering design, constructionand operation of offshore production and onshore treatment facilities

B) Contract covering onshore and offshore engineering services/ consulting

C) Contract covering construction of offshore gas transmission system

D) Contract covering construction of onshoregas transmission system

BOT Concept

From Government perspectiveTo provide competitively priced infrastructure (power, tunnels, telecoms).To develop infrastructure off balance sheet.

From Lender/ Investors perspectiveInvest in long-term stable cashflow.Receive and adequate return.

Possible Sources of Debt

Export Credit AgenciesMutilaterals/ BilateralsCommerce BanksCapital Markets

Export Credit Agencies

Traditional providers of concessional financing for equipment sales

US: US EXIMGermany: HERMESUK: ECGDJapan: J-EXIM

OECD Guidelines: 85% of Country Specific Costs15% of Local Content and 15% of Local Costs

Growing flexibility towards project finance

Multilaterals/ Bilaterals

IFC, World Bank, ADB, EBRDOPIC, CDC, OECFCatalyst for mobilizing financeCan provide debt, equity and cofinancingGenerally flexible on tenor and will do project financing

Commercial Banks

Traditional providers of limited recourse financingRecently more aggressive on accepting political riskPolitical risk can be isolated through:

offshore guaranteesescrow accountspolitical risk insurance

Capital Markets

Appetite of US capital markets for infrastructure projects144A marketPrivate placements

Offer longer tenors which improve project economicsMore flexible on political risk

Comparison of Cash Flows

Debt Service

Best Case Cash Flow

Expected Case Cash Flow

Worst Case Cash Flow

ExpectedLife of Project

Years0 5 10 15 20

0

5

10

15

20

$25

Sample Project Risks

Risk Allocation Mitigation1 Compleiton Delay Turnkey Contractor - Contingency for owner-caused

- Financially strong contractor- Insurance

2 Cost Overrun Turnkey Contractor - Good Design/ Well-defined Sco- Contingency for owner-caused- Sound EPC Contract

3 Output Shortfall Owner - Solid Base Case Economics- Reserve Accounts- Insurance

4 Offtake Shortfall Utility - Capacity Payments- Minimum Take

5 Currency Fluctuations Utility - Denomination of power sales incurrency of Contractual Obligat

6 Increased Interest Rate Owner - Interest Rate Swaps- Continency funds- Bond Issues

7 Erosion of Project Economics Owner - Experienced developer duringdevelopment phase & allowancefor margin of error

8 Political Risk All - Insurance- Self Insurance- Off-shore Arbitration

Principles of Risk Allocation

First PrincipleRisk can be transferred, not eliminated

Second PrincipleAssumption of risk is to be balanced by rewards

Third PrincipleAllocate risk to the party best positioned to manage and mitigate the risk