Project FinanceFeatures

Ideal Venture for Project Finance

Independent economic entities

Completion without undue uncertainty

Generate adequate revenues

Significantly worth more on completion

Characteristics Creation of separate entity

Equity Holding Pattern

Non Recourse Debt

Leverage

Contractual Structure

Project Financing Technique SPV Way Forward

Promoter Equity 15-30% (sponsors contribution)

The Risk Shield› Non recourse› Sans Recourse

Project Financing Technique Viability Gap Funding Mechanism Grant Can’t exceed 40% of project cost) Positive grant Negative grant

› SPV is L&T Vadodara Bharuch Tollways Ltd

› Negative grant of Rs. 471 crore that would be paid to the National Highways Authority of India (NHAI) by L&T.

Project Financing Technique

Contractual Agreements

Lenders Wisdom

Legal advisor responsibility to advise› Appropriate risk allocation› Robust legal and structural framework

Structure Promoters Lenders Borrowers Equipment Providers EPC Contractors Fuel Supplier (Input Supplier) Consultants Product off takers as output buyers Insurance companies providing cover Operations maintenance operators

SPV & Balance Sheet Funding

Type of project Recourse D/E Ratio Equity Funding Project Implementation Risk

SPV & Balance Sheet Funding

Project Size Cost of Funding Third party Investment Separation of Cash Flows Degree of scrutiny

Infrastructure Finance INDIA Public Private Participation

Conceding Authority Concessionaire Concession Period Concession Agreement

PPP Projects BOT

BOOT

DFBOOT

BOO

PPP India

PPP Experience in INDIA

And

Viability Gap Funding (VGF

Disadvantages Huge Third Party Costs

Time Consuming Process

High Cost Project Debt

Stringent Covenants

Project Finance Phases Developmental Phase

Completion Phase

Operation Phase

Project Finance Risks Risk To Lenders

Reallocation of risks

Highest upto Commercial Operations date

Stakeholders Equity investors

Lenders

Input Suppliers

Output Buyers

Managing Risks Identification of risks Assessment of the possibilities Elimination of impact or quantification of risk Determination of level of risks Deciding acceptance level of risks Risk control measures Monitoring through approved process/mechanism

Mitigation of Risks

Avoidance Provision for contingency Prevention Reduction Transference Acceptance

Risk Phases

Development Phase Risk› Borne by promoters› No risk to lenders

Construction Phase Risk

Operational Phase Risk

Development Phase Risk

Joint venture agreement among promoters

Elaborate project development agreement

Environment clearances Equity IPO and strategic investors Loan against future cash flows

Development Phase Risk

Approval of licenses Technology risks Experienced professional Services Turnkey EPC Fuel Supply And Transportation

agreements

Construction Phase Risk Lenders Risk Funding Risk Sponsoring Risk Mitigation through

gearing Pre disbursement Conditions Grievances handling through Mutual

Considerations

Construction Phase Risk

Technology risks mitigation through EPC contractors

Contingency risks Equipment performance risks cover

given by manufacturers

Project Finance Appraisal

Due Diligence Promoters, their capabilities, credit

worthiness, experience Project structure, time taken Technical feasibility Commercial analysis Infra Requirements

Project Finance Appraisal

Legal and regulatory clearance Project cost Financing plan and strategy Risk analysis Risk mitigation proposals Financial Model Credit enhancement mechanism

Process of Appraisal Evaluation of investment decision Free cash Flow for assessing project

› Payback period› NPV› IRR› ENPV› Decision Tree Analysis› TVM

Internal risk management Internal Credit Risk Rating

Differ from bank to bank

Risk validation

Separate risk rating mechanism

Major areas of evaluation Management Analysis

› Past Track Record› Managerial Competence› Financial Strength› Project Team› Financial performance of group,

Promoters(willful default)› CDR Mechanism

Technical Evaluation› Feasibility Study› Outsourcing› TPC

Land Building Equipment Working Capital Provisional Expenses Interest

Financial Viability› Equity, Debt

Pure Rupee debtForeign Currency DebtSubordinate DebtMezzanine Debt

Financing PatternCost of projectMeans of financingStable debt equity gearingFinancial structuring of debt

Market Assessment› Industry Profile

› Demand –Supply Position

› Competition Level

› Absorption Capacity of market

› Promoter’s Track record in marketing

› SWOT

Social Impact› Society

› Employment

› Self Sufficiency

Ecological Analysis› Environment Damage› Corporate Governance

Contractual Framework

Lenders and SPV› Borrower SPV and EPC Contractor› SPV and Fuel/RM Supplier› SPV and Project Management Consultant› SPV and buyer of SPV’s goods/services

Follow up of Project Finance

Cash Flows Trust and Retention Account (TRA)

Project Documentation Concession/License Agreement Shareholders Agreement EPC Contract Operations and maintenance Contract Financing Documents Common Loan Agreement Inter Creditor Agreement

Disbursement and Monitoring

Disbursement of project loans › Drawdown Payments› Ensuring End use

Disbursement for Loan for Tractor Disbursement for power plant

Monitoring in construction phase

Network Technique

Network technique used in project implementation

CPM and PERT

Monitoring, supervision and follow up of project finance loans

LIE Services in operations Phase O&M activity is critical Monitor revenues and TRA Temporary Revenue Maintenance Interest rate dates Consortium Meetings Insurance policies