SG II BANKABILITY 20151110 - Com Solar€¦ · accelerated depreciation Dividend policy to sponsors...

SolarGuidelinesPhase II - Bankability

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Content

1. Introduction

2. Bankability Aspects

3. Due Diligence Checklist

4. Sources and Helpful links

5. Disclaimer

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Project Finance

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One of the most common - and often most efficient - financing arrangements for projects is “project

financing”, also known as “limited recourse” or “non-recourse” financing. Project financing normally

takes the form of limited recourse lending to a specially created project vehicle (special purpose

vehicle or “SPV”) which has the right to carry out the construction and operation of the project. It is

typically used in a new build or extensive refurbishment situation and so the SPV has no existing

business. The SPV will be dependent on revenue streams from the contractual arrangements and/or

from tariffs from end users which will only commence once construction has been completed and the

project is in operation. It is therefore a risky enterprise and before they agree to provide financing to

the project the lenders will want to carry out an extensive due diligence on the potential viability of

the project and a detailed review of whether the project risk allocation protects the project company

sufficiently. This is known commonly as verifying the project’s “bankability”. (Source: World Bank)

The following slides provide an insight in the due diligence processes. The content was gathered

from different banks‘ due diligence checklists and structured along the project life cycle of a given

photovoltaic project. The bankability process is addressing medium and large size photovoltaic

power plants applicable for project finance schemes. The time being project finance in India is

understood to be limited recourse or collateral based. Finally the risk profile of a given project

defines the project finance concept a bank countersigns.

Bankability

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Planning

Phase

Bidding

Phase

Construction

Phase

Operational

Phase

Supplier selection

Technical appraisal

Site selection

Technology selection

Erection of plant

Project commissioning

Operation & Maintenance

Monitoring Arrangement

Improvement / Benchmarking

Bankability and Due Diligence

Insurance coverage

Project phases and bankabiliy issues

Go to

Stay here !

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SOLAR GUIDELINES wants to enable

investment in the Solar Sector through

support to local companies in the

development phase of solar projects with the

help of an internet based guideline tool

providing public access for latest information

with regular updates.

SOLAR GUIDELINES wants to raise the

awareness of the developer in terms of

Bankability of a given photovoltaic project.

While the chapter “FINANCING AND

FUNDING” of the website contains elements

of project finance, in here bankability and risk

mitigation concepts are discussed.

The following presentation starts at the

elements of the SolarGuidelines website and

complements common due diligence

elements to achieve bankability.

Website: FINANCING AND FUNDING I

Web

site

: FIN

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>>

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Please refer to the SolarGuidelines Website

chapter FINANCING AND FUNDING

Web

site

: FIN

AN

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Please refer to the SolarGuidelines Website

chapter FINANCING AND FUNDING

SolarGuidelines website and Bankability

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For more general information:

go to website SolarGuidelines.in !

For more detailed

information:

stay here !

Content

1. Introduction




5. Disclaimer

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Stakeholder perspectives

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So

urc

e:

Go

etz

pa

rtn

ers

Bankability

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Due Diligence Process

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Project Life Cycle: Milestone “Due Diligence”

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Loan

Equity

Cash based Project Finance reflects at future operational revenues and

cost. Subsequently business concepts and respective risks must be

analyzed in very detail.

Equity + Loan = Total Investment

Bank Controlling Reports

Construction OperationDevelopment Time

Quality Management and Risk Mitigating ActionsOw

ner,

Investo

r

B

ank

During Due Diligence banks consider the project’s future and risk profile!

Content

1. Introduction




5. Disclaimer

14

Due Diligence Checklist

1. Project description

2. Project Company

3. Financing structure of borrower and project

4. Construction and completion

5. Solar irradiation

6. Electricity export

7. Operation & Maintenance

8. Project economics and financial projection

9. Security mechanisms

10. Insurance package

11. Gross economic and international risks

12. Legal, regulatory and contractual framework

13. Social

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Due Diligence Checklist #1a

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1 Project description Developer Bank

• Motivation for the project and mission of the

developing/ investing company

• General description, salient figures of the project,

e.g. location, ownership structure, CAPEX, OPEX,

revenues

• Studies and appraisals performed:

Comprehensive feasibility study and financial plan

preferably carried out by an independent

consultant; appraisals of solar irradiation, grid

impact, environ-mental impact, soil survey etc.

• Investment plan (incl. description of the investment

program including the costs and sources of equip-

ment that has to be acquired and other

development costs of the project);

• Project infrastructure e.g. roads, water supply and

grid access

• Financial statements of the investors, sponsors,

owners, eventually second bank for project finance

• Structure of ownership, shareholders, parent

company in relation to project company

Comprehensive

description of the project

to make bank understand

the ownership structure,

key economic data, crucial

path, risks and outcome.

The project description

serves as a teaser for the

bank in terms of

reasonable economic and

technical figures and in

professionalism of

management.

Bank often provides

checklists and supportive

guidelines to assist the

developer.

Due Diligence Checklist #1b

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1 Project description Developer Bank

● Existing statements of major parties involved:

EPC, operator, off-takers/PPA, etc.

● Support letters of public stakeholders, local

government

● Concession of project, long term duration, land

owner or lease structure

● Listing of external advisors, legal, financial,

technical

● Listing of all contractual agreements

● Listing of all administrative clearances, approvals,

permissions necessary for the construction and

completion phase including binding obligations and

conditions, reporting, involvement of

administration etc.

● Environmental impact study

● Social impact study

● Grid impact study

● Comprehensive feasibility study, preferably carried

out by independent third party

Due Diligence Checklist #2

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2 Project Company Developer Bank

● Company presentation, history, legal and physical

domicile, business activities, commercial size,

significant events, present situation

● List of subsidiaries, parent company, ownership

structure, turnover

● Organizational chart, management overview,

supervisory structure, board of directors

● Shareholders and articles of company including

voting rights and profit distribution and

shareholders’ agreement terms and conditions;

consortia structures

● Company policies for quality, environment,

corporate governance structure

● Top management CV’s, key staff’s qualifications

and training programs

● All rights proprietary know how, intellectual

property in respect of the project

● All land rights, right of way

● Risk management and mitigation processes

The developer shall give

proactively full insight to

the finance institutions

to create a high

confidence level.

An experienced

management and

structured risk

management will be

beneficial.

Banks aspect full insight

into the audited

company’s balance

sheets and articles. Bank

may undertake own and

independent research in

terms of

creditworthiness of the

company and the

management.


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3 Financing structure of borrower and project Developer Bank

● Sources of funds, e.g. equity and debt, mezzanine;

private equity

● Creditworthiness of the sponsors

● Usage of funds, e.g. investment, operating capital

● Redemption period and structure, disinvestments,

public offering of equity or debt

● Guarantees or collaterals of the investors,

sponsors, parent company to apply for limited

recourse or non-recourse project finance

● Guarantees from third parties like EPC, PPA to be

transferred to the bank for collaterals, securities

● Ownership structure of project assets, property

and land rights, intellectual property

● Relationship of sponsors, borrower and other key

parties describing potential of conflict of interest

Bank will evaluate the

third party guaranties,

securities, collaterals and

parent company

guaranties.


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4 Construction and completion Developer Bank

● Supplier of equipment

− Photovoltaic modules

− Sub-construction

− Inverter systems (central / string)

− DC cables

− AC cables

− Step-up transformer and grid access

− Medium voltage switch cabinets and yards

− Fencing and protection

− SCADA system and remote control

following international codes and standards.

● Technical and commercial guarantees, warranties,

payment terms, performance bonds of suppliers,

strong reference lists of all suppliers

● EPC contractor (turn-key) covering

− Fixed price for turn-key delivery

− Strong execution force

− Interfaces of work and equipment

− Technical and commercial guarantees,

warranties of the suppliers

The developer is advised

to negotiate equipment

supply and /or EPC

agreements along with

international terms, codes

and bankability checklists.

For larger projects an

experienced owner’s

engineer might be

supportive.

Bank will question in very

detail and may assign a

lender’s engineer to

reassess all administrative

and technical documents.

The cost of the lender’s

engineer is often to be

borne by the developer.

Bank may select

independent engineer for

commissioning of the

plant.


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- Adding additional value through own sound

references

− Strong balance sheet for claims caused by

underperformance, delay, cost overrun

● Supplier, EPC and their market share or positioning

● Supplier, EPC fall back in case of shortfall

● Supplier, EPC and/or civil contractor portions of

foreign equipment respectively local content

● How realistic is the work plan and schedule?

● Payments in local and foreign currencies, exchange

rate risks and hatching

● Risk assessment for

- performance risk

- cost over-run risk

- delay risk

- environmental risks

- force majeure risk

- foreign currency risk

The developer should be

aware that banks might

re-negotiate equipment

supply or EPC contracts.

The developer should

implement strong project

supervision and

controlling procedures

and detailed

documentation of

progress on site day by

day. Strong quality

management improves

relationship with the

banks.

Bank may directly interact

with the EPC for quality

and payment control.

Bank may request

immediate progress

reporting from the

developer and EPC.

Due Diligence Checklist #4c

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● Commissioning and acceptance of

− Detailed and transparent procedure to be agreed

upon with EPC and suppliers, including checklists

and measurement equipment

− Testing through independent third party,

approved body (best international)

− Risk of disputes of accuracy between supplier

and commissioner or supervisor because of

unclear measurement procedures and

insufficient measurement tools.

● Supervision and quality control concept on site of

− All suppliers

− Incoming goods and deliveries

− Milestone definitions and milestone payments

− Final acceptance testing, punch-list procedure,

claiming procedure,

− Release or withholding of payments procedure


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5 Solar irradiation Developer Bank

● Independent third party appraisal of

− Sources of solar irradiation data and quality

− Comparison of different sources, e.g. national or

international from leading providers

− Solar irradiation and photovoltaic modules

selected/preferred, system analysis on

performance ratio

● 2nd independent appraisal might be necessary or

requested to mitigate systematic errors and to

compare results.

The developer conducts

own calculations which

will be assessed by third

party.

Bank may appoint third

party consultant, cost

often to be borne by the

developer.


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6 Electricity export Developer Bank

● Market history

● Political risks

● Regulatory risk of the market

● Terms of the power purchase agreement (PPA)

− take-or pay obligations

− duration of agreement

− quantity or limitations of electricity purchase

− metering point and metering terms

− payment terms

− inflation component

− Currency, etc.

● Creditworthiness of debtor of PPA

● Grid impact study and assessment of power

evacuation risk

− technical conditions of grid access point

− downtime, black out /brown out of grid

− cost of grid access, etc.

● Wheeling of electricity to third party as alternative

to PPA

● Electricity supply agreement for auxiliary and

parasitic loads

Bankability of debtor or

off-taker prevails the

bankability of the entire

project.


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7 Operation & Maintenance Developer Bank

● Experience and reliability of the operator

(track record)

● Experience and reliability of the management

(track record, CVs)

● Performance incentives structure for the operator,

e.g. shareholder, value added or premium

● Employment structure and capacity building of key

staff

● Maintenance contracts for key components, e.g.

with inverter company (spare-parts, reaction time,

penalties, etc.)

● Benchmarking capability of the operator

● Plant safety system (fire defense, theft protection

etc.)

The developer must

anticipate the entire life

cycle of a given project

including lifespan of

crucial components,

refurbishment period

etc. while repayment

obligations are always

secured.


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8 Project economics and financial projections Developer Bank

● Business plan and financial model (minimum on a

yearly basis) covering the investment as well as the

redemption period explaining in detail all the

assumptions made:

− CAPEX, in detail, including development cost,

engineering, quality control, clearances,

approvals, hardware or EPC, insurance, etc.

− OPEX, in detail according to fixed and variable

operating expenditures, including operation and

maintenance, lease, insurances, management,

quality control, working capital etc.

− Financing structure (equity, debt)and cost of

financing

− interest rates

− inflation and other relevant indices (employment

rate etc.)

− taxes

− contingencies

− currencies, exchange rate

− etc.

The developer must be

aware of being able to

explain all financials in

very detail to the bank.


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8 Project economics and financial projections Developer Bank

● Loan and interest payment schedule

● Different scenarios / sensitivities and break even

analysis assuming base, worst, best case and

considering different performances

● Cover ratios and reserve accounts e.g. Debt Service

Cover Ratio (DSCR), Debt Service Reserve Account

(DSRA), Minimum Repayment Amount (MRA)

● Tax situation, import tax, specific regulations e.g.

accelerated depreciation

● Dividend policy to sponsors and shareholders

● Waterfall payments: ranking of payments: senior

loan, other loans, escrow accounts and - after bank

approval - dividend payments

● During implementation period detailed milestone

plan as defined by a payment schedule including

release criteria and assessments


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9 Security mechanisms Developer Bank

● mortgages over tangible property, land rights and

rights of way

● pledge of movables, the entire plant and all

warranties and guaranties of the supplier /EPC

● pledge of project accounts

● pledge of escrow account

● assignment of receivables and insurance claims

● contractual agreements, e.g. with other lenders or

counter-parties to project agreements

Bank will value the third

party guaranties,

securities, collaterals and

parent company

guaranties.


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10 Insurance package Developer Bank

Agreement upon an insurance package:

● construction phase

− fire, perils, force majeure

● operating phase;

− fire, perils, force majeure

− machinery breakdown

Listing of existing insurance policies (incl. amounts

insured, limitation of liability and retention,

minimum requirements, costs etc.)

The developer may hire

an independent

insurance agent to get

reasonable coverage.

Insurance coverage is a

precondition for project

finance.


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11 Gross economic and international risks Developer Bank

● Stable and friendly political environment

● Mature legal system of the country:

- licenses and permits are available

- contracts can be enforced

- legal remedies

- regulation of the industry

- taxes and import/export tariffs

● Governmental involvement/support:

- concessions

- subsidies

- guarantees

- tax benefits

● Estimation of the following risks for international

investors:

- expropriation risk

- country risk

- currency and foreign exchange risks

In recent years the

political backing of

renewable energy

schemes became more

stable and reliable.


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12 Legal, regulatory and contractual framework Developer Bank

Listing of ALL approvals, permits, agreements required

and qualifying the status of the same, like in place,

outstanding, pending.

● Compliance with laws and regulations

● Role of relevant authorities; experiences existing

● Ability of approvals and permits to be transferable

on security enforcement;

● Specific local incentives (tax, depreciation,

infrastructure provided or supported by local

authorities etc.)

● Impacts on purchasing prices due to regulations

● Lawsuits of the last three years and related risks of

the company or the management

● Taxation incl. general tax items, possible refunds,

tax holidays etc.

● Expected changes in legal, regulatory, tax

environment

● Current status of management agreements, profit

and loss sharing or transfer agreements

The developer must

anticipate a very detailed

assessment.

Banks usually hire a legal

expert for detailed legal

due diligence.


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12 Legal, regulatory and contractual framework Developer Bank

● Agreements with holding or other group companies

and contemplated changes

● Articles of Association including By-laws and

amendments

− Shareholder agreements

− Excerpt from companies register

− Business license, Certificate of Approval etc.

● Every substantial legal company document, such as

joint venture Agreements, partnership agreement,

management agreements, intercompany

agreements

● Every project agreement e.g. EPC contract, PPA

agreements, O&M agreements, lease agreements


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13 Social Developer Bank

Corporate Governance

● Know Your Client (KYC) requirement

● Corruption; prevention of money laundering

Social

• Improvement through the solar project in terms

of quality of life, livelihood, welfare, local industry

• Employment: permanent jobs during operation,

short-term or temporary jobs during construction

Content

1. Introduction




5. Disclaimer

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Sources and Helpful Links

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During our research about the bankability of PV systems we have screened many

publications. Out of them we would like to recommend just a small reference list. We

are well aware that there are many more valuable publications worthwhile reading in

order to develop a deeper insight into the subject.

• Best Practice in PV System Installation https://www.nrel.gov/tech_deployment/state_local_governments/blog/sapc-finalizes-two-best-practices-documents

• Best Practice in PV System Operations and Maintenancehttps://www.nrel.gov/tech_deployment/state_local_governments/blog/sapc-finalizes-two-best-practices-documents

• Grid Integration of Distributed Solar Photovoltaics (PV) in Indiahttp://www.bridgetoindia.com/wp-content/uploads/2014/09/PEG_grid-integration_dist-PV_2014.pdf

• The Myth of Bankability (Chapter 2) http://www.goetzpartners.com/uploads/tx_gp/Studie_Bankability_final_01.pdf

• Risk Engineering Guidelines – Photovoltaic Systemhttps://www.hdi-gerling.de/docs/industrie/fachinformationen/hdi-gerling_SIFI_photovoltaik3.pdf

• The Worldbankhttp://ppp.worldbank.org/public-private-partnership/financing/issues-in-project-financed-transactions

• International Finance Corporationhttp://www.ifc.org/wps/wcm/connect/f05d3e00498e0841bb6fbbe54d141794/IFC+Solar+Report_Web+_08+05.pdf?MOD=AJ

PERES

Content

1. Introduction




5. Disclaimer

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Disclaimer

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The presentations and listings above, herein the report, do not claim to be

exhaustive. The report summarizes our findings from the data we received from

third parties or through own research conducted between August and November

2015.

The work presented in this report represents our best efforts and judgments based

on the information available, which we deemed to be correct at the time that we

prepared this report. The authors are not responsible for the reader’s use of, or

reliance upon, the report, nor any decisions based on the report.

The authors do not make any representations or warranties expressed or implied.

Readers of the report are advised that they assume all liabilities incurred by them,

or third parties, as a result of their reliance on the report, or the data, information,

findings and opinions contained in the report.

E.Quadrat GmbH & Co. Energy Experts KG, Germany

SG II BANKABILITY 20151110 - Com Solar€¦ · accelerated depreciation Dividend policy to sponsors...

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