Advanced Project Finance

Day One The C haracteristics of Project Finance

Project finance, advanced project financing , or limited recourse financing, has features that render it quite different from ‘normal financings’. These differences permeate throughout the structure.

• The limitation of recourse

• The due diligence required

• The choice of entity as the SPV

• Modelling skills and the role of the project cash flow model

• The significance of debt risk vs. commercial risk

• The role of contract in limited recourse financings

• The role of security in limited recourse financings

• The rationale for selecting project finance

Contracts and Cross-Border Enforcement

Project financing involves a spider’s web of contracts. These contracts are pointless unless there is an ability to enforce rights under them. In cross-border contexts, this is often not straightforward. Litigation is not the answer.

• Why enforcement can be problematic

• The shortcomings of contractual litigation in limited recourse financings

• Dispute resolution - typical structure and procedure

• Arbitration and the NY Convention

PPP and Infrastructure Projects

Because most PPPs and BOTs have a contractually based revenue stream , their structure and characteristics differ greatly from other project financings.

• PPP projects contrasted with industrial/extractive industry projects

• The motivations and objectives behind PPPs

• The role of the parties and the sequence of implementation

• Public sector procurement

• The structure of concession agreements

Advanced Project Finance Course Case Study: emerging market infrastructure project

Pre-Completion

Getting a project built and working as planned is the hardest and therefore the highest risk phase of most projects. Particular care is required in structuring the rights and obligations.

• Standard form contracts – e.g. FIDIC

• Liquidated damages

• Performance bonds and retentions

• Fixed price, lump sum, liquidity

• Variation and change orders

• Turnkey EPC structures

• Completion guarantees, refinancing risk

• Technology, logistics and learning curve risks

Day Two Introducing Market and Operating Risks

Advanced Project Finance Training Case Study: Power Generation Project

Market and Operating Risks

Most projects have only one revenue source. The cash flow coming into the project needs careful structuring and due diligence.

• Offtake agreements and the errors that often occur

• Availability risk vs. market risk

• Take-or-pay features

• Hidden recourse structures

• Exclusions

• Implications of market volatility

Advanced Project Finance Course Case Study: LNG Project

Project Cash Flow and Debt Structuring

Total dependence on a single cash flow results in structures and covenants that are not found in other financings.

• Risk: solvency risk vs volatility risk

• Free Cash Flow: why is it fundamental to the analysis?

• Cash management issues

• Liquidity: creating ‘suspension’ for the special purpose vehicle

• Cash Available for Debt Service (CADS)

• Loan life cover, project life cover, debt service cover

• Surplus cash flows, lock-up, cash sweeps

• Cashflow waterfall; reserve accounts

• Contingency reserves

• Designing amortisation to match cash flows

• Dealing with default

• Mortgage debentures/fixed and floating charges

• Separating risk-taking and funding

Technical Issues in Limited Recourse Financings

This section of advanced project finance training deals with many topics that change the conventional treatments.

• The proper calculation of IRR

• Insurances: pre-completion and operating phase

• Assignment and cut-through agreements

• The options for dealing with political risk

• Environmental risks: the limitations of insurance

• Currency exposures: optional approaches to structuring

• Financings involving multilateral agencies - implications

• Direct agreements

• Step-in rights

Sponsor Perspective

Sponsors need a disciplined approach to selecting projects likely to deliver the benchmark IRR. There are many potential pitfalls in the analytical approach.

• The investment analysis without project finance

• The difference in approach with a limited recourse structure

• Project IRR contrasted with Equity/Sponsor IRR

• The drivers of Sponsor IRR: the implications of negotiation of the financing term sheet

• Evaluation of projects in emerging markets

Advanced Project Finance Training: The Golden Rules & Wrap-Up

Training Objectives

• Gaining an understanding of the approach to identifying, quantifying, and managing the cashflow volatilities (i.e. risks) across a broad range of limited recourse projects

• Identify the ‘killers’ of project financings, as learnt from an analysis of precedents

• Exploring the motivations of the Sponsors in their choice of the financing approach to their project

• Analysing the key ingredients that the debt financiers need to put in place to make the transaction suitable for a limited recourse approach

Training Course Summary

Advanced Project Financing training begins with an overview of the entire project financing approach. We explore how it works and what is involved.

These financings are a spider’s web of contracts, so we look at the complex issue of cross-border contractual enforcement, including Alternative Dispute Resolution Procedures. We then look at infrastructure projects, including PFI/PPP, with characteristics that differ from other contexts of limited recourse transactions.

Training then moves into the structuring of the high-risk development phase of the project. Then, the structuring of risk management during the operating phase. Having identified the structuring of the project and its risk management, we then look at the financier’s control of the project to promote debt serviceability, as well as the Sponsor’s perspective of maximising the investment returns of the project.