financing ppps: project finance june 2006 - oecd.org · project presentation in the capital markets...
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Financing PPPs: Project Finance June 2006
P. 2
Index
Section I. Project Finance
Section II. Spanish Market Advantages
Section III. Risk Matrix
Project Finance
Section IProject Finance
P. 4
Definition
Definition: A form of financing projects, primarily based on claims against the financed asset or project rather than on the sponsor of the project. However, there are varying degrees of recourse possible. Repayment is based on the future cash flows of the project.
Sección I
Project Finance
P. 5
Principal Participants in a Project Finance
Sponsorsnational
Sponsorsinternational
Government BanksNational Banks
MonolinesInternational Banks
Capital Markets
Project Finance
Sección I
P. 6
Financing Structure
Shareholders
Construction Joint Venture Operating Company
CapitalDividends + interest
Principal + Interest
Payment
Payment CV + CF
Insurance company
Service supplier 1 Service supplier 3 Service supplier 3 Service supplier n
ServiceContracts
Project Company (SPV)Administration BanksConcession
AgreementFinancialcontracts
ConstructionContract
Operating & Maint.
Contract
Project Finance
Sección I
P. 7
Calendar
• Feasibility Study
• Contracts & Risk management
• Economic analysis and Financing structure
Financial Advisor: Banks
Financial Structure
Phase I
Risk analysis
Phase II
Financial closing
Phase III
• Term Sheet & IM
• Arrangers: Term Sheet & Contracts negotiation
• Financial closing
• Participants: Syndication
Process duration: 4 monthsProject Finance
Sección I
P. 8
Financial institution rules
Financial Underwriting
Funding in the Capital Markets
Other financial facilities: bridge, RCF,
Possibility of equity investments
Arrangement/Financing
Tender preparation
Advisory to the Sponsors
Feasibility study of the project
Risk analysis
Optimum economic, legal and tax structure
Other sponsor research
Legal structure
Coordination between different participants
Project presentation in the Capital Markets
Negotiation with the financial institutions
Advisory
Sección I
Project Finance
P. 9
Volume of operations
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
UK USA Australia Italy China Indonesia Brazil
USD
Mll
Spain Japan México
Volume operations (2004)Dealogic
Sección I
Project Finance
P. 10
Financing tools
Bank financing
No bank financing
• Securitization
• Bonds
Sección I
Project Finance
P. 11
Bank Financing (I)
► Main financial source
► Debt with SPV. Operative relationship with the sponsors, no financial relationship.
► High leverage ratios.
► Long repayment terms. Taking into account Cash Flows
► It is out of the balance financing for the sponsors, no effect in rating
► Pricing: Interest rate + margin
► Reference rate: DSCR
Sección I
Project Finance
P. 12
►The Financial model is the main tool to obtain the economic analysis and the financing structure.
►Main ratios to measure project capacity to face debt obligations:
Interest Coverage Ratio (“ICR”)
Cash Flow available for debt service
Interest
Debt Service Coverage Ratio (“DSCR”)
Cash Flow available for debt service
Debt service (principal, interest & commissions)
Loan Live Coverage Ratio (LLCR)
NPV of Cash Flows available for debt service (during debt) discounted at debt rate
Outstanding debt
Sección I
Project Finance Bank Financing (II)
P. 13
Leverage and Term
Debt / Equity vs term
IPP Spain (1)x
Deb
t/Equ
ity
Total term
40
50
60
70
80
90
0 10 15 20 25 30
Wind USA
x
Roads USA
x
Wind Spain
x
Underground
Spain
x
Roads Ireland
x
UK PPP’s
x
Ports Spain
x
Sección I
Project Finance
P. 14
Non Bank Financing
► The process of aggregating credit rights of the concessionaire, mainly right to collect tolls, revenues of the commercial areas and payments of the Administration into a negotiable security.
• Risk transfer to the investor.
• Different terms.
• Widely used in the international markets. No in Spain
• Advantages: cheaper financing cost and flexibility.
Securitization
Sección I
Project Finance
P. 15
►As the borrower is a SPV, the risk profile is complicated and not attractive for the bond market.
►This type of financing is used with a Monoline guaranty
►In Spain it has been used just in the “Autovía de los viñerdos” and M-45
Bonds
Sección I
Non Bank FinancingProject Finance
Project Finance
Section IISpanish market advantages
P. 17
The main differences with the UK modelSpanish Market
UK SPAIN
Concession Grant► Initial competition
► Concession terms negotiation
► Initial competition
► Initial terms stated and
then negotiation
► Financial Close prior to
concession grant
► Financial Close once the
Concession is granted
► Fixed from the beginningBinding terms
Financing
Section II
P. 18
Advantages of the Spanish Legal FrameworkSpanish Market
Legal framework helps to structure different financial schemes
Asset Responsibility Economic + FinancialEquilibrium
Section II
Project Finance
Section IIIRisk Matrix
P. 20
Main risksRisk Matrix
Building & Operational Risk:
► Building► Demand► Operating
Financial Risk
Section III
P. 21
Risk mitigation
Cost Construction Contract Fixed price
Delay Construction Contract Penalty clause
Technical performance Construction Contract Penalty clause
Operating Operation Contract Technical advisor will control the operation
Traffic Concession contract Fix tariff
Tariff / Law Concession contract Tariff will compensate traffic and law changes
Force Majeure Concession contract Concession agreement will cover these risk
Political risk Concession contract Concession agreement will cover these risk
Contracts will provide mechanisms to mitigate the risk:
Mitigation mechanismContract
Contractual structure & risk mitigation
Risk:
Section III
Risk Matrix
P. 22
Other risk mitigations
• Sponsors Technical & Financial solvency.
• Due diligence.
• EPC Contract.
Long warranty periods.
Penalty clauses.
• Operating & Maint. Contract.
Extension definition.
Length.
Cost limits.
Section III
Risk Matrix
P. 23
Advisors & Insurance Program
Insurance program
External Advisors
Traffic Advisor
Insurance Advisor
Legal Advisor
Technical Advisor
Audit Advisor
Construction
Operating
Damages
ALOP
Civil liability
ALOP
Civil liability
Force Majeure
Section III
Risk Matrix