project finance versus corporate finance opportunities in ... · pdf fileseveral major reasons...

Project Finance versus Corporate Finance

Opportunities in Oil&Gas Industry

Q1:Q1: Why Project Finance in Oil&Gas Industry?Why Project Finance in Oil&Gas Industry?

Q2:Q2: Why Project Financing represents an OPPORTUNITY?Why Project Financing represents an OPPORTUNITY?

Several major reasonsSeveral major reasons

�� Despite limited opportunities so far in the Romanian economy, thDespite limited opportunities so far in the Romanian economy, the needs e needs and potential are important and potential are important

�� Oil & Gas sector, and energy sector as complement, are special tOil & Gas sector, and energy sector as complement, are special targets for argets for these specific financings these specific financings

�� Both the complexity of financing and the technicality needed, prBoth the complexity of financing and the technicality needed, provide ovide opportunitiesopportunities for many types of companies: companies investing in Oil & Gas for many types of companies: companies investing in Oil & Gas sector, design companies, companies providing specific equipmentsector, design companies, companies providing specific equipments, s, technical / engineering consulting companies, construction compatechnical / engineering consulting companies, construction companies, nies, legal advisors, insurers and banking partners (19 types of partilegal advisors, insurers and banking partners (19 types of participants)cipants)

�� These projects offer longThese projects offer long--term predictability of business, so again term predictability of business, so again opportunitiesopportunities

�� Because we have the necessary expertise to provide financial advBecause we have the necessary expertise to provide financial advisory and isory and banking financing on this segmentbanking financing on this segment

Q1:Q1: Why Project Finance in Oil&Gas Industry?Why Project Finance in Oil&Gas Industry?

A1:A1: because Oil&Gas sector has specific features for Project Financbecause Oil&Gas sector has specific features for Project Financee

Q2:Q2: Why Project Financing represents an OPPORTUNITY?Why Project Financing represents an OPPORTUNITY?

A2:A2: because risk allocation in such structured transaction is a bubecause risk allocation in such structured transaction is a business siness

opportunityopportunity

IntroductionIntroduction

�� Project financingProject financing has become a major factor in the provision of MT and LT has become a major factor in the provision of MT and LT finance for new capital developments. It has underpinned many bufinance for new capital developments. It has underpinned many buyy--outs outs of companies and assets, and is seen as a method of lending agaiof companies and assets, and is seen as a method of lending against a nst a controllable and predictable cash flow.controllable and predictable cash flow.

There are many There are many definitions definitions of the project finance:of the project finance:

�� A funding structure that relies on future cash flows from a specA funding structure that relies on future cash flows from a specific ific development as the primary source of repayment, with that develodevelopment as the primary source of repayment, with that developmentpment’’s s assets, rights, and interests held as collateral security. Usualassets, rights, and interests held as collateral security. Usually the recourse ly the recourse on the sponsor of the project company is limited. Project needs on the sponsor of the project company is limited. Project needs to be well to be well defined conceptually and contractually.defined conceptually and contractually.

What do we mean by a What do we mean by a ProjectProject??�� Investment made by a sponsor (a company or a jointInvestment made by a sponsor (a company or a joint--venture) venture)

�� In a long term project/concession, which is either In a long term project/concession, which is either greenfieldgreenfield development or a development or a sizeable increase in capacity or significant refurbishment/extensizeable increase in capacity or significant refurbishment/extension of an existing sion of an existing plantplant

�� Which will generate a well defined stable cashWhich will generate a well defined stable cash--flowflow

The general form of project finance is threeThe general form of project finance is three--steppedstepped

First stepFirst step –– Funding to construct the projectFunding to construct the project

Second stepSecond step –– Completion of the projectCompletion of the project

Third stepThird step –– ProjectProject’’s cash flows cash flow


First stepFirst step –– Funding to construct the projectFunding to construct the project

�� The first step is the provision of funding to construct the projThe first step is the provision of funding to construct the project. ect.

�� Funding is provided progressively under a bank project financingFunding is provided progressively under a bank project financing where where

drawdown procedures / rigorously test that the money has been spdrawdown procedures / rigorously test that the money has been spent. ent.

�� The convention is to capitalize the interest charges into the loThe convention is to capitalize the interest charges into the loan prean pre--

completion (because there is no cash flow yet from the project).completion (because there is no cash flow yet from the project).

�� Alternatively, a construction loan will be designed with a takeAlternatively, a construction loan will be designed with a take--out at out at

completion. A construction loan, therefore, is never a project fcompletion. A construction loan, therefore, is never a project financing. inancing.


Second stepSecond step –– Completion of the project Completion of the project

�� The second step is completion of the project. At the end of the The second step is completion of the project. At the end of the

commissioning period, successful completion is measured by a commissioning period, successful completion is measured by a

<performance completion test>. <performance completion test>.

�� This objective test measures whether the project has been built This objective test measures whether the project has been built on time on time

and at budget and is capable of producing the cash flow that wasand at budget and is capable of producing the cash flow that was originally originally

projected during the loan application phase. projected during the loan application phase.

�� Until this test is satisfied, there will be:Until this test is satisfied, there will be:

�� Careful allocation of funding from debt and equity; andCareful allocation of funding from debt and equity; and

�� Recourse to some creditworthy entity to cover any overruns, delaRecourse to some creditworthy entity to cover any overruns, delays or ys or

cash flow/performance deficiencies.cash flow/performance deficiencies.

�� Once the completion test has been satisfied (or as in the case oOnce the completion test has been satisfied (or as in the case of an f an

acquisition, a project is already producing cash flow), then theacquisition, a project is already producing cash flow), then the true project true project

financing commences.financing commences.


Third stepThird step –– ProjectProject’’s cash flows cash flow

�� In this third step, the projectIn this third step, the project’’s cash flows are used for debt service and s cash flows are used for debt service and

recourse is limited to those cash flows and collateral security.recourse is limited to those cash flows and collateral security.

�� A number of projects have not been able to meet the completion tA number of projects have not been able to meet the completion test est

and thus never became project financings.and thus never became project financings.

ComponentsComponents of project financeof project finance

Five componentsFive components of project finance:of project finance:

�� Cash flowCash flow predictions derived from technical, financial and market studiepredictions derived from technical, financial and market studiess

�� Risk allocationRisk allocation agreements through the project contracts and financing agreements through the project contracts and financing

agreements agreements

�� Funding and repaymentFunding and repayment mechanismmechanism

�� Legal security and provisionLegal security and provision to handle default/workoutsto handle default/workouts

�� Project reporting and complianceProject reporting and compliance..

TypesTypes of PROJECT FINANCEof PROJECT FINANCE

There are There are six typessix types of project financing that can be distinguished either by the of project financing that can be distinguished either by the method of repayment or the character of the funding:method of repayment or the character of the funding:

�� Straight project financingStraight project financing

•• where the sponsors guarantee completionwhere the sponsors guarantee completion

�� Production loansProduction loans

•• where principal repayment is linked directly to output, often Cwhere principal repayment is linked directly to output, often CCY/unit CY/unit basisbasis

�� CoCo--financingsfinancings

•• where different funding sources provide project finance under owhere different funding sources provide project finance under one set ne set of docsof docs

�� Complementary financingsComplementary financings

•• where the funding is accomplished by parallel documentation where the funding is accomplished by parallel documentation

�� NonNon--recourserecourse

•• where is no further recourse on sponsors; structured as prewhere is no further recourse on sponsors; structured as pre--completion through a turncompletion through a turn--key construction contract key construction contract

�� Limited recourseLimited recourse

•• where recourse is limited to an amount or subject to certain pwhere recourse is limited to an amount or subject to certain project roject performance criteria performance criteria

MISCONCEPTIONSMISCONCEPTIONS

Project finance is subject to a number of widely held Project finance is subject to a number of widely held misconceptionsmisconceptions, including the following:, including the following:

•• Project financing is always offProject financing is always off--balance sheetbalance sheet

There is a great deal of confusion between the riskThere is a great deal of confusion between the risk--sharing nature of project financing and the sharing nature of project financing and the balance sheet treatment which is a matter of accountants. Some vbalance sheet treatment which is a matter of accountants. Some varieties of project financings arieties of project financings are recorded on the balance sheet as a longare recorded on the balance sheet as a long--term item, while others are simply mentioned in the term item, while others are simply mentioned in the notes accompanying the financial statements.notes accompanying the financial statements.

The main offThe main off--balance sheet tool is to deconsolidate by holding 20balance sheet tool is to deconsolidate by holding 20--50% or less equity in the SPV or 50% or less equity in the SPV or project borrowing company.project borrowing company.

•• Lenders absorb all the risks, including political risk, during tLenders absorb all the risks, including political risk, during the construction and the project finance he construction and the project finance stagestage

Some country risk exposure may be available from lenders, bSome country risk exposure may be available from lenders, but political risk insurance and cout political risk insurance and co--financing with multilateral agencies will more often be requiredfinancing with multilateral agencies will more often be required..

•• Project finance is 100% debtProject finance is 100% debt

In some cases this is possible due to very strong cash flowsIn some cases this is possible due to very strong cash flows or high sunk equity. However, or high sunk equity. However, substantial equity commitment from sponsor is seen as an integrasubstantial equity commitment from sponsor is seen as an integral part of risks being shared. l part of risks being shared.

•• Project financiers and sponsors share the risk of defaultProject financiers and sponsors share the risk of default

This is rarely the case because its senior legal security poThis is rarely the case because its senior legal security position will provide priority repayment and sition will provide priority repayment and even operating rights to the project financier.even operating rights to the project financier.

•• All project financings are nonAll project financings are non--recourserecourse

Very few projects are nonVery few projects are non--recourse, because additional supports are required, although turrecourse, because additional supports are required, although turnn--key key construction contracts can get most of the way of nonconstruction contracts can get most of the way of non--recourse. There will always be recourse in recourse. There will always be recourse in the event of fraud or false representation or warranties.the event of fraud or false representation or warranties.

13

What is the difference between What is the difference between project and corporateproject and corporate finance?finance?

Difference:Difference: An assetAn asset--based financing or financing of a project with financial based financing or financing of a project with financial recourse to a companyrecourse to a company’’s balance sheet or with the benefit of a financial s balance sheet or with the benefit of a financial guarantee from a parent company or a government is not regarded guarantee from a parent company or a government is not regarded as a as a project financing.project financing.

Corporate financeCorporate finance •• Internal cash flow Internal cash flow

generationgeneration

•• Raise equity Raise equity

•• BondsBonds

•• LoansLoans

•• Bank is financing a corporate to do a projectBank is financing a corporate to do a project

•• Financial analysis of the company Financial analysis of the company

•• Specific documentation / LMA or bilateral docsSpecific documentation / LMA or bilateral docs

Project financeProject finance •• Equity Equity

•• Quasi equity Quasi equity

•• Loans (limited Loans (limited

recourse)recourse)

•• Bank is financing a project and not the sponsors Bank is financing a project and not the sponsors

developing the project developing the project

•• Nature of project cash flows / certainty of cash Nature of project cash flows / certainty of cash

flow flow

•• Credit rating of major project counterparties > Credit rating of major project counterparties >

Credit intensive: with 19 possible participantsCredit intensive: with 19 possible participants

•• Highly structural: risk allocation makes for Highly structural: risk allocation makes for

rigorous structuring among the parties involved rigorous structuring among the parties involved

•• Margins: project financing is highly competitive Margins: project financing is highly competitive

and margins are low relative to the risk assumed by and margins are low relative to the risk assumed by

the project financiersthe project financiers

•• ProjectProject’’s risk evaluation / s risk evaluation / risk allocationrisk allocation

SectorsSectors

The suitability of project financing to a particular industry seThe suitability of project financing to a particular industry sector is a direct ctor is a direct function of the predictability of the future cash flows, either function of the predictability of the future cash flows, either from the from the economics of the industry or the commercial relationship customaeconomics of the industry or the commercial relationship customary to that ry to that sector.sector.

SectorialSectorial features for project finance:features for project finance:

◘◘ Reliance on OPEX competitiveness:Reliance on OPEX competitiveness: oil&gasoil&gas, mining, mining

◘◘ Insulation from market and supply risks (nature of tolling): Insulation from market and supply risks (nature of tolling): power,power, oil&gasoil&gas, , ports ports

◘◘ Long term offLong term off--take contracts: power, take contracts: power, oil& gasoil& gas, water, waste management , water, waste management

◘◘ Monopoly/concessionaire provisions (revenues protection):Monopoly/concessionaire provisions (revenues protection):oil&gasoil&gas/pipelines/pipelines, telecom, infrastructure , telecom, infrastructure

Difficult sectors for project finance: Difficult sectors for project finance:

> market risk: industrial minerals, pulp/paper; low barrier: > market risk: industrial minerals, pulp/paper; low barrier: pharmapharma, , manufacturing, cement; technology dependent: computers, tertiarymanufacturing, cement; technology dependent: computers, tertiary oil; oil; short life products (software, electronics); environmental risksshort life products (software, electronics); environmental risks: second hand : second hand plants; asset driven: aircraft, property, real estateplants; asset driven: aircraft, property, real estate

Opportunities in project financeOpportunities in project finance

WhWhy are opportunities in project finance? y are opportunities in project finance?

�� With 19 possible participants, 6 basic types and 16 risks to With 19 possible participants, 6 basic types and 16 risks to

evaluate/allocate, project financing is a multievaluate/allocate, project financing is a multi--disciplinary business disciplinary business

opportunity. opportunity.

�� Potentially there are 19 participants in a project financing (anPotentially there are 19 participants in a project financing (and the next d the next

figure shows relationships for a typical buildfigure shows relationships for a typical build--ownown--operate cooperate co--generation generation

power plant.power plant.

�� Each type of participant will have his own agenda and objectivesEach type of participant will have his own agenda and objectives..

ParticipantsParticipants

1.1. SponsorsSponsors

The sponsors are providing: technology, operations managThe sponsors are providing: technology, operations management, ement, construction, financial clout, supply/resources and/or offconstruction, financial clout, supply/resources and/or off--take. take.

Objectives of sponsors: shed risk to lenders (e.g. politObjectives of sponsors: shed risk to lenders (e.g. political risk); project ical risk); project too large; isolate a project; nontoo large; isolate a project; non--recourse; new sector; greater recourse; new sector; greater debt/equity, higher leverage; funding sources; offdebt/equity, higher leverage; funding sources; off--balance sheet.balance sheet.

2.2. The borrowerThe borrower

Many project financings are structured with a specialMany project financings are structured with a special--purpose entity or purpose entity or borrowing vehicle that gathers support from sponsors preborrowing vehicle that gathers support from sponsors pre--completion. completion. PostPost--completion it becomes the sole borrower of the project financingcompletion it becomes the sole borrower of the project financing. . This is the key means of isolating recourse to the sponsors postThis is the key means of isolating recourse to the sponsors post--completion. completion.

3. Financial advisers3. Financial advisers

Banks, Banks, ECAECA’’ss/country risk specialists, financial analysts, accounting firms,/country risk specialists, financial analysts, accounting firms,law firms, brokers. law firms, brokers.

Participants in project finance / continuedParticipants in project finance / continued

4. Arrangers/lead underwriters4. Arrangers/lead underwriters (arranger/managers, co(arranger/managers, co--lead/colead/co--managers, managers,

agent bank/documentation, technical bank, cash flow modeler, etcagent bank/documentation, technical bank, cash flow modeler, etc))

5. 5. ECAsECAs/Multilateral banks/Multilateral banks: players that can provide co: players that can provide co--financings or financings or

complementary financings, or buyer credit/supplier credits.complementary financings, or buyer credit/supplier credits.

6. Agent/trustee6. Agent/trustee: in some cases a separate entity is charged with the : in some cases a separate entity is charged with the

responsibility of managing the documentation, bank accounts and responsibility of managing the documentation, bank accounts and the the

reserve account provisioning.reserve account provisioning.

7. 7. LessorsLessors

8. Independent experts8. Independent experts: market, engineering, environmental, tax, : market, engineering, environmental, tax,

accounting, reserves, traffic/supply.accounting, reserves, traffic/supply.

9. Lawyers9. Lawyers

10. Governments10. Governments

Participants in project finance / continuedParticipants in project finance / continued

11. Construction contractors11. Construction contractors: engineering, design, procurement, construction, : engineering, design, procurement, construction, management of construction, completion/commissioning.management of construction, completion/commissioning.

12. O&M companies12. O&M companies: managing during commissioning or after completion : managing during commissioning or after completion (performance guarantees providers)(performance guarantees providers)

13. Insurers13. Insurers : brokers/advisers or insurance companies (packages during : brokers/advisers or insurance companies (packages during construction, business interruption /postconstruction, business interruption /post--completion, environmental, completion, environmental, statutory insurances, etc)statutory insurances, etc)

14. Swap counterparties 14. Swap counterparties

15. Suppliers 15. Suppliers

16. Equipments vendors16. Equipments vendors

17. Off17. Off--takerstakers

18. Transportation companies18. Transportation companies

19. Rating agencies19. Rating agencies

Project finance participantsProject finance participants

Risk sharingRisk sharing

The main attraction of project financing is the ability to pass The main attraction of project financing is the ability to pass on certain risks to on certain risks to the lenders, although this has a perceived cost (risk premium) the lenders, although this has a perceived cost (risk premium) and and lengthens the negotiating process. Every major risk presented bylengthens the negotiating process. Every major risk presented by a certain a certain project is allocated to the party that is best able to appraise project is allocated to the party that is best able to appraise and control and control that risk.that risk.

Opportunities:Opportunities:

�� to use project finance to isolate a specific project from the onto use project finance to isolate a specific project from the ongoing going business of the company and thereby not jeopardize the debt capabusiness of the company and thereby not jeopardize the debt capacity of city of the organization;the organization;

�� project financing is where more than one project is being developroject financing is where more than one project is being developed at the ped at the same time;same time;

�� where a project financing is arranged from an existing venture twhere a project financing is arranged from an existing venture to generate o generate acquisition funds or even develop another project;acquisition funds or even develop another project;

�� a project finance could first be arranged from one enterprise toa project finance could first be arranged from one enterprise to develop a develop a second and, a few years later, the first two refinanced to develsecond and, a few years later, the first two refinanced to develop a third op a third ––i.e. sequential project financings building up a portfolio.i.e. sequential project financings building up a portfolio.

The ability to identify and quantify the risks in a project finaThe ability to identify and quantify the risks in a project financing is pivotal to ncing is pivotal to any understanding of the business.any understanding of the business.

Risks can be mitigated by: financial, contractual or legal meansRisks can be mitigated by: financial, contractual or legal means..

Part of them may be sufficiently well studied or accepted.Part of them may be sufficiently well studied or accepted.

The project developer may have a track record dealing with partiThe project developer may have a track record dealing with particular risk.cular risk.

Risks impact on cash flowRisks impact on cash flow

Risk category / cash flow categoryRisk category / cash flow category

Covering the key risksCovering the key risks

LetLet’’s complete s complete togethertogether this LIST !this LIST !

There are ongoing projects and, most significantly, important poThere are ongoing projects and, most significantly, important potential ahead.tential ahead.

◘◘ pipelinespipelines

◘◘ underground gas storage (underground gas storage (greenfieldgreenfield or brown field)or brown field)

◘◘ cogeneration power plants (cogeneration power plants (greenfieldgreenfield or brown field)or brown field)

◘◘ onon--shore/offshore/off--shore oil terminals shore oil terminals

◘◘ LPG/LNG terminals LPG/LNG terminals

◘◘ energy efficiency energy efficiency oil&gasoil&gas related projects related projects

◘◘ the others to be discovered together the others to be discovered together

Global Sector Share 1 H 2009 (1H 2008)Global Sector Share 1 H 2009 (1H 2008)

Source: Source: DEALOGICDEALOGIC GLOBAL PROJECT FINANCE REVIEW, H1 2009GLOBAL PROJECT FINANCE REVIEW, H1 2009

Project Finance Project Finance -- Rankings & Volume H1 2009Rankings & Volume H1 2009

Source: Source: DEALOGICDEALOGIC GLOBAL PROJECT FINANCE REVIEW, H1 2009GLOBAL PROJECT FINANCE REVIEW, H1 2009

BRD BRD GroupeGroupe SocieteSociete GeneraleGenerale is ready to successfully structure for you is ready to successfully structure for you

project financing and any other kinds of debt. We understand theproject financing and any other kinds of debt. We understand the way way

the companies and the Oil&Gas Industry operates and we have the the companies and the Oil&Gas Industry operates and we have the

necessary insight for debt funding and operations. necessary insight for debt funding and operations.

Our structuring capabilities, Oil&Gas Industry experience and acOur structuring capabilities, Oil&Gas Industry experience and access to cess to

the capital markets enables BRD to offer the capital markets enables BRD to offer project financeproject finance, maybe the , maybe the

next tool for your company's development and growth.next tool for your company's development and growth.

Petroleum ClubPetroleum Club

THANK YOU !THANK YOU !

Grigore PANA Grigore PANA

[email protected]@brd.ro

project finance versus corporate finance opportunities in ... · pdf fileseveral major reasons...

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