The instructor
Haydn Palliser
Managing Director
BEng (Hons), MAppFin
[email protected] +1 646 771 5937
Project finance involvement for 10+ years Managed projects from various angles including engineering, contract management, financial modeling, strategic and financing advice, negotiating and arranging financing Project finance consultant across energy, infrastructure and mining An expert trainer, training teams in project finance within banks, PE firms, funds and corporates
Wall Street Prep’s Project Finance Partner Corality Financial Group is a global consulting firm specialising in training, financial modeling, model auditing and transaction support. •
Thought leaders in the world of analytical consulting
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Offices in London, Sydney, New York
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Project finance trainers and leaders
Consulting
Training
Financial modelling
Model audit
Transaction support
Opportunities to learn more! Corality runs public boot camps in project finance, including: •
2-day best practice project finance modeling
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2-day advanced project finance modeling
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Project finance: concepts and applications
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Project finance: transaction simulation masterclass
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Financial modeling for renewable energy projects
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PPP/P3/Infrastructure project modeling
Slide deck for the course •
Download: http://wsp_coursematerials.s3.amazonaws.com/Webinars Technical issues during the presentation:
[email protected]
What is project finance?
A brief overview of project finance •
Project Finance is a means of financing projects with significant capital requirements and/or which may not otherwise secure funding
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Financing assets or groups of assets (projects) – limited role
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Relatively small companies are able to build large and complex projects
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Non-recourse debt repayment, solely reliant on the cash flows of the project
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Typically applied to projects in Power and Energy, Natural Resources, Utilities and Infrastructure (Social and Economic) industries
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It focuses on structuring risk through contracts to the parties most able to take it
But what is a project?
If you have procured all of the necessary: -
Components;
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Land;
Labour, etc.
Do you have a “bankable”* project?
*bankable = financeable project = a project which could raise third party finance, both debt and equity?
A brief overview of project finance
If you have procured all of the necessary components, land, labour, etc.; and
Have installed all of the components above; and
Your company produces the desired output
Do you have a “bankable” project?
No, not yet a bankable project! … a “bankable” project is a set of contracts, which:
Regulate the relationships between the various parties involved in the project, including builders, operators, clients, suppliers, etc.
Regulate the risk sharing between the various parties involved in the projects
Regulate the obligations and remuneration between the various parties involved in the projects
Generate sufficient cash flow to repay your debt / provide a return
“Bankable” project
All required permits
Developer
Grid Connection Agreement
Financiers
Project Company (“SPV”)
Land Lease / Right to Use
EPC Contract
Offtake Agreement
Fuel Supply
Site Security
O&M Contract
Management Contract
Insurance Contract
Timeline and completion
Development 1 – 3 yrs
Construction 1
Financial Close
Operations 1-3 yrs
5 - 30 yrs
Completion
Refinancing
Closure 1 - 5 yrs
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The majority of the work is performed during the development phase
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Arranging finance takes ~3-6 months
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It is important that all parties (contractors, suppliers and financiers) agree on the contractual structure simultaneously – occurs at the Financial Close day Early involvement of a professional financial adviser and due diligence consultants is critical to the success of the project Completion and cash flow / contracted period
Characteristics of project finance •
Capital Intensive – tendency towards large-scale projects (industry focused)
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Highly Leveraged – typical gearing of 50-75% (mezzanine debt ensures return to equity holders)
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Long Term – duration can typically reach 15-35 years
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Special Purpose Vehicle – project company typically established by sponsor to own and operate the project
Characteristics of project finance •
Non-recourse Financing – Lenders only repaid from project cashflow
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Controlled Dividend Policy – Income to cover OPEX, debt service, tax and ROE
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Multiple Participants – technical and geographical scale demands many players
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Allocated Risk – identification and allocation of key risks is crucial
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Contracted cash flows
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Expensive – greater information requirements and contractual complexity increases overall transaction costs
Why use project finance?
Some alternative funding sources •
Corporate debt (capital markets / debt)
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Equity
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Venture Capital
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Convertible Notes
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Shareholder Loans
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Quasi debt / equity
Why Bother with Project Finance?
Can you achieve the same thing with corporate finance? All required permits
Developer
Grid Connection Agreement Land Lease / Right to Use Insurance Contract
Projects
Financiers
Why Bother with Project Finance?
Can you achieve the same thing with corporate finance? All required permits
Developer
Grid Connection Agreement
Financiers
Advantages:
Simpler Easier Disadvantages: Hard to transfer the ownership to 3rd parties Concentrated risk A single project may bankrupt the Developer Project > Developer Off-balance sheet financing Other Consideration: Cost of Capital
Land Lease / Right to Use
Projects
Insurance Contract
Commercial drivers for project finance •
Limited or no recourse
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Risk sharing
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Involvement of joint venture partners
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Restrictions on level of corporate borrowing
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Tax advantages
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Local legislation
Characteristics of project finance •
Non-recourse Financing – Lenders only repaid from project cashflow
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Controlled Dividend Policy – Income to cover OPEX, debt service, tax and ROE
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•
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Multiple Participants – technical and geographical scale demands many players Allocated Risk – identification and allocation of key risks is crucial Expensive – greater information requirements and contractual complexity increases overall transaction costs
Comparison to corporate finance
Common project finance funding sources •
Traditional project finance banks
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Capital markets
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Debt funds
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Asset or alternative funds
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Government
More on this in seminar 2..
Structure and participants
Project finance structure
Participants •
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Sponsor o
SPV owners (equity providers)
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Typically active in project (have a role)
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Financial capacity is still important
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Partnering and risk sharing
Borrower o
Special purpose vehicle (SPV)
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Enters into contracts
Participants •
Construction contractor o
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Fixed price / turnkey vs other structures, track record
Operator o
Provide operations and maintenance
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Experience, fixed price
Offtaker o
Credit risk
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Fixed price vs volume vs both
Participants •
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Financiers o
Experience critical (structure / metrics / “problems”)
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Multiple lenders and structures (seminar 2)
Advisors o
Helping bankability before going to banks
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Financial model is central to negotiation due to structure
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Legal, accounting / tax, insurance, technical, financial
Seminar 2
Wrap-up •
Project finance is a viable and often compulsory alternative to capital intensive projects
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Risk allocation is a major driver
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Can provide additional leverage
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Is a well defined process, know the right steps
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Financial model is your main negotiation tool, metrics bespoke to project finance, scenarios!
