The Mechanics of Project Finance

OVERVIEW This training is designed to help bankers, private investors, project developers, equipment suppliers, official creditors, and other project participants acquire the skills they need to evaluate project financing transactions in a wide variety of industrial sectors. Relying heavily upon examples from around the world characteristic of the energy, transportation, social services, water, sanitation, telecommunications, […]

OVERVIEW

This training is designed to help bankers, private investors, project developers, equipment suppliers, official creditors, and other project participants acquire the skills they need to evaluate project financing transactions in a wide variety of industrial sectors. Relying heavily upon examples from around the world characteristic of the energy, transportation, social services, water, sanitation, telecommunications, oil, gas and mining, attendees will be brought up to date on the latest techniques and innovative approaches to structuring and funding projects

WHAT YOU WILL LEARN

  • Improved technical and theoretical knowledge of project financing.
  • Ability to analyse and be part of the deal team
  • Ability to assess the bankability of projects from a very wide range of sectors.
  • Understanding of how both the investor and the banker thinks to get the most out of them.

WHO SHOULD ATTEND

  • Bankers/Investment Bankers
  • Financial Advisors
  • Sponsors/Project Joint Ventures
  • Project Developers
  • Government Agencies
  • Public Sector Managers
  • Export Credit Agencies
  • Multilateral Agencies
  • Accountants and Taxation Advisers
  • Financial Analysts
  • Share Market Analysts and Brokers
  • M&A and Buyout Specialists
  • Privatization Executives
  • Company Treasurers and Directors
  • Credit Committee Staff
  • Rating Agencies
  • Project Managers and Engineers
  • Project Consultants
  • Investment/Portfolio Managers
  • Insurance Advisers and Brokers

COURSE AT A GLANCE

CORE UNITS:

  1. An Introduction to Project Finance
  2. Qualitative Risk Identification Analysis & Mitigation (part A)
  3. Qualitative Risk Identification Analysis & Mitigation (part B)
  4. Quantitative Analysis, Debt Sizing & Structuring
  5. Documenting the Deal
  6. Project Finance Time-Line & Project Finance Security

 

CHOOSE BETWEEN TWO ELECTIVE PATHS ELECTIVE UNITS –

PATH A:

  1. Infrastructure Project Finance
  2. PPP/PFI Project Finance ELECTIVE UNITS –

PATH B:

  1. Oil, Gas & Mining Project Finance
  2. Conventional & Renewable Power Project Finance

EACH DELEGATE TO COMPLETE EITHER

ELECTIVE PATH A OR ELECTIVE PATH B

ELECTIVE PATH A – TWO UNITS TO COMPLETE

 

UNIT 1

1
AN INTRODUCTION TO PROJECT FINANCE
  • What is ‘Project Finance’ – How Does it Differ From Other Forms of Lending?
  • Who Uses Project Finance & Why?
  • Off-Balance-Sheet’ lending
  • Project finance ‘Carve-Outs’
  • Joint ventures/unequal partnerships
  • Risk sharing
  • Capital rationing/return maximisation
  • ‘No Choice’
  • Key Characteristics of Project Finance – Corporate Structures & Contractual Relationships
  • Usually (not always) limited-liability ‘SPV’
  • Multiple contractual relationships:
  • construction contractor(s)
  • suppliers
  • offtakers
  • operators
  • insurance providers
  • public sector – government bodies and agencies
  • Disadvantages for Borrowers/Sponsors
  • Increased complexity (risk identification/mitigation/allocation)
  • Need for third-party due diligence reports
  • Longer timelines
  • Higher debt costs – interest margins and fees
  • Supervision by and reporting to lender group
  • Tighter debt covenants and undertakings
  • Risk/Reward Relationships of the Players – Lenders & Borrowers/Sponsors
  • Borrower/sponsor seeks to optimise return through NPV/IRR/WACC analysis and wide sensitivity analysis on both upside and downside
  • Lender is not exposed to upside – in business of analysing and managing/ mitigating/transferring risk

UNIT 2

1
QUALITATIVE RISK IDENTIFICATION, ANALYSIS & MITIGATION (A)
  • Sponsor Risk – A Potential ‘On-Off’ Switch
  • Competence and track-record
  • Management skillsets
  • Equity injection – capacity and timing
  • Country/Political Risk – Banks are Better at Accepting Commercial Rather than Political Risk
  • What are the risks?
  • expropriation, confiscation and nationalisation risk
  • other political perils
  • war, civil war
  • strike, riot and civil commotion
  • depreciation and non-convertibility
  • Mitigating country/political risk
  • political risk insurance
  • export credit agencies
  • multilateral agencies
  • Risks of the Project Itself (Part One)
  • Construction/completion risk
  • risk areas
  • time delay
  • cost overrun
  • technology
  • risk mitigants/transfers
  • transfer to the contractor – ‘fixed-price turnkey’ contracts
  • transfer to the sponsor – pre-completion guarantees and other support mechanisms
  • support from the lender – cost-overrun facilities
  • Operation and maintenance risk
  • bank preference for robust long-term arrangements
  • alternative types of structure
  • key ‘bankability’ features of O&M contracts

UNIT 3

1
QUALITATIVE RISK IDENTIFICATION, ANALYSIS & MITIGATION (B)
  • Risks of the Project Itself (Part Two)
  • Supply risks
  • split into volume and price
  • lender likely to be anxious about uncovered volume risk
  • preference for ‘send-or-pay’ type of structure
  • price risk analysed through modelling
  • Reserve risk – special type of supply risk
  • minerals projects have finite store of value
  • also real sub-surface risks and uncertainties
  • probabilistic vs. deterministic reserve classification/valuation
  • applying banking value to reserves
  • Sales/offtake risk
  • split into volume and price
  • lender again likely to be concerned about uncovered volume risk
  • offtake risk mitigation:
  • ‘take-or-pay’ contracts
  • tolling contracts
  • marketing agreements
  • Approvals and permits
  • usually transferred to sponsor
  • transfer effected through conditions precedent
  • Environmental considerations of immense and growing importance to lenders
  • impact of environmentally and socially-sensitive projects on lenders
  • advent of equator principles:
  • genesis and development
  • structure and function
  • impact on: project analysis and rating
  • Credit approval process Documentation – representations and warranties, undertakings and events of default
  • Regulatory risk
  • role of the regulator – ensuring security of supply and avoiding abuse of monopoly
  • impact of the regulator/regulatory regime on:
  • project revenue/cashflow
  • structure/security

UNIT 4

1
QUANTITATIVE RISK ANALYSIS & DEBT SIZING/STRUCTURING UNIT LEARNING AIMS AND OBJECTIVES

1. The Borrower/Sponsor Objectives:

• Maximise debt

• Minimise/delay equity injections

• Maximise/accelerate distributions

• Avoid ‘cash-traps’

2. Use of Different Techniques by Borrower to Assess Project Attractiveness – Cashback, Npv, Irr

3. The Banker’s Objectives – Timely Debt-Service with an Adequate ‘Cushion’

4. Debt Sizing & Sculpting

• The cash flow waterfall in more detail

• The lender’s model – its structure and function

– structure of a typical debt unit

– interaction with other parts of the model

– primacy of the cash flow

• CFADS – the starting point for quantitative analysis and debt sculpting

• Lender ratios for debt calibration and stress testing

– debt to equity ratio and drawdown control

– ADSCR – definition and use in the sculpting of mortgage-style repayment

• The NPV-based ratios (LLCR/PLCR) and sculpting to maintain loan-to-value

• Control accounts and other ‘Cash Traps’

– debt-service reserve account

– maintenance reserve account

– cash sweeps

• Base case design and sensitivity running

– control of input parameters – technical and economic

– calibrating debt and structuring the repayment methodology/profile

– ‘testing for weakness’ – bank sensitivity analysis

– dealing with the toughest issues –accept, mitigate or transfer?

• Getting to the optimum debt level – balancing equity against bank funds

 


UNIT 5

1
DOCUMENTING THE DEAL

1. The Documentation Process

• The lender/borrower/counsel interface

• Different approaches to the term sheet

• Drafting for completeness with economy

A Recap on Syndicated Debt Terminology with Special Reference to Project Finance:

• Obligors – borrower and guarantor

• Use of and access to the funds – purpose, availability and conditions precedent

• Loan economics – interest and fees

• Repayment and /or prepayment

The Key ‘Command & Control’ Mechanisms in Project Finance Agreements

• Control accounts and the cash flow ‘Waterfall’

– the cash flow waterfall – purpose, typical priority ranking and variations

– types of control account:

~ disbursement account

~ revenue/proceeds account

~ compensation account

~ debt service reserve account

~ maintenance reserve accounts

• Availability and the debt: equity balance

• Conditions precedent

• Reps and warranties

• Covenants – in particular:

– debt and security limitations

– reporting requirements

– restrictions on amending project documents

– maintenance of ratios

– distribution lock-ups

• Events of Default – in particular:

– default cover ratios

– default under project documents

– abandonment/cessation of production

2. Borrower/Sponsor Needs and ‘Hot-Buttons’

• Access to the loan facility

• Limits on operating flexibility and control

• Cash-traps and ‘IRR-Killers’

• Offences against the limited-recourse concept

• Pricing – margins and fees

UNIT 6

1
THE PROJECT FINANCE TIME- LINE & PROJECT FINANCE SECURITY-TAKING

1. Steps in the Project Financing Process

• Pre-feasibility analysis

• Financial feasibility analysis – using advisers

• Approaching lenders – underwriting/best efforts; financing competitions

• The Banks’ credit process

• Due diligence consultants

• The documentation process

• Reaching financial close

2. Lender Security-Taking Objectives

• Maintaining priority/defeating the ‘pari passu’ principle

• Maintaining value

• Limiting dealings

• Negotiating strength

• Enforcement/disposal

3. Relative Value of Different Security Types Security in Challenging Locations

Key Security Instruments:

• Guarantees and indemnities

• Bank guarantees and performance bonds

• Pledges

• Mortgages and charges

• Assignments

• Security over shares

• Credit balances

• Direct agreements

 

ELECTIVE UNIT 1

INFRASTRUCTURE PROJECT FINANCE

1. Sector Background

• History and drivers of infrastructure project finance

• Contractual and legal framework

• Key project documents – the concession and other government agreements

2. The Banker’s Risk Analysis/Key Structuring & Pricing Drivers

• Local legal issues

– procurement regime

– concession law

– insolvency law

– experience and capacity

– political risk

• Concession risk

– awarding authority

– tenor

– revenue basis

– termination

– asset ownership

– security

– penalty regime

• Construction issues in infrastructure transactions

• Operation and maintenance

• Typical risk allocations

3. Modelling & Structuring Methodology

• Base methodology

• Sector variants

– roads

– rail/light rail

– ports

– airports

4. The Infrastructure Project Finance ‘Identikit’

• Key lender concerns

• Typical maturity profile

• Likely gearing/leverage levels

• Debt sculpting methodology

• Pricing

• Security structures

Case Study

ELECTIVE UNIT 1 PATH A

1
INFRASTRUCTURE PROJECT FINANCE

1. Sector Background

• History and drivers of infrastructure project finance

• Contractual and legal framework

• Key project documents – the concession and other government agreements

2. The Banker’s Risk Analysis/Key Structuring & Pricing Drivers

• Local legal issues

– procurement regime

– concession law

– insolvency law

– experience and capacity

– political risk

• Concession risk

– awarding authority

– tenor

– revenue basis

– termination

– asset ownership

– security

– penalty regime

• Construction issues in infrastructure transactions

• Operation and maintenance

• Typical risk allocations

3. Modelling & Structuring Methodology

• Base methodology

• Sector variants

– roads

– rail/light rail

– ports

– airports

4. The Infrastructure Project Finance ‘Identikit’

• Key lender concerns

• Typical maturity profile

• Likely gearing/leverage levels

• Debt sculpting methodology

• Pricing

• Security structures

Case Study



ELECTIVE UNIT 2 PATH A

1
PPP/PFI PROJECT FINANCE

1. Sector Background

• Drivers for PPP/PFI project finance/origins of the sector

• Features of PPPs/contractual and legal framework

• PPP/PFI agreements

• The PPP process/public sector involvement

• Investor drivers – contractors and financial investors

• Impact of ‘credit crunch’

2. The Banker’s Risk Analysis/Key Structuring & Pricing Drivers

• Local legal issues

• Concession risk

• Demand risk – who takes it?

• Construction issues in PPP transactions

• Operation and maintenance

• Typical risk allocations

3. Modelling & Structuring Methodology

• Base methodology

• Sector variants

– roads

– hospitals

– schools

– prisons

– waste

4. The PPP Project Finance ‘Identikit’

• Key lender concerns

• Typical maturity profile

• Likely gearing/leverage levels

• Debt sculpting methodology

• Pricing

• Security structures

Case Study



ELECTIVE UNIT 1 PATH B

1
OIL & GAS/MINING PROJECT FINANCE

1. Sector Background

The hydrocarbon value chain – upstream to downstream

• Petroleum geology and reserves – the ‘Bare Bones’

• Mining reserves – the ‘Bare Bones’

• Exploration and development licences, concessions and other agreements

2. The Banker’s Risk Analysis/Key Structuring & Pricing Drivers

• Upstream oil and gas lending:

– single-field transactions

– portfolio lending

– junior financing products

• Refinery finance

• Pipeline and storage finance

• LNG financing:

– liquefaction

– regasification

– tanker Finance

• Petrochemical financing

• Financing the extraction and processing of other minerals

3. Modelling & Structuring Methodology

• Upstream oil debt structuring – single and multiple fields

• Midstream/downstream debt structuring:

– refineries

– LNG

– petrochemicals

• Open cast and underground mining

4. The Oil & Gas and Mining Project Finance ‘Identikit’

• Key lender concerns

• Typical maturity profile

• Likely gearing/leverage levels

• Debt sculpting methodology

• Pricing

• Security structures

Case Study



ELECTIVE UNIT 2 PATH B

1
CONVENTIONAL & RENEWABLE POWER PROJECT FINANCE

1. Sector Background

• How power markets work

• Financing power projects in emerging markets

• Developed/regulated markets

• ‘Base-Load’, ‘Mid-Merit’ or ‘Peaking’?

• CHP/cogeneration projects

• Renewable energy and energy from waste

2. The Banker’s Risk Analysis/Structuring & Pricing Drivers

• Offtake Regime

– power purchase agreements

– tolling projects

– merchant power

– green certificates

– feed-in tariffs

• Construction issues in power transactions

• Operation and maintenance regime

• Typical risk allocations

3. Modelling & Structuring Methodology

• Power purchase agreement transactions

• Tolling projects

• Merchant power

• Renewable power projects

• Cogeneration projects

4. The Power Project Finance ‘Identikit’

• Key lender concerns

• Typical maturity profile

• Likely gearing/leverage levels

• Debt sculpting methodology

• Pricing

• Security structures



Richard has a unique blend of experience in Law, Corporate Banking, Investment Banking, Corporate Financial Management, General Management & Workout. He has gained a worldwide reputation for the quality and depth of his project finance training courses which have been developed and presented over 20 years.

OVERVIEW

This training is designed to help bankers, private investors, project developers, equipment suppliers, official creditors, and other project participants acquire the skills they need to evaluate project financing transactions in a wide variety of industrial sectors. Relying heavily upon examples from around the world characteristic of the energy, transportation, social services, water, sanitation, telecommunications, oil, gas and mining, attendees will be brought up to date on the latest techniques and innovative approaches to structuring and funding projects.


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The Mechanics of Project Finance
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