Introduction to Project Finance. Project Appraisal, Financing and Management

1.

Introduction to Project
Finance
Project Appraisal, Financing and Management
CRISIL CERTIFIED ANALYST PROGRAMME
SEMESTER III
Dr. A. B. Rastogi
NMIMS

2. What is a Project?

Slide 2
What is a Project?
High operating margins.
Low to medium return on capital.
Limited Life.
Significant free cash flows.
Few diversification opportunities.
Asset specificity.
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3. What is a Project? (cont.)

Slide 3
What is a Project? (cont.)
• Projects have unique risks:
– Symmetric risks:
Demand, price.
Input/supply.
Currency, interest rate, inflation.
Reserve (stock) or throughput (flow).
– Asymmetric downside risks:
• Environmental.
• Creeping expropriation.
– Binary risks
Technology failure.
Direct expropriation.
Counterparty failure
Force majeure
Regulatory risk
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4. What Does a Project Need?

Slide 4
What Does a Project Need?
• Customized capital structure
• Asset specific governance systems
– to minimize cash flow volatility and
– to maximize firm value.
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5.

Slide 5
“Project finance” is not the same thing
as “financing projects”.
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6. What is Project Finance?

Slide 6
What is Project Finance?
Project Finance involves a corporate
sponsor investing in and owning a single
purpose, industrial asset through a legally
independent entity financed with nonrecourse debt.
Cash flow is security to lenders.
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7. Project Structure

Slide 7
Project Structure
• Structure highlights
• Disadvantages
• Motivations
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8. Structure Highlights

Slide 8
Structure Highlights
• SPV - Independent, single purpose company
formed to build and operate the project.
• Extensive contracting
– As many as 15 parties in up to 1000 contracts.
– Contracts govern inputs, off take, construction and
operation.
– Government contracts/concessions: one off or
operate-transfer.
– Ancillary contracts include financial hedges,
insurance for Force Majeure, etc.
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9. Structure Highlights (cont.)

Slide 9
Structure Highlights (cont.)
• Highly concentrated equity and debt ownership
– One to three equity sponsors.
– Syndicate of banks and/or financial institutions provide
credit.
– Governing Board comprised of mainly affiliated directors
from sponsoring firms/ independent directors
• Extremely high debt levels
– Mean debt of 70% and as high as nearly 95%.
– Balance of capital provided by sponsors in the form of
equity or quasi equity (subordinated debt).
– Debt is non-recourse to the sponsors.
– Debt service depends exclusively on project revenues.
– Has higher spreads than corporate debt.
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10. Disadvantages of Project Financing

Slide 10
• Often takes longer to structure than equivalent size
corporate finance.
• Higher transaction costs (~60bp) due to creation of
an independent entity.
• Project debt is substantially more expensive (50400 bp) due to its non-recourse nature.
• Extensive contracting restricts managerial decision
making.
• Project finance requires greater disclosure of
proprietary information and strategic deals.
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11. Type of Projects

Slide 11
Type of Projects
• BOT - Build Operate Transfer
• BOOT - Build Own Operate Transfer
• BOO - Build Own Operate
• BOOST - Build Own Operate Share Transfer
• BOLT - Build Own Lease Transfer
• DBFO - Design Build Finance Operate
• OMT - Operate Maintain Transfer
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12. Means of Finance

Slide 12
Means of Finance
• Equity Capital
• Mezzanine Finance
– Convertibles
– Preference Capital
– Sub-ordinated Debt
• Senior Debt
– Rupee Term Loan
– Bonds
– Foreign Currency Loan
– Export Credit
–
Supplier’s
Credit
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13. Deal Diagram

Slide 13
Deal Diagram
Sponsors
Advisers
Government
Invt. Bankers,
Technical & Legal
Advisers
Advisers
Invt. Bankers,
Technical & Legal
Advisers
Equity
Concession / Licence
Agreement
Financial
Investors
Equity /
Sub-Debt
Users
TRA
Agent
Off-take
Contracts
Insurance
Companies
Insurance Policies
Project SPV
O&M
Contract
TRA/Escrow
Agreement
O&M
Operator
EPC Contract
Debt
Lenders
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Substitution
Agreement
EPC
Contractor
Financing Infrastructure Projects

14. Key Components

Slide 14
Key Components
• Cash flow projections based on technical, market
and financial analysis
• Risk allocation through project contracts and
financing agreements
• Structured financing
• Security and documentation
• Project monitoring and compliance
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15. Base case analysis shows adequate debt servicing capacity of the enterprise.

Slide 15
Base case analysis shows adequate debt
servicing capacity of the enterprise.
200
100
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
-100
-200
-300
-400
-500
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Capital Expenditure
Operating Cash Flow
Debt Service

16. Why Investors Use Project Finance

Slide 16
Why Investors Use Project Finance
High leverage
Tax benefits
Off-balance sheet financing
Borrowing capacity
Risk limitation
Risk spreading
Long-term finance
Enhanced credit
Unequal partnerships
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17. Benefits of Project Finance to Third Parties

Slide 17
Benefits of Project Finance to Third Parties
• Lower product or service cost
• Additional investment in public
infrastructure
• Risk transfer
• Lower project cost
• Third-party due diligence
• Transparency
• Additional inward investment
• Technology transfer
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18. Case Study - 1

Slide 18
Case Study - 1
• Project : 4-laning of 59 km on NH5 on
annuity basis
• Concession Period : 17.5 years (incl
construction period)
• Promoter : GMR Group
• Project Cost: Rs 315 crore
• Financed in a Debt-Equity Ratio of 3:1 by
way of:
– Equity: Rs 1 crore
– Preference Capital: Rs 78 crore
– Debt: Rs 236 crore
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19. Case Study - 2

Slide 19
Case Study - 2
NHAI
Annuity
Concession
Agreement
UEM
Financing
Agreements
Lenders
Project SPV
Shhldr’s
Agmnt
Equity
Debt
LE
Scott Wilson
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EPC
Agmnt
UEM
GMR
Group
Indep Eng
Dorsch
Engineers

20. INFRASTRUCTURE

Slide 20
INFRASTRUCTURE
• Transport – road including toll road, a bridge, rail
system, a highway project, a port, airport, inland
port.
• Telecommunication – basic or cellular, radio
paging, domestic satellite services, broadband
network, internet services.
• Energy – generation, distribution, transmission,
gas supply
• C&I – a water project, irrigation project, water
treatment system, industrial park, SEZ, education
and hospitals.
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21. Thank you

Slide 21
Thank you
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