Project Finance in Theory and Practice: Designing, Structuring, and Financing Private and Public Projects

Project Finance in Theory and Practice......Page 4
Copyright Page......Page 5
Abbreviated Contents......Page 6
Contents......Page 8
Foreword......Page 14
Preface......Page 18
Acknowledgments......Page 20
About the Author......Page 22
Introduction......Page 23
1.2 Why Do Sponsors Use Project Finance?......Page 24
1.3.1 Industrial Sponsors in Project Finance Initiatives Linked to a Core Business......Page 26
1.3.2 Public Sponsors with Social Welfare Goals......Page 27
1.3.3 Contractor/Sponsors Who Develop, Build, or Run the Plant......Page 28
1.4 Overview of the Features of Project Finance......Page 29
1.4.1 The Contractor and the Turnkey Construction Contract (TKCC)......Page 30
1.4.4 Suppliers and Raw Material Supply Agreements (RMSAs)......Page 31
1.5 The Theory of Project Finance......Page 32
1.5.1 Separate Incorporation and Avoidance of Contamination Risk......Page 33
1.5.2 Conflicts of Interest Between Sponsors and Lenders and Wealth Expropriation......Page 37
2.1 Historical Evolution of Project Finance and Market Segments......Page 41
2.2 The Global Project Finance Market......Page 44
2.2.1 A Closer Look at the European Market......Page 48
2.2.2 PPP Development......Page 49
Introduction......Page 53
3.1 Identifying Project Risks......Page 54
3.1.1 Precompletion Phase Risks......Page 55
3.1.3 Risks Found in Both the Pre- and Postcompletion Phases......Page 57
3.2.1 Allocation of Construction Risk: The Turnkey (or Engineering, Procurement, and Construction—EPC) Agreement......Page 67
3.2.2 Allocation of Supply Risk: Put-or-Pay Agreements......Page 70
3.2.4 Allocation of Market Risk......Page 71
3.3 Summary of the Risk Management Process......Page 83
Introduction......Page 85
4.1 The Role of Legal Advisors in Project Finance Deals......Page 86
4.1.1 Legal Advisor, Legal Advisors, and Law Firms: The International Part and Local Legal Counsel......Page 87
4.1.2 Project Financing Development Stages and Impacts on the Role of Legal Advisors......Page 88
4.2 The Role of the Independent Engineer in Project Finance Deals......Page 97
4.2.1 Initial Due Diligence Reporting......Page 98
4.2.2 Monitoring Realization of the Project (Engineering and Construction)......Page 100
4.2.3 Assistance at the Time of Plant Acceptance......Page 105
4.2.4 Monitoring Operations Management......Page 109
4.3 Role of Insurance Advisors and Insurance Companies in Project Finance Deals......Page 110
4.3.1 Rationale for Using Insurance in Project Finance Deals......Page 111
4.3.2 When Should Insurance Products Be Used?......Page 112
4.3.3 Areas Where the Insurance Advisor Is Involved......Page 113
4.3.4 Types of Conventional and Financial Insurance Products Available for Project Finance Deals......Page 115
4.3.5 Integrated Insurance Solutions—Structure and Content......Page 119
4.3.6 Classification of Insurance Underwriters......Page 120
Introduction......Page 123
5.1 Analysis of Operating Cash Flows and Their Behavior in Different Project Life-Cycle Phases......Page 124
5.1.1 Inputs for Calculating Cash Flows......Page 127
5.2 Defining the Optimal Capital Structure for the Deal......Page 138
5.2.1 Equity......Page 140
5.2.2 Senior Debt......Page 141
5.2.3 VAT Facility......Page 143
5.2.4 Stand-by Facility......Page 145
5.2.5 Identifying Sustainable Debt/Equity Mixes for Sponsors and Lenders......Page 146
5.3 Cover Ratios......Page 154
5.3.1 What Cover Ratios Can Tell Us and What They Can’t......Page 156
5.3.2 Cover Ratios as an Application of the Certainty Equivalents Method......Page 161
5.4 Sensitivity Analysis and Scenario Analysis......Page 162
5.4.1 Which Variables Should Be Tested in Sensitivity Analysis?......Page 163
6.1 Advisory and Arranging Activities for Project Finance Funding......Page 169
6.1.1 Advisory Services......Page 171
6.1.2 Arranging Services......Page 174
6.1.3 Integration of Advisory and Arranging Services......Page 175
6.3 Fee Structure......Page 179
6.3.1 Fees for Advisory Services......Page 180
6.3.3 Fees to Participants and the Agent Bank......Page 181
6.3.4 Example of Fee Calculation......Page 182
6.4 International Financial Institutions and Multilateral Banks......Page 184
6.4.1 Multilateral Organizations......Page 186
6.4.2 Regional Development Banks......Page 193
6.5.1 Developmental Agencies......Page 200
6.5.2 Export Credit Agencies (ECAs)......Page 201
6.6 Other Financial Intermediaries Involved in Project Finance......Page 205
6.7.1 Timing of the Equity Contribution and Stand-by Equity and Equity Acceleration......Page 208
6.8 Funding Options: Mezzanine Financing and Subordinated Debt......Page 210
6.9 Funding Options: Senior Debt......Page 216
6.9.2 Working Capital Facility......Page 217
6.9.5 Loan Remuneration......Page 218
6.9.7 Repayment Options......Page 219
6.9.8 Refinancing Loans Already Granted to the SPV......Page 223
6.10.1 Valuing the Convenience of a Project Leasing......Page 230
6.10.2 The Tax Effect......Page 232
6.11 Project Bonds......Page 233
6.11.1 Investors in Project Bonds......Page 236
6.11.2 Various Categories of Project Bonds......Page 237
6.11.3 Municipal Bonds......Page 241
6.11.4 When Should Project Bonds Be Used?......Page 242
6.11.5 Procedure for Issuing Project Bonds......Page 246
Introduction......Page 255
7.1 The Project Company......Page 256
7.1.1 Reasons for Incorporating the Project in a Project Company......Page 257
7.1.2 The Project Company as a Joint Venture: Another Reason to Develop a Project in an SPV......Page 258
7.1.4 Corporate Documentation: Articles of Incorporation......Page 259
7.1.5 Outsourcing the Corporate Functions of the Project Company: How the Company/Project Is Actually Run......Page 260
7.2.1 Before the Financing: The Due Diligence Report and the Term Sheet......Page 261
7.2.2 Classification of Project Documents......Page 264
7.2.3 The Credit Agreement......Page 265
7.2.4 Security Documents: Security Interests and What They Do......Page 287
7.2.5 Other Finance Documents......Page 296
7.2.6 Project Agreements......Page 300
7.3 Refinancing Project Finance Deals......Page 307
Introduction......Page 311
8.1 The Basel Committee’s Position on Structured Finance Transactions (Specialized Lending, SL)......Page 312
8.1.1 Classes of Transactions Included in Specialized Lending......Page 313
8.2 Rating Criteria for Specialized Lending and Their Application to Project Finance......Page 314
8.2.2 Political and Legal Environment......Page 315
8.2.6 Summary of Grading Criteria......Page 316
8.3 Rating Grade Slotting Criteria of the Basel Committee and Rating Agency Practices......Page 318
8.4 The Basel Accord: Open Issues......Page 319
8.4.1 Effects of the Basel Proposal on the Syndicated Project Finance Loan Market......Page 320
8.5 Introduction to the Concepts of Expected Loss, Unexpected Loss, and Value at Risk......Page 326
8.6 Defining Default for Project Finance Deals......Page 328
8.7.1 Defining a Risk Assessment Model......Page 330
8.7.2 Identifying Project Variables and Key Drivers......Page 331
8.7.3 Input Variables: Estimation and Data Collection......Page 336
8.8 Estimating Value at Risk through Simulations......Page 339
8.9 Defining Project Value in the Event of Default......Page 341
8.9.1 Deterministic vs. Stochastic LGD Estimates......Page 342
8.9.3 Restructuring vs. Default......Page 343
C1.1 Situation......Page 345
C1.3 Sponsors of the Deal......Page 346
C1.4 Agreements Underpinning the Deal......Page 347
C1.5 Financial Structure......Page 350
C1.6 Conclusion: In Arrigoni’s Office......Page 351
C2.1 Business Plan of the Project......Page 353
C2.2 Assumptions......Page 354
C2.4 Financial Requirement and Sources of Financing......Page 356
C2.5 Operational Period......Page 359
C2.6 Economic and Financial Ratios......Page 361
Introduction......Page 363
A.1 Breakdown of the Financial Model......Page 364
Case Study 3: Hong Kong Disneyland Project Loan......Page 381
C3.1 Background on Syndicated Bank Lending......Page 382
C3.2 The Hong Kong Disneyland Project Loan......Page 385
C3.3 Designing a Syndication Strategy......Page 392
C3.4 Executing the Syndication Strategy......Page 397
C3.5 Conclusion......Page 399
Glossary and Abbreviations......Page 401
References......Page 417
Index......Page 423