Financing PPPs: Project Finance

June 2006
P. 2
Index
Section I. Project Finance
Section II. Spanish Market Advantages
Section III. Risk Matrix
Project Finance
Section I
Project Finance
P. 4
Definition
Definition: A form of financing projects, primarily
based on claims against the financed asset or
project rather than on the sponsor of the project.
However, there are varying degrees of recourse
possible. Repayment is based on the future cash
flows of the project.
Seccin I
Project Finance
P. 5
Principal Participants in a Project Finance
Sponsors
national
Sponsors
international
Government
Banks
National Banks
Monolines
International
Banks
Capital Markets
Project Finance
Seccin I
P. 6
Financing Structure
Shareholders
Construction
Joint Venture
Operating Company
Capital Dividends +
interest
Principal
+ Interest
Payment
Payment
CV + CF
Insurance company
Service supplier 1 Service supplier 3 Service supplier 3 Service supplier n
Service
Contracts
Project Company
(SPV)
Administration Banks
Concession
Agreement
Financial
contracts
Construction
Contract
Operating &
Maint.
Contract
Project Finance
Seccin I
P. 7
Calendar
Feasibility Study
Contracts & Risk management
Economic analysis and Financing
structure
Financial Advisor: Banks
Financial Structure
Phase I
Risk analysis
Phase II
Financial closing
Phase III
Term Sheet & IM
Arrangers: Term Sheet &
Contracts negotiation
Financial closing
Participants: Syndication
Process duration: 4 months
Project Finance
Seccin I
P. 8
Financial institution rules
Financial Underwriting
Funding in the Capital Markets
Other financial facilities: bridge, RCF,
Possibility of equity investments
Arrangement/Financing
Tender preparation
Advisory to the Sponsors
Feasibility study of the project
Risk analysis
Optimum economic, legal and tax structure
Other sponsor research
Legal structure
Coordination between different participants
Project presentation in the Capital Markets
Negotiation with the financial institutions
Advisory
Seccin I
Project Finance
P. 9
Volume of operations
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
UK USA Australia Italy China Indonesia Brazil
U
S
D

M
l
l
Spain Japan Mxico
Volume operations (2004)
Dealogic
Seccin I
Project Finance
P. 10
Financing tools
Bank financing
No bank financing
Securitization
Bonds
Seccin I
Project Finance
P. 11
Bank Financing (I)
Main financial source
Debt with SPV. Operative relationship with the sponsors, no financial relationship.
High leverage ratios.
Long repayment terms. Taking into account Cash Flows
It is out of the balance financing for the sponsors, no effect in rating
Pricing: Interest rate + margin
Reference rate: DSCR
Seccin I
Project Finance
P. 12
The Financial model is the main tool to obtain the economic analysis and the financing structure.
Main ratios to measure project capacity to face debt obligations:
Interest Coverage Ratio
(ICR)
Cash Flow available for debt service
Interest
Debt Service Coverage
Ratio (DSCR)
Cash Flow available for debt service
Debt service (principal, interest & commissions)
Loan Live Coverage
Ratio (LLCR)
NPV of Cash Flows available for debt service (during debt) discounted at debt rate
Outstanding debt
Seccin I
Project Finance
Bank Financing (II)
P. 13
Leverage and Term
Debt / Equity vs term
IPP Spain (1)
x
D
e
b
t
/
E
q
u
i
t
y
Total term
40
50
60
70
80
90
0 10 15 20 25 30
Wind USA
x
Roads USA
x
Wind Spain
x
Underground
Spain
x
Roads Ireland
x
UK PPPs
x
Ports Spain
x
Seccin I
Project Finance
P. 14
Non Bank Financing
The process of aggregating credit rights of the concessionaire, mainly right to collect tolls, revenues of the
commercial areas and payments of the Administration into a negotiable security.
Risk transfer to the investor.
Different terms.
Widely used in the international markets. No in Spain
Advantages: cheaper financing cost and flexibility.
Securitization
Seccin I
Project Finance
P. 15
As the borrower is a SPV, the risk profile is complicated and not attractive for the bond market.
This type of financing is used with a Monoline guaranty
In Spain it has been used just in the Autova de los vierdos and M-45
Bonds
Seccin I
Non Bank Financing
Project Finance
Project Finance
Section II
Spanish market advantages
P. 17
The main differences with the UK model Spanish Market
UK
SPAIN
Concession Grant
Initial competition
Concession terms negotiation
Initial competition
Initial terms stated and
then negotiation
Financial Close prior to
concession grant
Financial Close once the
Concession is granted
Fixed from the beginning
Binding terms
Financing
Section II
P. 18
Advantages of the Spanish Legal Framework Spanish Market
Legal framework helps to structure
different financial schemes
Asset Responsibility
Economic + Financial
Equilibrium
Section II
Project Finance
Section III
Risk Matrix
P. 20
Main risks Risk Matrix
Building & Operational Risk:
Building
Demand
Operating
Financial Risk
Section III
P. 21
Risk mitigation
Cost Construction Contract Fixed price
Delay Construction Contract Penalty clause
Technical performance Construction Contract Penalty clause
Operating Operation Contract Technical advisor will control the operation
Traffic Concession contract Fix tariff
Tariff / Law Concession contract Tariff will compensate traffic and law changes
Force Majeure Concession contract Concession agreement will cover these risk
Political risk Concession contract Concession agreement will cover these risk
Contracts will provide mechanisms to mitigate the risk:
Mitigation mechanism Contract
Contractual structure & risk mitigation
Risk:
Section III
Risk Matrix
P. 22
Other risk mitigations
Sponsors Technical & Financial solvency.
Due diligence.
EPC Contract.
Long warranty periods.
Penalty clauses.
Operating & Maint. Contract.
Extension definition.
Length.
Cost limits.
Section III
Risk Matrix
P. 23
Advisors & Insurance Program
Insurance program
External Advisors
Traffic Advisor
Insurance Advisor
Legal Advisor
Technical Advisor
Audit Advisor
Construction
Operating
Damages
ALOP
Civil liability
ALOP
Civil liability
Force Majeure
Section III
Risk Matrix