The chapter explores how financial model is used by investors to evaluate their returns. An adequ... more The chapter explores how financial model is used by investors to evaluate their returns. An adequate financial model is an essential tool for financial evaluation of the project. The financial model covers the whole of the project company's operations, not just the project, and thus takes into account tax and accounting issues that may affect the final cash flow of the project company. Although separate and parallel financial models may be developed by the sponsors and the lenders, it is often more efficient for a single model to be developed jointly. This means that the sponsors develop the model initially and then work on it jointly with the lenders, depending on the timing of the lenders' involvement in the project. The sponsors may then use the model to calculate their own returns, taking into account the ownership structure of the project company, the results of which are not of concern to the lenders.
The second edition of this best-selling introduction for practitioners uses new material and upda... more The second edition of this best-selling introduction for practitioners uses new material and updates to describe the changing environment for project finance. Integrating recent developments in credit markets with revised insights into making project finance deals, the second edition offers a balanced view of project financing by combining legal, contractual, scheduling, and other subjects. Its emphasis on concepts and techniques makes it critical for those who want to succeed in financing large projects. With extensive cross-references, a comprehensive glossary, and online spreadsheets that follow its chapters, this new edition presents a new guide to the principles and practical issues that can commonly cause difficulties in commercial and financial negotiations. Provides a basic introduction to project finance and its relationship with other financing techniques Describes and explains: sources of project finance typical commercial contracts (e.g., for construction of the proj...
Publisher Summary This chapter discusses the macroeconomic risks, namely inflation, interest rate... more Publisher Summary This chapter discusses the macroeconomic risks, namely inflation, interest rate, and currency exchange rate movements. Inflation may be either a risk or a benefit to a project company. The construction costs should not be vulnerable to inflation-based increases; the engineering, procurement and construction (EPC) contract price, financing costs, and most advisers' costs should all be fixed. In preparing the construction cost budget, however, an allowance has to be made for inflation over the construction period in costs that are not fixed, such as the project company's general personnel costs, and purchase of any items not included in the scope of the EPC contract. In many markets, bank lenders do not provide long-term loans at fixed rates because their deposit base is short-term, and fixed-rate long-term funding is either unavailable or uneconomic. The base interest rate on project finance loans is thus often adjusted at intervals to the then current wholesale market rate at which the lenders raise their funding, and is therefore on a floating (variable) rate rather than fixed-rate basis. Currency exchange rate risks may exist during both the construction and operating phases of the financing. During the construction phase, if costs are in one currency and funding in another, the Project Company is exposed to the risk that the currency in which the costs are being incurred may appreciate.
This chapter reviews the main building blocks of information and assumptions used for projections... more This chapter reviews the main building blocks of information and assumptions used for projections that are assembled to create inputs for a project’s financial model (§13.2), namely: macro-economic assumptions (§13.3); project costs and funding (§13.4); operating revenues and costs (§13.5); accounting and taxation assumptions (§13.6). The final model outputs (§13.8) will confirm the viability (or otherwise) of the project from the point of view of investors (and in the case of a process-plant or infrastructure project the costs to the Offtaker/Contracting Authority, or users). Lenders use the model to carry out sensitivity calculations to ensure that their loan is not unduly at risk in downside scenarios (§13.9). The final version of the model as at Financial Close is known as the ‘Base Case’ (§13.10). The Base Case continues to be used by the lenders and the Project Company after Financial Close (§13.11).
This chapter covers financial support to projects from Contracting Authorities or other governmen... more This chapter covers financial support to projects from Contracting Authorities or other government entities in the Host Country. Cross-border support provided by ECAs and DFIs is discussed in Chapter 16. Some form of indirect public-sector financial support is found in many projects (§15.2), but this chapter deals with direct financial support in various ways (§15.3), through public-sector loans (§15.4–§15.9), grants (§15.10–§15.13), debt guarantees (§15.14–§15.14) and revenue support (§15.18–0), as well as the use of a public-sector Project Company (§15.20). A government may also set up a guarantee fund, to provide investors and lenders with more certainty that there will be funds available to meet guarantee obligations (§15.21).
The Project Contracts provide a basis for the Project Company’s construction and operation of the... more The Project Contracts provide a basis for the Project Company’s construction and operation of the project. The most important of these is the Project Agreement (i.e. the contract that provides the framework under which the Project Company obtains its revenues). The Sub-Contracts which make up the rest of the Project Contracts are discussed in Chapter 8. A preliminary clarification: expressions such as BOT, DBFO, and so on are rather confusing, and overlap with each other. There is no need to use these terms (§6.2). There are three main models for a Project Agreement: (1) an Offtake Contract (i.e. a process-plant project), under which the Project Company produces a product and sells it to an Offtaker (§6.3); (2) an Availability-based Contract (i.e. one based on the PFI Model), where a Contracting Authority pays a Project Company for making the project available for use (§6.4); (3) a Concession Agreement, under which the Project Company provides a public service, and collects User Charges for doing so (§6.5). The confusing list of ‘PPP-like’ contracts, which are often counted as PPPs, but most of which do not require project finance, is reviewed in §6.6.
Export-Credit Agencies and Development-Finance Institutions
Principles of Project Finance, 2014
This chapter covers the types of cross-border support which may be available for projects, especi... more This chapter covers the types of cross-border support which may be available for projects, especially in developing countries. There are three main sources of such support: (1) export-credit agencies, which provide loans, or financial- or political-risk insurance or guarantees, for exports of capital equipment to projects outside the country concerned (§16.2); ECAs also provide political-risk cover for investors—but obviously not cover for commercial risks (§16.3). (2) bilateral DFIs, which provide ‘untied’ loans, or political-risk insurance or guarantees, generally for projects outside the country concerned (i.e. not linked to specific exports from the country concerned); these frequently work with their national ECAs; these may include both development agencies which also provide aid, as well as development-finance institutions or funds; the various types of support offered by the leading ECAs and bilateral DFIs are discussed in §16.4. (3) multilateral DFIs—these provide support for all types of projects, mainly but not entirely in developing countries (§16.5).
Apart from the financial structuring and modeling issues discussed in Chapter 12 and Chapter 13, ... more Apart from the financial structuring and modeling issues discussed in Chapter 12 and Chapter 13, the loan documentation also deals with the lenders’ additional controls and other requirements which will be imposed on the Project Company, as dealt with in this chapter. The end result is a loan agreement to which the Project Company and the lenders are parties, and ancillary security documentation. The terms are commonly set out at first in a term sheet (§14.2), before being negotiated in detail (§14.3–§14.15). This chapter also covers two other key topics for the Project Company’s investors, which typically arise once the project is completed and operating—refinancing the Project Company’s debt (§14.16) and sale of its equity to secondary investors (§14.17).
The active equity investors in a project are usually referred to as the Sponsors, meaning that th... more The active equity investors in a project are usually referred to as the Sponsors, meaning that their role is one of promotion, development, and management of the project. Even though the project finance debt may be nonrecourse (have no guarantees from the Sponsors), their involvement is important. One of the first things a lender considers when deciding to participate in a project financing is whether the Sponsors of the project are appropriate parties. Lenders normally require the original Sponsors of the project to retain their shareholdings at least until the construction of the project is complete and it has been operating for a reasonable period of time; otherwise the perceived benefits of the particular Sponsors being involved in the project would be lost. Lenders are uneasy if a significant share of the equity in a project is held by passive investors who take no active role in its promotion, development, or operation, although this concern reduces when the project has been built and is seen to be operating successfully.
Publisher Summary This chapter highlights the procedures for raising project finance from private... more Publisher Summary This chapter highlights the procedures for raising project finance from private-sector lenders, particularly commercial banks and bond investors. Most commercial banks in the project finance field have specialist departments that work on putting project finance deals together. Project finance is a time-consuming process for banks and uses well-qualified and therefore expensive staff; some past market leaders withdraw from the business if the bank comes to the decision that a better return on capital can be obtained from other types of structured finance or from concentrating on retail banking. Therefore, projects need to be of a reasonable minimum size to provide banks with enough revenue to make the time spent on them worthwhile. Arranging debt for a project much under, say, $25 million, is unlikely to be economic, and most major banks would prefer to work on projects of, say, $100 million or more. Investors in bonds generally do not get directly involved in the due-diligence process to the extent that banks do, and rely more on the project's investment bank and a ratings agency to carry out this work.
This chapter sets out the basic structure of the service-fee payment mechanism for a public-priva... more This chapter sets out the basic structure of the service-fee payment mechanism for a public-private partnership (PPP) contract, i.e. contracting for outputs; service-fee payment structure; start date for payments; structuring service fees based on: usage/demand, availability/service or mixed usage and availability; dealing with third-party revenues. Chapter 16 deals with events that may give rise to a change in the PPP contract and Chapter 17 with termination provisions.
The chapter explores how financial model is used by investors to evaluate their returns. An adequ... more The chapter explores how financial model is used by investors to evaluate their returns. An adequate financial model is an essential tool for financial evaluation of the project. The financial model covers the whole of the project company's operations, not just the project, and thus takes into account tax and accounting issues that may affect the final cash flow of the project company. Although separate and parallel financial models may be developed by the sponsors and the lenders, it is often more efficient for a single model to be developed jointly. This means that the sponsors develop the model initially and then work on it jointly with the lenders, depending on the timing of the lenders' involvement in the project. The sponsors may then use the model to calculate their own returns, taking into account the ownership structure of the project company, the results of which are not of concern to the lenders.
The second edition of this best-selling introduction for practitioners uses new material and upda... more The second edition of this best-selling introduction for practitioners uses new material and updates to describe the changing environment for project finance. Integrating recent developments in credit markets with revised insights into making project finance deals, the second edition offers a balanced view of project financing by combining legal, contractual, scheduling, and other subjects. Its emphasis on concepts and techniques makes it critical for those who want to succeed in financing large projects. With extensive cross-references, a comprehensive glossary, and online spreadsheets that follow its chapters, this new edition presents a new guide to the principles and practical issues that can commonly cause difficulties in commercial and financial negotiations. Provides a basic introduction to project finance and its relationship with other financing techniques Describes and explains: sources of project finance typical commercial contracts (e.g., for construction of the proj...
Publisher Summary This chapter discusses the macroeconomic risks, namely inflation, interest rate... more Publisher Summary This chapter discusses the macroeconomic risks, namely inflation, interest rate, and currency exchange rate movements. Inflation may be either a risk or a benefit to a project company. The construction costs should not be vulnerable to inflation-based increases; the engineering, procurement and construction (EPC) contract price, financing costs, and most advisers' costs should all be fixed. In preparing the construction cost budget, however, an allowance has to be made for inflation over the construction period in costs that are not fixed, such as the project company's general personnel costs, and purchase of any items not included in the scope of the EPC contract. In many markets, bank lenders do not provide long-term loans at fixed rates because their deposit base is short-term, and fixed-rate long-term funding is either unavailable or uneconomic. The base interest rate on project finance loans is thus often adjusted at intervals to the then current wholesale market rate at which the lenders raise their funding, and is therefore on a floating (variable) rate rather than fixed-rate basis. Currency exchange rate risks may exist during both the construction and operating phases of the financing. During the construction phase, if costs are in one currency and funding in another, the Project Company is exposed to the risk that the currency in which the costs are being incurred may appreciate.
This chapter reviews the main building blocks of information and assumptions used for projections... more This chapter reviews the main building blocks of information and assumptions used for projections that are assembled to create inputs for a project’s financial model (§13.2), namely: macro-economic assumptions (§13.3); project costs and funding (§13.4); operating revenues and costs (§13.5); accounting and taxation assumptions (§13.6). The final model outputs (§13.8) will confirm the viability (or otherwise) of the project from the point of view of investors (and in the case of a process-plant or infrastructure project the costs to the Offtaker/Contracting Authority, or users). Lenders use the model to carry out sensitivity calculations to ensure that their loan is not unduly at risk in downside scenarios (§13.9). The final version of the model as at Financial Close is known as the ‘Base Case’ (§13.10). The Base Case continues to be used by the lenders and the Project Company after Financial Close (§13.11).
This chapter covers financial support to projects from Contracting Authorities or other governmen... more This chapter covers financial support to projects from Contracting Authorities or other government entities in the Host Country. Cross-border support provided by ECAs and DFIs is discussed in Chapter 16. Some form of indirect public-sector financial support is found in many projects (§15.2), but this chapter deals with direct financial support in various ways (§15.3), through public-sector loans (§15.4–§15.9), grants (§15.10–§15.13), debt guarantees (§15.14–§15.14) and revenue support (§15.18–0), as well as the use of a public-sector Project Company (§15.20). A government may also set up a guarantee fund, to provide investors and lenders with more certainty that there will be funds available to meet guarantee obligations (§15.21).
The Project Contracts provide a basis for the Project Company’s construction and operation of the... more The Project Contracts provide a basis for the Project Company’s construction and operation of the project. The most important of these is the Project Agreement (i.e. the contract that provides the framework under which the Project Company obtains its revenues). The Sub-Contracts which make up the rest of the Project Contracts are discussed in Chapter 8. A preliminary clarification: expressions such as BOT, DBFO, and so on are rather confusing, and overlap with each other. There is no need to use these terms (§6.2). There are three main models for a Project Agreement: (1) an Offtake Contract (i.e. a process-plant project), under which the Project Company produces a product and sells it to an Offtaker (§6.3); (2) an Availability-based Contract (i.e. one based on the PFI Model), where a Contracting Authority pays a Project Company for making the project available for use (§6.4); (3) a Concession Agreement, under which the Project Company provides a public service, and collects User Charges for doing so (§6.5). The confusing list of ‘PPP-like’ contracts, which are often counted as PPPs, but most of which do not require project finance, is reviewed in §6.6.
Export-Credit Agencies and Development-Finance Institutions
Principles of Project Finance, 2014
This chapter covers the types of cross-border support which may be available for projects, especi... more This chapter covers the types of cross-border support which may be available for projects, especially in developing countries. There are three main sources of such support: (1) export-credit agencies, which provide loans, or financial- or political-risk insurance or guarantees, for exports of capital equipment to projects outside the country concerned (§16.2); ECAs also provide political-risk cover for investors—but obviously not cover for commercial risks (§16.3). (2) bilateral DFIs, which provide ‘untied’ loans, or political-risk insurance or guarantees, generally for projects outside the country concerned (i.e. not linked to specific exports from the country concerned); these frequently work with their national ECAs; these may include both development agencies which also provide aid, as well as development-finance institutions or funds; the various types of support offered by the leading ECAs and bilateral DFIs are discussed in §16.4. (3) multilateral DFIs—these provide support for all types of projects, mainly but not entirely in developing countries (§16.5).
Apart from the financial structuring and modeling issues discussed in Chapter 12 and Chapter 13, ... more Apart from the financial structuring and modeling issues discussed in Chapter 12 and Chapter 13, the loan documentation also deals with the lenders’ additional controls and other requirements which will be imposed on the Project Company, as dealt with in this chapter. The end result is a loan agreement to which the Project Company and the lenders are parties, and ancillary security documentation. The terms are commonly set out at first in a term sheet (§14.2), before being negotiated in detail (§14.3–§14.15). This chapter also covers two other key topics for the Project Company’s investors, which typically arise once the project is completed and operating—refinancing the Project Company’s debt (§14.16) and sale of its equity to secondary investors (§14.17).
The active equity investors in a project are usually referred to as the Sponsors, meaning that th... more The active equity investors in a project are usually referred to as the Sponsors, meaning that their role is one of promotion, development, and management of the project. Even though the project finance debt may be nonrecourse (have no guarantees from the Sponsors), their involvement is important. One of the first things a lender considers when deciding to participate in a project financing is whether the Sponsors of the project are appropriate parties. Lenders normally require the original Sponsors of the project to retain their shareholdings at least until the construction of the project is complete and it has been operating for a reasonable period of time; otherwise the perceived benefits of the particular Sponsors being involved in the project would be lost. Lenders are uneasy if a significant share of the equity in a project is held by passive investors who take no active role in its promotion, development, or operation, although this concern reduces when the project has been built and is seen to be operating successfully.
Publisher Summary This chapter highlights the procedures for raising project finance from private... more Publisher Summary This chapter highlights the procedures for raising project finance from private-sector lenders, particularly commercial banks and bond investors. Most commercial banks in the project finance field have specialist departments that work on putting project finance deals together. Project finance is a time-consuming process for banks and uses well-qualified and therefore expensive staff; some past market leaders withdraw from the business if the bank comes to the decision that a better return on capital can be obtained from other types of structured finance or from concentrating on retail banking. Therefore, projects need to be of a reasonable minimum size to provide banks with enough revenue to make the time spent on them worthwhile. Arranging debt for a project much under, say, $25 million, is unlikely to be economic, and most major banks would prefer to work on projects of, say, $100 million or more. Investors in bonds generally do not get directly involved in the due-diligence process to the extent that banks do, and rely more on the project's investment bank and a ratings agency to carry out this work.
This chapter sets out the basic structure of the service-fee payment mechanism for a public-priva... more This chapter sets out the basic structure of the service-fee payment mechanism for a public-private partnership (PPP) contract, i.e. contracting for outputs; service-fee payment structure; start date for payments; structuring service fees based on: usage/demand, availability/service or mixed usage and availability; dealing with third-party revenues. Chapter 16 deals with events that may give rise to a change in the PPP contract and Chapter 17 with termination provisions.
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