Transcript Document

FINANCE 101
AN OVERVIEW OF PROJECT FINANCE
IN PRIVATE-PUBLIC PARTNERSHIPS
PRESENTED BY:
TERRI SMALINSKY
Managing Director
312 596 1582
[email protected]
Presented to National Conference for Private-Public Partnerships
P3 Connect July 28, 2014
B.C. Ziegler and Company | Member of SIPC & FINRA
THREE TYPES OF FINANCINGS ARE TYPICALLY USED
BY GOVERNMENTAL ENTITIES
• Tax supported bonds
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Secured by general credit of the municipality
Obligation to pay from all available resources, usually property and other
taxes and fees
Obligation to pay even if project is never completed or does not operate
• Asset based lending -- municipal leases
– Used primarily for equipment, such as computers or buses
– Secured by a specific asset or receivables
– Also secured by general credit of the municipality
• Enterprise revenue supported bonds
– Supported solely by revenue of the enterprise, such as a water system or
an airport, but not by the assets of the enterprise
– System is owned and operated by the municipality
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ADOPTING A P3 PROJECT FINANCE APPROACH
• Requires the governmental entity to adopt a
partnership and risk sharing approach to
development of infrastructure
Giving up some control of the design, construction,
operation, and financing including a lien on the asset
or the right to use the asset
• In return, enables the governmental entity to
share the risks of the project with the private
sector
Shifts some or all of the risks of design, construction,
operation and financing to a private sector partner
who is better able to manage those risks in return for
a financial return
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BENEFITS OF A P3 PROJECT FINANCE APPROACH
• Using a P3 project finance should achieve a lower
cost and lower risk to the governmental entity
• Isolate the financial risks of the project from the
other operations and assets of the governmental
entity
• Enables the governmental entity to set quality and
performance expectations for the project and let
competing private sector entities propose creative
alternative means of achieving those objectives
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WHAT IS THE “PROJECT” IN A PROJECT FINANCE?
• “Project” in a project financing context is a term with a
more specific meaning than in general use
• A “project” is not just a hard asset
• A “project” generally consists of:
• An asset or group of assets that generate identifiable revenues
from operations
• Includes the legal documents assigning rights to those revenues
to debt and/or equity providers for an extended period of time
• Sometimes includes a lien on the asset or assets
• No financial guarantee or recourse to any person or
corporation, even a 100% owner of the “project”
• The revenue generating asset typically has less asset value
than its ability to generate revenues through its intended use
in place
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PROJECT OWNERSHIP IN A P3 STRUCTURE
• The private sector party will typically be a group of
separate companies each bringing a different set of skills
necessary to accomplish the project’s goals
• These companies will set up a “special purpose entity” or
SPE to be the project owner and enter into a contract
with the governmental entity
• This SPE structure accomplishes two major goals from the
private sector owners’ perspective
• Isolates the financial risks of ownership from the partners in
the “project” thereby limiting their financial risk
• Allocates the risks and benefits of ownership appropriately
among partners in the “project”
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GOVERNMENTAL ENTITY’S ROLE
IN A P3 PROJECT FINANCING
• Governmental entity grants the right to build, own and
operate an infrastructure facility to a private sector party
• A identified asset or group of assets that generate revenues
from operations, existing or to be built
• Legal rights to all of those revenues and obligation to pay
expenses
• May or may not include actual ownership of the asset(s),
but always includes the right to use and operate the
assets
• Equally important, the governmental entity sets the
performance requirements for the facility, and penalties
for non-performance
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TYPICAL CONTRACTS IN A PROJECT FINANCING
• Contract with the public sector entity to construct,
finance and operate asset(s)
• An agreement among the SPE partners controlling
governance of the SPE, such as capital contributions,
ownership shares and voting rights
• Construction contract between the SPE and a construction
contractor (which may be a partner in the SPE) typically
guaranteeing a fixed price and schedule
• An operating agreement with a company experienced in
operating the asset (which may be a partner in the SPE)
• Loan documents, typically assigning all rights of the SPE
to own, construct and operate the asset(s) as collateral,
including the ownership interests in the SPE
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TYPICAL PROJECT FINANCING
SPE CONTRACT STRUCTURE
Governmental
Entity
Operating
Company
Agreement
Feedstock
Agreements
SPE
Offtake
Agreements
Construction
Agreements
Financing
Agreements
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SPE FLOW OF FUNDS IN A PROJECT FINANCE
• Lenders will typically want all revenues of the project to
be held by trustee
• The trust indenture (or loan agreement) is the contract to
repay the debt, and will establish priority of usage of the
revenues as they are received
1. Operations and Maintenance
2. Debt Service
3. Capital Replacement Reserve
4. Debt Service Reserve
5. Distributions to equity
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SPE LOAN COVENANTS
• Trust indenture/loan agreement will also contain
covenants that the SPE is obligated to meet
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Debt Service Coverage ratio
Annual audits
Insurance requirements
Performance obligations
• It also specifies events of default, and remedies available
to the lender in the event of default
– Cure periods for certain defaults
– Step-in rights
– Sale of assets or the SPE
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LENDER RIGHTS IN A PROJECT FINANCE
Among the most difficult areas of discussion between
public and private sector parties in a P3, because the
governmental entity often wants to be the party to
reclaim the project in the event of default
• However, the lender will want right to foreclose and to
“step-in” to the rights of the SPE if the SPE defaults on
the loan, including all rights to operate and receive
revenue from the project asset
• Typically, lender will want the right to replace the
construction company and/or operator
• May or may not also have the right to foreclose on the
asset itself
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LENDER RIGHTS IN A PROJECT FINANCE
• Will also want the right to sell the ownership of the SPE,
including all of the rights of the SPE under the P3
contract, in the event of a default
• Especially important if the asset is a single purpose asset
(i.e. a highway or a hospital)
• The value of the physical asset would generally not be
sufficient for the lender to recoup its losses
• The value is in the legal agreement giving the SPE the
right to build/operate the asset
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TYPICAL PROJECT FINANCE CAPITAL
STRUCTURE COMPONENTS IN P3 PROJECTS
Equity
Senior Debt
Subordinated Debt
Leases
State Grants and/or loans
Federal Grants and/or loans
Public Sector Contribution
Tax Equity
Tax Credits (Low Income Housing, New Markets)
EB-5 Equity
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SHARING AND MITIGATING PROJECT FINANCE RISKS
Risk
 Technology
Mitigation
 Warranties on equipment
 Design and installation expertise
 Renewal and Replacement Reserve for post warranty
period
 Operations & Management
 Financial
 Experienced operators for the specific project type
 Requirements for ongoing maintenance
 Performance requirements
 Offtake and feedstock agreements
 Trusteed revenues and cash traps
 Insurance covers damage and destruction, theft and
business interruption
 Construction
 Experienced contractor
 Fixed price construction contract
 Performance bond
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