Transcript Project Finance Presentation

Project Finance
ICAM Conference September 2014
Presented by Audrey Mwala, Director Project
Finance & Risk Analysis, The PPPC
7/21/2015
1
In SADCs to spend
US$64bn between
2013 to 2017
Source: SADC Short-term Plan 2013 – 17
7/21/2015
Presented by Audrey Mwala, Director Project Finance & Risk Analysis,
The PPPC
2
• Infrastructure demand
growth rate >
traditional finances
• Traditional finance not
enough for operations
• Need for Project
Finance
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
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Definition
by E. R. Yescombe, 2007
Means of raising long term non-recourse debt
financing for major projects based on lending
against the project’s future cash flows and depends
on a detailed evaluation of project’s construction,
operating and revenue risks, their allocation
between the investors, lenders and other parties
through contractual and other arrangements.
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
4
Corporate Finance
Trend Analysis
7/21/2015
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Loan against exiting balance sheet
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A going concern status
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Extrapolate from past performance
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Management has full control
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Recourse to company balance sheet;
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
5
Sovereign Finance
• Government borrows to finance public
infrastructure.
• Govt. may contribute its own equity
• Analyze govt.’s ability to raise funds
• Shows up as a liability on Government
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
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Angel Finance
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7/21/2015
Rich individuals or a group
Retired entrepreneurs or executives
Seed capital
Management advice & contacts
Bear extremely high risks
A higher reward
Invest beyond monetary return
Equity or convertible debt
A defined exit strategy
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
7
Structured Finance
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Existing Company borrows
Finance brown field project
Full recourse on borrower
Creditworthiness - historical &
future
Limited security perfection
Pay interest in construction
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
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Project Finance
• High upfront capital intensive
assets, long lives.
• Greenfield project
• Used in most PPP’s
• Special Purpose Vehicle borrows
• Highly leveraged structure
• Non or limited recourse
• Bankability- NPV of future cash
flows
• Capitalise interest in construction
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
9
Financing Agreement
• Disbursements-lender’s consent.
• Lenders monitoring
• Step in rights
• In large projects financiers
appoint manager
• Lien-project assets, paid from
project cash flows
• Debt repaid before the end of
project life.
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
10
Typical Stages in Project Finance
Preliminary negotiations (Business Plan, Cash flow projections
Stage Due diligence (affordability, technical, Economic, Environmental, legal, financial,
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commercial)
Procurement/Bidding
Contract negotiations
Stage Contract Signing
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Financial closure (Sale and Purchase Agreement, concession,
Construction, FM agreement, Conditions precedent, Architects, Contractors,
Project Management team, Marketing team)
Stage
3
7/21/2015
• Construction
• Service delivery
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
11
Project Finance Pricing
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During Construction Period: LIBOR + X%
During Project Operation: LIBOR + X% -1%
Typical Upfront Fees : X
Arrangement Fee – Once off
Documentation Fees
• Legal Fees
• Commitment Fees –X% p.a. on undrawn amount ™
• Administration Fees
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
12
The Cash flow waterfall
• Construction, operating and
maintenance expenditure
• Principal &Interest senior debt
• Senior debt service reserve
account
• Interest subordinated debt
• Principal on subordinated debt
• Maintenance Reserve Account
• Shareholder subordinated loans
• Distributions to shareholders
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
13
The Cash flow Waterfall
DSCR =
Revenue
EBITDA
----------------=>1.5
Debt Service
Operating Income or
EBITDA
O&M
Expenses
7/21/2015
Debt Payment
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
Taxes
Profit
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Key Ratios (negative covenants)
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Debt Service Cover Ratio (“DSCR”)
Loan Life Cover Ratio (“LLCR”)
Project Life Cover Ratio (“PLCR”)
Cash flow waterfall priority
Major Maintenance reserve
account >X
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
15
Financial Modeling
• Lending based on financial
modeling of investment, cost &
revenues.
• bankability based on key
assumptions
• Sensitivity & scenario analysis
used to draw the comfort lines
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
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Key Inputs of a financial model
• Project duration
• Initial Capital plus
additional capital
Demand volume
• Price
• Unit cost
• Overheads
• Inflation
• Discount rate- Cost of
total capital
• Interest rate
• Debt repayment
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
17
Special Purpose Vehicle
• A special entity created for project, shields other
sponsor’s assets from project failure.
• Has no assets besides the project.
• Sponsors capital contribution assures lenders of the
sponsors' commitment.
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
18
Special Purpose Vehicle
Project
sponsors
Contracting Authority
Marriage
contract
f
e
e
s
Contract
Monitoring
Unitary
payments
The Special
Purpose Vehicle
Payment
Construction
firm
Government
contracted
certifier
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The
PPPC
7/21/2015
19
Sources of Project Finance
• Equity- for new or same line of business
– Pure equity or Quasi equity, Preferred equity, Shareholder loans
• Pension funds- matches with pension obligations
• A 'syndicate' of lending institutions
– Senior debt, Second lien debt, Mezzanine debt, Convertible debt
• Bank loans (usually short term)
• Construction companies @ risk capital
• Infrastructure Bonds- based on project cash flows
• Revenue Bonds- used by municipals
• Securitization – receivables used to float a bond
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
20
Project Financing Risks
• Infrastructure projects are inherently risky.
• A project may be subject technical,
environmental, economic and political risks.
• Risk identification and allocation is a key.
• Project financing is distributed among
multiple parties, so as to distribute the
project risk.
• Financiers institutions at times conclude that
the risks in a project are unbankable
• Riskier projects may require limited recourse
financing, a surety from sponsors
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
21
Risk Allocation
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
22
Affordability
Public Sector Base
Comparator
• Hypothetical, risk-adjusted,
cost of govt. doing a
project.
• Expressed in present value
• Testing private party bid for
value for money.
• Helps to ascertain full life
cycle cost of the project.
7/21/2015
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Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
PV of Govt.’s
future revenue :
equals or
exceeds present
value of future
capital & current
expenditure
Whole life cycle
costs
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Present Value of O & M
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
24
Risk Impact Assessment
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
25
Risk Probability
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
26
Value for Money
• Present Value of PSC less Risk adjusted private bid
• Monitor VM during tender, construction & Service
delivery
Develop a
PSC
Develop a
Shadow
bid
Compare
with
shadow
price
If PSC
price>
shadow
bid, then
proceed
to
tender
Compara
tor bid
price
with PSC
Monitor the
value for
money
throughout
the project
life
• Significant shift of VM might be ground for
renegotiation
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
27
Value for Money assessment
Value for Money=
• NPV of PSC $149.9m less
• NPV of PPP bid $121.1m = $28.8m
7/21/2015
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC
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Summary
$170
$14.9m
$149.9
$100
7/21/2015
$28.8m
$135
$121.1
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC
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Thank you for your Attention
7/21/2015
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
30