Project Finance Documentationtime . II. Structure 27th Training Program of Asian EXIM Banks Forum on...
Transcript of Project Finance Documentationtime . II. Structure 27th Training Program of Asian EXIM Banks Forum on...
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Project Finance Documentation
27th Training Program of
Asian EXIM Banks Forum
on Project Finance
Colin Gin June 2014
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Project Finance Training
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Project Finance Training
Road Map
I. Overview of Project Finance
II. Structure
III. Factors to Consider Before Preparing Finance
Documentation
IV. Finance Documentation Issues
V. Specific EXIM Bank / IFI Institutional Issues
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I. Overview of Project Finance
27th Training Program of Asian
EXIM Banks Forum on Project
Finance
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Project Finance Training
Why Use Project Finance?
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”
Mark Twain (1835 – 1910)
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Project Finance Training
Why Use Project Finance? (cntd)
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Project Finance Training
Disadvantages of Project Finance
• Cost of finance (interest, fees)
• Inflexibility (clearance from lenders)
• Timing to fruition
• Government and political risks
• Transactional costs
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Target – “Mission Accomplished”
• Finance a good project
• Timely and within budget
• Financing is repaid
• Institutional goals met
• Documents to stand the test of
time
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II. Structure
27th Training Program of Asian
EXIM Banks Forum on Project
Finance
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Project Finance Training
PF Deal
Project Documents Structure
Government Shareholders
Agreement +
Equity Subscription
Agreement
Implementation
Agreement
Power
Purchase
Agreement
Fuel Supply
Agreement
Operation &
Maintenance
Agreement
Subordinated
Debt
Shareholders
Operator Project Company Off-taker
Fuel Supplier Construction
Contractor
EPC Contract
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Project Company -
SPV Individual Lenders
Lenders and Agents &
Security Trustee
Accounts Bank
Loan
Agreements
Accounts
Agreement
Security
PF Deal
Finance Documentation Structure
Common Terms
Agreement
Security Trustee
Shareholders
Sponsor
Support
Agreement
Government EPC Contract Power Purchases Fuel Supplies
Direct Agreement
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Know Your Product (KYP)
Loans
Direct loan: market-based pricing with major international and/or local currencies
B-loan: ADB as Lender of Record (funded by eligible third-party financing)
Unfunded risk participations: fronting arrangement with IFIs and/or commercial banks
Guarantees
Political Risk Guarantee: FX restrictions, expropriation, political violence and contract dispute
Partial Credit Guarantee: non-payment by the borrower of the principal and interest due
Equity Investment
Investment into enterprises: common shares, preferred stock, and/or convertibles
Technical Assistance
Grants to assist the project preparation or capacity building
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III. Factors to Consider When Preparing
Finance Documentation
27th Training Program of Asian
EXIM Banks Forum on Project
Finance
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Don’t start drafting documentation until you know:
Project is viable (technical, economic, political, legal,
E&S)
Experienced management team
Proven technology
Strong economic demand
Social and political support
Excellent partners
Other risks must be manageable
Timetable must be defined
Project must serve a real need!!
Term Sheet?
Is it viable?
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The Importance of Due Diligence
• Due diligence findings translated into term sheet requirements (contingency
sponsor support, additional E&S reports and safeguarding)
• Sometimes walk away from the transaction – integrity due diligence findings,
allegations of corruption, major unresolveable E&S issues
• Sometimes amend underlying documents to allocate risk properly (unfair risk
allocation), eg change of law / political FM risk
• Sometimes restructure the financials of the deal (introduce higher DSCRs,
cash sweep mechanisms, re-leverage D:E ratio)
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Key Issues in Structuring
Many exist, but to name a few:
• D:E ratio – back ended equity
• Development costs/ (fee?)
• Sponsor contingent equity
• Sponsor support release date
• Cash sweeps
• Dividend blocking DSCRs
• EODs and cure periods
• EPC contingency
• LD and liability limits for contractors
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Documenting the Transaction
“Consistency is Key”
• Form of loan agreements and finance
documentation
• AP-LMA based form
• Traditionally not wedded to
templates
• Leaning that way now as the
team grows, younger lawyers in
place
• Provides consistency in approach
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IV. Finance Documentation Issues
27th Training Program of Asian
EXIM Banks Forum on Project
Finance
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Project Finance Training
Finance Documentation -
Common Terms Agreement
- What is it and why do we use it?
- Consistency across all loans (definitions,
disbursement procedures, reps & warranties,
EoDs, boiler-plate, governing law)
- Single point of contact - administrative ease
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Common Terms Agreement
- Issues arising in the CTA
- Disbursements – pro rata vs EXIM Banks tied financing issues
- Mandatory Prepayments - policy issues
- Use of proceeds – differing requirements
- Environmental & Social Safeguards
- Anticorruption provisions
- Preferred Creditor Status (repatriation issues)
- Events of Default – differing requirements
- Governing Law
Project Finance Training
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Project Finance Training
Loan Agreements
- Main terms (loan amount, interest rate, repayment
schedule, fees and anything “bank” specific)
- For IFIs, includes “institutional specific” provisions (E&S,
anticorruption, EoDs)
- Governing law and jurisdiction
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Sponsor Support Agreement
- What this is?
- What types of sponsor support there
are
- Full completion guarantee
- Limited cost overrun support
- Other obligations
- Retention of shareholding
- Ensure debt service reserve
account is full
Project Finance Training
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Sponsor Support Agreement (continued)
- When it falls away
Performance tests under EPC
Lender reliability tests
Permits and approvals
Ratio tests
All financing, project and security documents
No “Material Adverse Effect”
Absence of defaults
Project Finance Training
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Accounts Agreement
- What is it? Where does it fit in?
- Account Bank (onshore and offshore)
- “Cash flow waterfall”
- Sets out the “order” of how project
moneys are “spent” and “reserved for” in
order to meet all project expenses, debt
service and reserve requirements
- Dividend tests prohibit shareholder
distributions unless conditions are met
Project Finance Training
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Security
- Security - understanding the different types of security available for a
typical project finance deal.
- Land mortgages
- Equity pledge
- Security over Accounts and receivables
- Moveables (equipment and assets)
- Project documents
- Insurances
- Quasi-security
- Completion guarantee
- Direct Agreements
- Governing law
Project Finance Training
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Direct Agreements
- Direct Agreements (tri-partite) with counterparties to the project
documents (Concession Agreement, PPA, EPC, O&M, etc)
- What are the objectives?
- Consent to assign by way of security to lenders
- Consent to assign the contract to 3rd party in case of default by the
Project Company
- Additional grace periods before terminating project document
- Step-in rights for lenders
- Clarifications and additional negotiated items for lenders
- Governing law
Project Finance Training
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Inter-Creditor Agreement
- Voting rights based on proportion of
loan size
- Voting thresholds for different
decisions (waivers & amendments,
acceleration, enforcement) –
unanimous/supermajority/simple
majority/unilateral
- Security sharing and turnover
- ADB and other IFI requirements
(unilateral rights), exception to
sharing - preferred creditor status
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IV. EXIM Bank / IFI Institutional Issues
27th Training Program of Asian
EXIM Banks Forum on Project
Finance
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Institutional Specific Requirements
- Procurement – “tied” financing
- Suspended or ceases to be a member of ADB, leads to
cancellation/prepayment
- Safeguards
- Prohibited list
- Anticorruption, anti-money laundering, financing of
terrorism
- Sanctions list
- GAP
- Development Monitoring Framework
- Social Protection Requirements
Project Finance Training
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- Privileges and immunities
- What are they?
- No taxes or duties imposed
- Access to hard currency
- Freedom to repatriate
- Where from?
- Charter
- Statutes in each member country
- Private Sector Framework Agreement / Host Country Agreements
Project Finance Training
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Project Finance Training
Thank you.