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Project Financing

Project Financing. Prof. Ian GIDDY Stern School of Business New York University. Asset-Backed and Project Financing. Collateralized debt Securitized loans Non-recourse project debt

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Project Financing

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  1. Project Financing Prof. Ian GIDDY Stern School of Business New York University

  2. Asset-Backed and Project Financing • Collateralized debt • Securitized loans • Non-recourse project debt • Basic question: Why should a company segregate the cash flows from a particular business, and make it self-financing?

  3. Project Financing • Stand-alone, non-recourse, multi-stake, "production payment financing" • Structure? • Participants? • Funding sources? • Risks?

  4. Project Financing (Summary) • Stand-alone, non-recourse "production payment financing" • Sponsor's vehicle company structures multi-stake finance • Sources: govt development financing, IBRD/IFC, sponsor loans, supplier credits, customer credits, institutional investors, banks, lease financing, equity • Risks: resource quantity, input costs, technical, timing, pre-completion, demand, operating, force majeure, political • Risk sharing and mitigation

  5. Financing Sources Sponsor • Loans • Equity

  6. Financing Sources Stakeholder credits • Suppliers • Purchasers Sponsor • Loans • Equity

  7. Financing Sources Stakeholder credits • Suppliers • Purchasers Sponsor • Loans • Equity Gov’t Development Banks, IBRD/IFC, Eximbanks

  8. Financing Sources Banks, Institutional Investors, Leasing Companies Stakeholder credits • Suppliers • Purchasers Sponsor • Loans • Equity Gov’t Development Financing, IBRD/IFC, Eximbanks

  9. Project Financing Definition • Lendingto a single purpose entity for the acquisition and /or construction of a revenue-generating asset with limited or no recourse to the sponser • Repaymentof the loan is solely from the revenues generated from operation of the asset owned by the entity • Securityfor the loan • the revenue generating asset • all shares and interests in the entity • real property • all contacts, permits • authorizations, etc.; and, • all other instruments necessary for continuing project operations Steps Project Identification & Resource Allocation Risk Allocation & Project Structuring Bidding & Mandating Contracts Due Diligence & Documentation Execution & Monitoring Construction Monitoring Term Loan Conversion & Ongoing Monitoring

  10. Benefits of Project Financing • Limitation of Equity Investment to Project’s Economic Requirement - Enhanced Returns • Risk Sharing and Diversification • Accounting Treatment Preserves Corporate Borrowing Capacity • Access to Long Term Financing • Tax Benefits • Political Risk Mitigation

  11. Sponsors / Shareholders SINGLE PURPOSE PROJECT COMPANY Syndicate Equipment Banks Supplier Feed Stock (e.g., fuel) Supplier Sample Structure Arranging Bank Warranties and Offtake (e.g, power purchase) Agreement Supply Agents Turnkey Contractor Construction Other Project Participants: Currency and Interest Rate Hedge Providers Multilaterals and EDA’s Legal Counsel Technical Consultants Long Term Agreement Purchaser Operator Operations & Maintenance Mgmt

  12. Don Pedro Hydro • What is typical about this project financing? • What is special about this project financing? • Explain how it is possible for this to be financed with an 81/19 debt-equity ratio, even though the debt is in dollars and the revenues are in local currency.

  13. Wednesday: Equity Financing Techniques Deutsche Telekom Mount Cameroon Ecotours Telkom SA

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