Principles of Project FinanceBy
- E. R. Yescombe
- E. R. Yescombe
This introduction for practitioners offers a balanced view of project financing, integrating legal, contractual, scheduling, and other areas that participate in large multiparty projects, large single-asset purchases, and broad-based financing programs for fleets of assets. It mixes theories and case studies but avoids becoming too oriented toward applications in any one particular industry. It focuses on the concepts and techniques required by project finance people without being overly academic or beset by case studies. The author, who has a legal background, recognizes that some legal information is necessary, but he doesn't attempt to write a law book.Project Finance refers to the techniques of financing projects which are dependent on cash flows for repayment, as defined by the contractual relationships within each project. By their very nature, these types of projects rely on a large number of integrated contractual arrangements for successful completion and operation. Project finance is an element within the larger field of project management. Many organizations around the world utilize project management to enable innovative processes, to plan, organize, and control strategic initiatives, to monitor enterprise performance, to analyze significant deviations, and to forecast their impact on the organization and project(s). Project management can be found in many industries today, from construction and information systems to healthcare, financial services, education, and training.
Professionals (bankers, members of various financial institutions-venture capital, the capital markets, international fund groups-as well as attorneys, various government regulators, and project finance professionals) who want a broad, high-level overview of project finance concepts and techniques. Graduate students and students enrolled in post-graduate or professional-level private courses on project financing.
Published: June 2002
Imprint: Academic Press
"This book provides a comprehensive treatment of project finance accessible to those less familiar with the subject matter yet detailed enough to serve as a valuable reference for the experienced manager. The book covers a wide array of topics from legal issues to valuation methods, and even hedging financial risk with financial derivatives. Given the increasing importance of project finance in Asia and the Pacific Rim, Principles of Project Finance, will be an invaluable reference for academics and managers alike in this region."
--Nobuya Takezawa, International Christian University, Tokyo, Japan
"This is an authoritative work written by a distinguished practitioner. I have no doubt it will quickly become a key text for those in both public or private sectors whose work involves Project Finance."
--Michael Gerrard, Head of Public Private Partnerships, Partnerships UK plc
- Chapter 1: Introduction Chapter 2: What is Project Finance? Â§2.1 Development of project financeÂ§2.2 Features of project financeÂ§2.3 Project finance and privatisationÂ§2.4 Project finance and structured financeÂ§2.5 Why use project finance? Chapter 3: The Project Finance MarketsÂ§3.1 Commercial banksÂ§3.1.1 Areas of activityÂ§3.1.2 Banks in the marketÂ§3.2 Bond issuesÂ§3.3 Mezzanine and subordinated debtÂ§3.4 Lease financeÂ§3.5 Vendor financeÂ§3.6 Public sector debtChapter 4: Project Development and ManagementÂ§4.1 Sponsors and other investorsÂ§4.2 Project developmentÂ§4.3 The rÃ´le of advisersÂ§4.4 Joint venture issuesÂ§4.5 The Project CompanyÂ§4.5.1 StructureÂ§4.5.2 Shareholder agreementÂ§4.5.3 Management and operationsÂ§4.6 Public procurementÂ§4.6.1 Pre-qualificationÂ§4.6.2 Request for proposalsÂ§4.6.3 Bid negotiation to contract signingÂ§4.6.4 Competitive bidding for other Project ContractsChapter 5: Working with LendersÂ§5.1 Commercial banksÂ§5.1.2 Advisers and Lead ManagersÂ§5.1.3 Letters of intentÂ§5.1.4 Lenders and the public procurement processÂ§5.1.5 Bank rÃ´lesÂ§5.1.6 Financial modelÂ§5.1.7 Term sheet, underwriting and documentationÂ§5.1.8 Information memorandum and syndicationÂ§5.1.9 Agency operationÂ§5.2 Bond issuesÂ§5.2.1 The investment bank and the ratings agenciesÂ§5.2.2 Rule 144aÂ§5.2.3 Wrapped bondsÂ§5.2.4 Bond paying agents and trusteesÂ§5.3 Loans v. bondsÂ§5.4 The rÃ´les of the lenders' advisersÂ§5.4.1 Legal advisersÂ§5.4.2 Lenders' EngineerÂ§5.4.3 Insurance adviserÂ§5.4.4 Model AuditorÂ§5.4.5 Other advisersÂ§5.4.6 Pre-appointment of lenders' advisersÂ§5.4.7 Use of advisers' timeChapter 6: Project Contracts: (1) The Project AgreementÂ§6.1 Off-take ContractÂ§6.1.1 Types of Off-take ContractÂ§6.1.2 PPA structureÂ§6.1.3 Completion of the plantÂ§6.1.4 Operation of the plantÂ§6.1.5 TariffÂ§6.1.6 Tariff indexationÂ§6.1.7 PenaltiesÂ§6.2 Concession AgreementÂ§6.2.1 Service contractsÂ§6.2.2 Toll contractsÂ§6.3 Term of Project Agreement6.4 Control of project design and construction, contracts and financingÂ§6.5 Compensation for additional costsÂ§6.5.1 Breach by the Off-taker or Contracting AuthorityÂ§6.5.2 Change in specificationsÂ§6.5.3 Changes in lawÂ§6.5.4 Latent defectsÂ§6.6 Force majeureÂ§6.7 Step-in by the Off-taker or Contracting AuthorityÂ§6.8 Termination of the Project AgreementÂ§6.8.1 Early termination: default by Project CompanyÂ§6.8.2 Early termination: default by the Off-taker or Contracting AuthorityÂ§6.8.3 Early termination: force majeureÂ§6.8.4 Optional terminationÂ§6.8.5 Tax implications of a Termination Sum paymentÂ§6.8.6 Final maturity of a BOOT/BOT/BTO contractÂ§6.9 Effect of debt refinancing or equity resale on the Project AgreementÂ§6.9.1 Debt refinancingÂ§6.9.2 Equity saleÂ§6.9.3 Does it matter?Chapter 7: Project Contracts: (2) Ancillary ContractsÂ§7.1 EPC ContractÂ§7.1.1 Scope of contractÂ§7.1.2 Commencement of the worksÂ§7.1.3 Owner's RiskÂ§7.1.4 Contract price, payments and variationsÂ§7.1.5 Supervision and the rÃ´le of the Owner's EngineerÂ§7.1.6 CompletionÂ§7.1.7 Force majeureÂ§7.1.8 Liquidated damages and terminationÂ§7.1.9 Suspension and termination by the EPC ContractorÂ§7.1.10 Security Â§7.1.11 Dispute resolution Â§7.2 Operation & Maintenance Contract(s)Â§7.2.1 Scope of contractÂ§7.2.2 ServicesÂ§7.2.3 Fee basisÂ§7.2.4 Incentives and penaltiesÂ§7.2.5 Major Maintenance Contract Â§7.3 Fuel / other Input Supply Contract Â§7.3.1 Supply basis Â§7.3.2 Physical delivery risks Â§7.3.3 Pricing basis Â§7.3.4 Security Â§7.3.5 Force majeure and change of law Â§7.3.6 Default and termination Â§7.4 Permits and other rights Â§7.4.1 Project Permits Â§7.4.2 Investment and financing Permits Â§7.4.3 Rights of way, easements, etc.Â§7.4.4 Shared facilities Â§7.5 Government Support AgreementÂ§7.6 InsuranceÂ§7.6.1 Construction phase insurancesÂ§7.6.2 Operating phase insurancesÂ§7.6.3 DeductiblesÂ§7.6.4 Lender requirementsÂ§7.6.5 ReinsuranceÂ§7.7 Direct AgreementsChapter 8: Commercial RisksÂ§8.1 Categories of project finance risk Â§8.2 Risk evaluation and allocation Â§8.3 Analysis of commercial risks Â§8.4 Commercial viability Â§8.5 Completion risks Â§8.5.1 Site acquisition and access Â§8.5.2 Permits Â§8.5.3 The EPC Contractor Â§8.5.4 Construction cost overruns Â§8.5.5 Revenue during construction Â§8.5.6 Delay in completion Â§8.5.7 Inadequate performance on completion Â§8.5.8 Third party risks Â§8.5.9 Projects without a fixed price, date certain, EPC Contract Â§8.6 Environmental risks Â§8.7 Operating risks Â§8.7.1 Technology Â§8.7.2 General project operation Â§8.7.3 General operating cost overruns Â§8.7.4 Project availability Â§8.7.5 Maintenance Â§8.7.6 Degradation Â§8.8 Revenue risks Â§8.8.1 Off-take Contracts Â§8.8.2 Concession Agreements Â§8.8.3 Hedging contracts 8.8.4 Contracts for differences Â§8.8.5 Long term sales contracts Â§8.8.6 Price and volume risk Â§8.8.7 Usage risk Â§8.8.8 Risks for the Off-taker or Contracting Authority Â§8.9 Input supply risks Â§8.9.1 Input Supply Contracts Â§8.9.2 When is an Input Supply Contract not needed? Â§8.9.3 Water and wind Â§8.9.4 Mineral reserves Â§8.9.5 Other utilities 8.9.6 Waste disposal Â§8.10 Force majeure Â§8.10.1 Force majeure and insurance 8.10.2 Temporary force majeure Â§8.10.3 Permanent force majeureÂ§8.11 Contract mismatch Â§8.12 Recourse to the Sponsors Chapter 9: Macro-economic Risks Â§9.1 Inflation Â§9.1.1 Inflation-indexed financing Â§9.2 Interest rate risks Â§9.2.1 Interest rate swaps Â§9.2.2 Interest rate caps and other instruments Â§9.2.3 Scale and timing of interest rate hedgingÂ§9.2.4 Additional costs Â§9.2.5 Redeposit risk Â§9.2.6 Interest rate hedging before Financial Close Â§9.3 Exchange rate risks Â§9.3.1 Hedging of currency risks Â§9.3.2 Finance in more than one currency Â§9.3.3 Conversion of local currency revenues Â§9.3.4 Fixing of security in local currency Â§9.3.5 Catastrophic devaluation Chapter 10: Political Risks Â§10.1 Projects and politicsÂ§10.2 Classification of political risk Â§10.3 Currency convertibility and transfer Â§10.3.1 "Enclave" projects Â§10.3.2 Counter-trade Â§10.3.3 Use of offshore accounts Â§10.4 Expropriation Â§10.5 War and civil disturbance Â§10.6 Change of law Â§10.6.1 Change of law risk in Project Contracts Â§10.6.2 Funding the costs of a change of law Â§10.7 Quasi-commercial risks Â§10.7.1 Breach of contract and court decisions Â§10.7.2 "Sub-sovereign" (or "sub-state") risksÂ§10.7.3 Creeping expropriationChapter 11: Political Risk Guarantees, Insurance and Finance Â§11.1 Mitigation of political risks Â§11.2 Export Credit Agencies Â§11.3 Export credits Â§11.3.1 Export credit structures Â§11.3.2 The OECD Consensus Â§11.3.3 Assumption of risks and scope of cover Â§11.3.4 Cash collateralisation Â§11.3.5 Benefit of ECA supportÂ§11.4 Untied cover and financing Â§11.4.1 Political risk insurance for equity investment Â§11.4.2 Development Finance Institutions (DFIs) Â§11.5 Export Credit Agencies (ECAs) and related institutions Â§11.5.1 U.S.A. (U.S. Exim) Â§11.5.2 U.S.A. (OPIC) Â§11.5.3 Canada (EDC) Â§11.5.4 Japan (NEXI / JBIC) Â§11.5.5 France (COFACE) Â§11.5.6 Germany (Hermes / KfW)Â§11.5.7 Italy (ISACE / Simest)Â§11.5.8 U.K. (ECGD)Â§11.6 International Financing Institutions (IFIs)Â§11.6.1 The World Bank (IBRD)Â§11.6.2 International Finance Corporation (IFC) Â§11.6.3 International Development Association (IDA) Â§11.6.4 Multilateral Investment Guarantee Agency (MIGA) Â§11.6.5 Asian Development Bank (ADB) Â§11.6.6 African Development Bank (AfDB) Â§11.6.7 Inter-American Development Bank (IADB) Â§11.6.8 European Bank for Reconstruction and Development (EBRD)Â§11.6.9 European Investment Bank (EIB) Â§11.6.10 Nordic Investment Bank (NIB) Â§11.6.11 Islamic Development Bank (IDB) Â§11.7 Private sector insurance Chapter 12: Financial Modelling and Evaluation Â§12.1 Model inputs Â§12.2 Model outputsÂ§12.3 Macroeconomic assumptions Â§12.3.1 Inflation Â§12.3.2 Commodity prices Â§12.3.3 Interest rates Â§12.3.4 Exchange rates and currency of the model Â§12.3.5 GDP / traffic growth Â§12.4 Project costs and funding Â§12.4.1 Project costs Â§12.4.2 Project funding Â§12.5 Operating revenues and costs Â§12.6 Loan drawings and debt service Â§12.7 Accounting and taxation issues Â§12.7.1 Capitalisation and depreciation of project costs Â§12.7.2 The dividend trap Â§12.7.3 Negative equity Â§12.7.4 Timing of tax paymentsÂ§12.7.5 Value Added Tax Â§12.7.6 Withholding tax (dividends / interest) Â§12.7.7 Exchange rates and tax Â§12.7.8 Inflation and tax Â§12.8 Equity returns Â§12.8.1 Net Present Value Â§12.8.2 Internal Rate of Return Â§12.8.3 Using NPV and IRR calculations for investment decisions Â§12.8.4 Non cash investment Â§12.9 Debt cover ratios Â§12.9.1 Annual Debt Service Cover Ratio Â§12.9.2 Loan Life Cover Ratio Â§12.9.3 Average ADSCR / LLCRÂ§12.9.4 Project Life Cover Ratio Â§12.9.5 Reserve cover ratio Â§12.9.6 Calculating cover ratiosÂ§12.10 The Base Case and changes in assumptions Â§12.11 Sensitivity analysis Â§12.12 Investors' analysis Â§12.12.1 Investors' returnsÂ§12.12.2 Timing of equity commitment Â§12.12.3 Effect of equity resale Â§12.12.4 Benefit of refinancing Chapter 13: Financial Structuring and Documentation Â§13.1 Debt:equity ratio Â§13.1.1 Level of debtÂ§13.1.2 Level of equityÂ§13.1.3 Calculation of debt:equity ratio Â§13.2 Debt service Â§13.2.1 Term of financingÂ§13.2.2 Average lifeÂ§13.2.3 Repayment schedule Â§13.2.4 Flexible repayment Â§13.3 Drawdown of debt and equityÂ§13.3.1 Priority of drawing Â§13.3.2 Procedure for drawing Â§13.3.3 Contingency funding Â§13.4 Interest rate and fees Â§13.5 Control of cash flow Â§13.5.1 The cash flow "cascade" Â§13.5.2 Reserve AccountsÂ§13.5.3 Controls on distributions to investors Â§13.5.4 Cash sweep Â§13.5.5 Cash clawback Â§13.6 Debt prepayments and refinancing Â§13.6.1 Loan commitment reduction Â§13.6.2 Partial prepayment Â§13.6.3 Refinancing Â§13.7 Security Â§13.7.1 Mortgages and contract assignments Â§13.7.2 Security over Project Company sharesÂ§13.8 Financial Close - conditions precedent Â§13.9 Representations and warranties Â§13.10 Covenants Â§13.10.1 Positive covenants Â§13.10.2 Negative covenantsÂ§13.11 Events of default Â§13.12 Waivers, amendments, and enforcement on defaultÂ§13.13 Inter-creditor issuesÂ§13.13.1 Interest rate swap providersÂ§13.13.2 Fixed rate lenders Â§13.13.3 Lenders with different securityÂ§13.13.4 LessorsÂ§13.13.5 Subordinated / mezzanine lendersGlossary and Abbreviations