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By E. R. Yescombe, E.R. Yescombe has over 30 years of experience in various forms of structured finance, including project finance, leasing, export credits,
real estate and asset finance. A former banker and head of project finance in London for a major international bank, he is now an independent
consultant on project finance and public-private partnerships (PPPs), advising investors on financing for power, infrastructure and PPP
projects, as well as public-sector entities on PPP policy issues, project procurement and contracting.
Description 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.
Audience
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.
Contents Chapter 1: Introduction
Chapter 2: What is Project Finance?
?2.1 Development of project finance
?2.2 Features of project finance
?2.3
Project finance and privatisation
?2.4 Project finance and structured finance
?2.5 Why use project finance?
Chapter 3: The Project Finance
Markets
?3.1 Commercial banks
?3.1.1 Areas of activity
?3.1.2 Banks in the market
?3.2 Bond issues
?3.3 Mezzanine and subordinated debt
?3.4 Lease finance
?3.5 Vendor finance
?3.6 Public sector debt
Chapter 4: Project Development and Management
?4.1 Sponsors and other
investors
?4.2 Project development
?4.3 The role of advisers
?4.4 Joint venture issues
?4.5 The Project Company
?4.5.1 Structure
?4.5.2
Shareholder agreement
?4.5.3 Management and operations
?4.6 Public procurement
?4.6.1 Pre-qualification
?4.6.2 Request for proposals
?4.6.3 Bid negotiation to contract signing
?4.6.4 Competitive bidding for other Project Contracts
Chapter 5: Working with Lenders
?5.1
Commercial banks
?5.1.2 Advisers and Lead Managers
?5.1.3 Letters of intent
?5.1.4 Lenders and the public procurement process
?5.1.5
Bank roles
?5.1.6 Financial model
?5.1.7 Term sheet, underwriting and documentation
?5.1.8 Information memorandum and syndication
?5.1.9
Agency operation
?5.2 Bond issues
?5.2.1 The investment bank and the ratings agencies
?5.2.2 Rule 144a
?5.2.3 Wrapped bonds
?5.2.4 Bond
paying agents and trustees
?5.3 Loans v. bonds
?5.4 The roles of the lenders' advisers
?5.4.1 Legal advisers
?5.4.2 Lenders' Engineer
?5.4.3 Insurance adviser
?5.4.4 Model Auditor
?5.4.5 Other advisers
?5.4.6 Pre-appointment of lenders' advisers
?5.4.7 Use of advisers'
time
Chapter 6: Project Contracts: (1) The Project Agreement
?6.1 Off-take Contract
?6.1.1 Types of Off-take Contract
?6.1.2 PPA structure
?6.1.3 Completion of the plant
?6.1.4 Operation of the plant
?6.1.5 Tariff
?6.1.6 Tariff indexation
?6.1.7 Penalties
?6.2 Concession
Agreement
?6.2.1 Service contracts
?6.2.2 Toll contracts
?6.3 Term of Project Agreement
6.4 Control of project design and construction,
contracts and financing
?6.5 Compensation for additional costs
?6.5.1 Breach by the Off-taker or Contracting Authority
?6.5.2 Change
in specifications
?6.5.3 Changes in law
?6.5.4 Latent defects
?6.6 Force majeure
?6.7 Step-in by the Off-taker or Contracting Authority
?6.8 Termination of the Project Agreement
?6.8.1 Early termination: default by Project Company
?6.8.2 Early termination: default by the
Off-taker or Contracting Authority
?6.8.3 Early termination: force majeure
?6.8.4 Optional termination
?6.8.5 Tax implications of a Termination
Sum payment
?6.8.6 Final maturity of a BOOT/BOT/BTO contract
?6.9 Effect of debt refinancing or equity resale on the Project Agreement
?6.9.1 Debt refinancing
?6.9.2 Equity sale
?6.9.3 Does it matter?
Chapter 7: Project Contracts: (2) Ancillary Contracts
?7.1 EPC Contract
?7.1.1 Scope of contract
?7.1.2 Commencement of the works
?7.1.3 Owner's Risk
?7.1.4 Contract price, payments and variations
?7.1.5 Supervision
and the role of the Owner's Engineer
?7.1.6 Completion
?7.1.7 Force majeure
?7.1.8 Liquidated damages and termination
?7.1.9 Suspension
and termination by the EPC Contractor
?7.1.10 Security
?7.1.11 Dispute resolution
?7.2 Operation & Maintenance Contract(s)
?7.2.1 Scope
of contract
?7.2.2 Services
?7.2.3 Fee basis
?7.2.4 Incentives and penalties
?7.2.5 Major Maintenance Contract
?7.3 Fuel / other Input
Supply Contract
?7.3.1 Supply basis
?7.3.2 Physical delivery risks
?7.3.3 Pricing basis
?7.3.4 Security
?7.3.5 Force majeure and
change of law
?7.3.6 Default and termination
?7.4 Permits and other rights
?7.4.1 Project Permits
?7.4.2 Investment and financing
Permits
?7.4.3 Rights of way, easements, etc.
?7.4.4 Shared facilities
?7.5 Government Support Agreement
?7.6 Insurance
?7.6.1 Construction
phase insurances
?7.6.2 Operating phase insurances
?7.6.3 Deductibles
?7.6.4 Lender requirements
?7.6.5 Reinsurance
?7.7 Direct Agreements
Chapter 8: Commercial Risks
?8.1 Categories of project finance risk
?8.2 Risk evaluation and allocation
?8.3 Analysis of commercial
risks
?8.4 Commercial viability
?8.5 Completion risks
?8.5.1 Site acquisition and access
?8.5.2 Permits
?8.5.3 The EPC Contractor
?8.5.4 Construction cost overruns
?8.5.5 Revenue during construction
?8.5.6 Delay in completion
?8.5.7 Inadequate performance on
completion
?8.5.8 Third party risks
?8.5.9 Projects without a fixed price, date certain, EPC Contract
?8.6 Environmental risks
?8.7
Operating risks
?8.7.1 Technology
?8.7.2 General project operation
?8.7.3 General operating cost overruns
?8.7.4 Project availability
?8.7.5 Maintenance
?8.7.6 Degradation
?8.8 Revenue risks
?8.8.1 Off-take Contracts
?8.8.2 Concession Agreements
?8.8.3 Hedging
contracts
8.8.4 Contracts for differences
?8.8.5 Long term sales contracts
?8.8.6 Price and volume risk
?8.8.7 Usage risk
?8.8.8
Risks for the Off-taker or Contracting Authority
?8.9 Input supply risks
?8.9.1 Input Supply Contracts
?8.9.2 When is an Input Supply
Contract not needed?
?8.9.3 Water and wind
?8.9.4 Mineral reserves
?8.9.5 Other utilities
8.9.6 Waste disposal
?8.10 Force majeure
?8.10.1 Force majeure and insurance
8.10.2 Temporary force majeure
?8.10.3 Permanent force majeure
?8.11 Contract mismatch
?8.12
Recourse to the Sponsors
Chapter 9: Macro-economic Risks
?9.1 Inflation
?9.1.1 Inflation-indexed financing
?9.2 Interest rate risks
?9.2.1 Interest rate swaps
?9.2.2 Interest rate caps and other instruments
?9.2.3 Scale and timing of interest rate hedging
?9.2.4
Additional costs
?9.2.5 Redeposit risk
?9.2.6 Interest rate hedging before Financial Close
?9.3 Exchange rate risks
?9.3.1 Hedging
of currency risks
?9.3.2 Finance in more than one currency
?9.3.3 Conversion of local currency revenues
?9.3.4 Fixing of security
in local currency
?9.3.5 Catastrophic devaluation
Chapter 10: Political Risks
?10.1 Projects and politics
?10.2 Classification of
political risk
?10.3 Currency convertibility and transfer
?10.3.1 "Enclave" projects
?10.3.2 Counter-trade
?10.3.3 Use of offshore
accounts
?10.4 Expropriation
?10.5 War and civil disturbance
?10.6 Change of law
?10.6.1 Change of law risk in Project Contracts
?10.6.2 Funding the costs of a change of law
?10.7 Quasi-commercial risks
?10.7.1 Breach of contract and court decisions
?10.7.2
"Sub-sovereign" (or "sub-state") risks
?10.7.3 Creeping expropriation
Chapter 11: Political Risk Guarantees, Insurance and Finance
?11.1
Mitigation of political risks
?11.2 Export Credit Agencies
?11.3 Export credits
?11.3.1 Export credit structures
?11.3.2 The OECD
Consensus
?11.3.3 Assumption of risks and scope of cover
?11.3.4 Cash collateralisation
?11.3.5 Benefit of ECA support
?11.4 Untied
cover and financing
?11.4.1 Political risk insurance for equity investment
?11.4.2 Development Finance Institutions (DFIs)
?11.5 Export
Credit Agencies (ECAs) and related institutions
?11.5.1 U.S.A. (U.S. Exim)
?11.5.2 U.S.A. (OPIC)
?11.5.3 Canada (EDC)
?11.5.4 Japan
(NEXI / JBIC)
?11.5.5 France (COFACE)
?11.5.6 Germany (Hermes / KfW)
?11.5.7 Italy (ISACE / Simest)
?11.5.8 U.K. (ECGD)
?11.6 International
Financing Institutions (IFIs)
?11.6.1 The World Bank (IBRD)
?11.6.2 International Finance Corporation (IFC)
?11.6.3 International Development
Association (IDA)
?11.6.4 Multilateral Investment Guarantee Agency (MIGA)
?11.6.5 Asian Development Bank (ADB)
?11.6.6 African Development
Bank (AfDB)
?11.6.7 Inter-American Development Bank (IADB)
?11.6.8 European Bank for Reconstruction and Development (EBRD)
?11.6.9
European Investment Bank (EIB)
?11.6.10 Nordic Investment Bank (NIB)
?11.6.11 Islamic Development Bank (IDB)
?11.7 Private sector
insurance
Chapter 12: Financial Modelling and Evaluation
?12.1 Model inputs
?12.2 Model outputs
?12.3 Macroeconomic assumptions
?12.3.1
Inflation
?12.3.2 Commodity prices
?12.3.3 Interest rates
?12.3.4 Exchange rates and currency of the model
?12.3.5 GDP / traffic
growth
?12.4 Project costs and funding
?12.4.1 Project costs
?12.4.2 Project funding
?12.5 Operating revenues and costs
?12.6 Loan
drawings and debt service
?12.7 Accounting and taxation issues
?12.7.1 Capitalisation and depreciation of project costs
?12.7.2 The
dividend trap
?12.7.3 Negative equity
?12.7.4 Timing of tax payments
?12.7.5 Value Added Tax
?12.7.6 Withholding tax (dividends /
interest)
?12.7.7 Exchange rates and tax
?12.7.8 Inflation and tax
?12.8 Equity returns
?12.8.1 Net Present Value
?12.8.2 Internal
Rate of Return
?12.8.3 Using NPV and IRR calculations for investment decisions
?12.8.4 Non cash investment
?12.9 Debt cover ratios
?12.9.1 Annual Debt Service Cover Ratio
?12.9.2 Loan Life Cover Ratio
?12.9.3 Average ADSCR / LLCR
?12.9.4 Project Life Cover Ratio
?12.9.5 Reserve cover ratio
?12.9.6 Calculating cover ratios
?12.10 The Base Case and changes in assumptions
?12.11 Sensitivity analysis
?12.12 Investors' analysis
?12.12.1 Investors' returns
?12.12.2 Timing of equity commitment
?12.12.3 Effect of equity resale
?12.12.4
Benefit of refinancing
Chapter 13: Financial Structuring and Documentation
?13.1 Debt:equity ratio
?13.1.1 Level of debt
?13.1.2 Level
of equity
?13.1.3 Calculation of debt:equity ratio
?13.2 Debt service
?13.2.1 Term of financing
?13.2.2 Average life
?13.2.3 Repayment
schedule
?13.2.4 Flexible repayment
?13.3 Drawdown of debt and equity
?13.3.1 Priority of drawing
?13.3.2 Procedure for drawing
?13.3.3
Contingency funding
?13.4 Interest rate and fees
?13.5 Control of cash flow
?13.5.1 The cash flow "cascade"
?13.5.2 Reserve Accounts
?13.5.3 Controls on distributions to investors
?13.5.4 Cash sweep
?13.5.5 Cash clawback
?13.6 Debt prepayments and refinancing
?13.6.1
Loan commitment reduction
?13.6.2 Partial prepayment
?13.6.3 Refinancing
?13.7 Security
?13.7.1 Mortgages and contract assignments
?13.7.2 Security over Project Company shares
?13.8 Financial Close - conditions precedent
?13.9 Representations and warranties
?13.10
Covenants
?13.10.1 Positive covenants
?13.10.2 Negative covenants
?13.11 Events of default
?13.12 Waivers, amendments, and enforcement
on default
?13.13 Inter-creditor issues
?13.13.1 Interest rate swap providers
?13.13.2 Fixed rate lenders
?13.13.3 Lenders with different
security
?13.13.4 Lessors
?13.13.5 Subordinated / mezzanine lenders
Glossary and Abbreviations
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