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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 r le 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 r les
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 r les 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 r le 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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