Principles of Project Finance

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 debtChapter 4: Project Development and Management§4.1 Sponsors and other investors§4.2 Project development§4.3 The rôle 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 ContractsChapter 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 rôles§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 rôles 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' timeChapter 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 Agreement6.4 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 rôle 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 AgreementsChapter 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 expropriationChapter 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 lendersGlossary and Abbreviations