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Project Financing
Prof. Ian Giddy
Stern School of Business
New York University
Project Financing
Stand-alone, non-recourse, multi-stake,
"production payment financing"
l Structure?
l Participants?
l Funding sources?
l Risks?
l
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Nukab Hydroelectric Project
Cost: $6 billion
l Completion: 4-5 years
l Capacity: 2,400 megawatts
l Contract for sale to National Power Co:
l
- Years 1-5: 16.5 nes/kwh
- Years 6-30: 17 nes/kwh
n
Could the project be financed with
ABS?
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Bakun!
Cost: RM15 billion ($6 billion)
l Completion: 2002?
l Capacity: 2,400 magawatts
l Contract for sale to Tenaga:
l
- Years 1-5: 16.5 sen/kwh
- Years 6-30: 17 sen/kwh
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Project Financing (Summary)
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l
l
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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
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Financing Sources
Banks, Institutional Investors, Leasing Companies
Sponsor
n Loans
n Equity
Stakeholder
credits
n Suppliers
n Purchasers
Gov’t Development Financing, IBRD/IFC, Eximbanks
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Project Financing
Definition
l
l
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Lending to a single purpose entity
for the acquisition and /or
construction of a revenuegenerating asset with limited or no
recourse to the sponser
Repayment of the loan is solely
from the revenues generated from
operation of the asset owned by
the entity
Security for the loan
u the revenue generating asset
u all shares and interests in the
entity
u real property
u all contacts, permits
u authorizations, etc.; and,
u 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
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Benefits of Project Financing
Limitation of Equity Investment to
Project’s Economic Requirement Enhanced Returns
l Risk Sharing and Diversification
l Accounting Treatment Preserves
Corporate Borrowing Capacity
l Access to Long Term Financing
l Tax Benefits
l Political Risk Mitigation
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The Risks
Political
l Resource & input
l Technical
l Construction
l Legal
l Economic
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Cost overruns
Completion delays
Mounting
interest expenses
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Eurotunnel: The Risks and the Remedies
Category
Nature
Remedy
Political
Nationalization
Govt interference
Taxes & the like
Legal
Treaty ratified
Technical
Process
Effect on completion
Repairability
Use existing technology
Construction Delays
Overruns
Repairability
Use top experts
Performance bonds
Legal
Access to control in default
Fire, injury, etc liability
Security interests
Default defn
Economic
Price competition
Rail links
Market studies
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Sample Structure
Arranging
Bank
Sponsors /
Shareholders
SINGLE PURPOSE
PROJECT COMPANY
Equipment
Supplier
Warranties and
Supply Agents
Contractor
Turnkey
Construction
Feed Stock
(e.g., fuel)
Supplier
Long Term
Agreement
Offtake (e.g,
power purchase)
Agreement
Syndicate
Banks
Other Project
Participants:
Purchaser
Currency and Interest
Rate Hedge Providers
Multilaterals and EDA’s
Operator
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Operations &
Maintenance Mgmt
Legal Counsel
Technical Consultants
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Asset-Backed and Project Financing
Collateralized debt
l Securitized loans
l Non-recourse project debt -- future
payments rather than assets are the
collateral in the SPV
l Basic question: When is an asset worth
more to investors outside the company
than inside it?
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Case Studies
Ras Laffan Qatar/Korea
l YPF Argentina/Oil Trading Corp
l West Java Power Project
l
Questions:
uWho
is the issuer?
uWhat assets does it have?
uWhat are the risks, and how are they
handled?
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Ras Laffan
l
Who is the issuer?
uRas
Laffan LNG Co. Ltd. (Qatar)
uBut Security Trustee (IBJ) plays unusually
major role
l
What assets does it have?
uNatural
gas reserves;
uLNG take-or-pay Sale and Purchase
Agreement with Korea Gas;
uSecurity Trust Agreement; Project
Coordination Agreement; loan refund
agreement, etc.
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Ras Laffan
l
What are the risks, and how are they
handled?
uQatar/regional
interference
uQatar legal system
uDefault on Agreements
uCompletion/timing
uOperating
uEconomic (LNG market)
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Ras Laffan: Natural Gas Project Finance
Ras Laffan
Liquified Natural Gas
LNG
Korea Gas
LNG
payments
Security Trustee
Debt service
payments
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Mobil QM
(Mobil Corp.)
Joint venture agreement
30%
Contractors
Contractors
Contractors
Qatargas
(State of Qatar)
70%
Ras Laffan
Liquified Natural Gas
LNG
Contract
payments
Korea Gas
Residual
payments
LNG
payments
Security Trustee
(New York)
Ras Laffan
Debt service
payments
Bondholders
Debt service
payments
Banks
Export Credit
Agencies
Ian H. Giddy
Stern School of Business
New York University
44 West 4th Street, New York, NY 10012, USA
Tel 212-998-0426
ian.giddy@nyu.edu
http://giddy.org
Copyright ©2002 Ian H. Giddy
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