New Mexico Housing Summit
Creating Affordable Housing Through Public- Private Partnerships
Disclaimer
RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with
RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other
person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The
information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of
1934. The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it
deems appropriate.
This presentation was prepared exclusively for the benefit of and internal use by the recipient. This presentation is confidential and proprietary to RBC
Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s
express written consent.
By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM,
its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without
limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant
to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the
recipient relating to such tax treatment, structure, or strategy.
The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly
available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information
and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change.
To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in
consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to
the oral presentation or other written materials that supplement it.
IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any
discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the
purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you
should seek advice based upon your particular circumstances from an independent tax advisor.
1
What is a PPP?
 Various definitions
 Public Private Partnership (PPP) describes a government service or private business venture which is funded and
operated through a partnership of government and one or more private sector companies
 PPP involves a contract between a public sector authority and a private party, in which the private party provides a public
service or project and assumes substantial financial, technical and operational risk in the project
 Private involvement in projects already
 Private construction
 Private investors buy municipal bonds
 Covers a broad spectrum of Private involvement in US
 Design Build (DB)
 Design Build Operate/Maintain (DBO)
 Design Build Finance (DBF)
 Design Build Finance Maintain (DBFM)
 Design Build Finance Operate/Maintain (DBFOM)
2
2
Brownfield v. Greenfield
 Brownfield
 Gives governments ability to raise needed funds, for example to fill budget deficits or to undertake new infrastructure
projects
 Government leases existing asset to private entity in exchange for large upfront payment
 Private entity gets right to collect tolls or other revenues generated by asset for life of the lease, called a concession
 Private entity operates and maintains asset during concession
 Government retains legal ownership of asset
 Greenfield
 Same concept as above regarding existing assets, except that private entity also constructs asset (usually no upfront
payment)
 Revenues may take the form of availability or similar payments from government
 Government gets control of asset at end of concession term
3
3
Revenue Risk v. Availability Payments
 Revenue Risk
 Private entity and lenders take risk that project revenues and user fees will be able to service debt and provide sufficient
equity return
 Toll roads, managed lanes, airports
 May have revenue sharing over certain levels between government and private entity
 Availability Payments
 Private entity receives periodic payments from government during operating period as long as project is properly operated
and maintained
 Used for roads, bridges and tunnels that cannot generate sufficient cash flow to service debt and provide equity return
 Used for assets that do not generate cash flow (courthouses, schools, hospitals, etc.) or other reasons
4
4
Sectors Suitable for P3s
 The sectors that are suitable for P3s differ across countries
 Roads and Bridges
 Tunnels
 Airports and Ports
 Parking Facilities
 Mass Transit Systems (high-speed rail, light rail, bus)
 Water Treatment and Waste-Management Facilities
 Housing (affordable housing, military housing)
 Hospitals
 Prisons
 Courthouses
 Sports Facilities
 Schools
5
5
Update on U.S. P3 Market – Status and Trends
Transaction Profile
Movement towards greenfield transactions…
The market is beginning to witness a shift away from:
Trend is moving toward:
 Brownfield transactions
 Construction based greenfield projects
 Politically challenging
 Delivery of new public infrastructure
Observations
 Growing acceptance of Private Public Partnerships (“P3”) – albeit each state is a different market
 Knowledge migration from Canada, Australia and UK into the U.S. P3 market
 Growing acceptance for availability payments transactions (however appropriations / authority credit risk is a key issue)
 Remains a transportation centric market
 Greenfield and real toll/volume based transportation projects will provide a steady source of new transactions
6
P3 Project Structure
Procurement Process
 Step 1 – Request for Qualification (RFQ)
 Step 2 – Shortlist (if applicable)
 Step 3 – Request for Proposal (RFP)
 Lenders get involved; design-build contract price and pricing of loan have largest impact on bid price
 Shortlisted bidders comment on Concession Agreement and Instructions to Proposers (ITP)
 All bidders submit bid on same Project Agreement and ITP
 Step 4 – Naming of Preferred Bidder
 Step 5 – Execution of Concession Agreement
 Step 6 – Financial Close
7
P3 Project Structure
Fundamental Principles
 Party best able to manage specific risks should assume such risks
 Risk allocation based on interwoven documentation that must fit together
 Risk allocation starts with Project Agreement between Authority and Private Entity (special purpose company or SPC) and
is further allocated to other project participants, including design-builder
 SPC accountable to Authority and Lenders (in addition to other project participants such as design-builder)
 SPC will need to get consent from Authority and Lenders for specified amendments, waivers and change orders
 Limitations on what SPC can do (i.e. negative covenants in financing documents, restrictions in Project Agreement)
 Lenders’ recourse is to Project, the SPC, SPC assets and Lenders’ collateral
 Lenders’ debt is not guaranteed
 Equity needs to wait for operating period to get their return
 Design-Builder to get paid monthly from draws under financing documents
 Equity to be funded upfront or during construction period but in any event would be funded upon an Event of Default under
Financing documents
8
Why use Project Finance?
P3’s typically use non-recourse Project Finance
 Project Finance is complex, slow and has a high upfront cost! But…
 Benefits for P3 projects
 Low funding cost due to high leverage
 Increases investors’ financial capacity, so creating more competition for projects
 Enables public sector to assess and monitor project-specific data
 Third-party due diligence helps to ensure project deliverability
 Benefits for investors
 Non-recourse
 Greater leverage, which may be off-balance sheet
 Hence higher return on investment
 Enables partnerships with different financial strengths to work together
9
Risk Transfer – The Fundamental Basis For P3
P3s All About Risk Transfer or Risk Sharing
Maxim is Risk is Passed to the Party Best Able to
Mitigate or Manage It
 Design risk
 Public sector always has inherent strengths
 Completion risk
 Counterparty credit risk
 Maintenance risk
 Interface risk (interactions between above risks)
 Legislative power
 Ability to obtain site
 Tax exemptions
 Liability exemptions or caps
 Ability to “self insure”
Private Sector Can Optimize & Mitigate
Risk is Managed, Assessed, and Priced by Private Sector
 Skilled specialists with necessary expertise and
experience
 Fixed price turnkey
 Whole life cost
 Patient Equity and active management
10
 Insurance
 Contingencies/ Concessionaire Equity
Role of Equity

Equity provides a buffer over third party debt funding (typically 10-15% in Availability Payment deals) and takes the first
loss

Equity upside is limited Availability Payment deals - some upside unused contingencies but little organic growth as there is
no volume or demand based payments

Long term investment horizon - no distributions pre-completion

Compensation for development / construction risk is received over entire project term

Ultimate investors/holders of PPP equity (usually via infrastructure-funds) are pension funds etc – relatively risk averse

Tends to be priced tightly compared to corporate finance target returns (20%+)

Equity’s most material exposure is contractor non-performance

In a well structured and diligenced deal, the probability of this risk should not be high, however, if it occurs impact can be
catastrophic (total loss of investment)
Investment Criteria for Equity Providers
 Potential for upside from unused contingencies …
 … but also for severe downside since take the first loss on a limited basket of risks including
 Cost increases, e.g. insurance, lifecycle or taxation
 Replacement of subcontractors
 Refinancing, etc.
 Similar due diligence requirements and expectations as senior funders vis a vis risks
 However, will also be looking for least restrictive funding agreements possible
 Allow them to manage the business
 Allow them to distribute cash
12
P3 Project Structure
The Role of the Special Purpose Company
 The Special Purpose Company (“SPC”) is the vehicle through which P3 projects are delivered
 Main responsibilities include:
 Act as a single point of contact with the Authority (through the Project Agreement) and lenders;
 Enter into project documents and financing documents;
 Raise project financing;
 Governance, controls and monitoring; and
 In the case of this project, to manage maintenance obligations
 Few assets and efficiently resourced
 Key decisions typically made by a board (representatives of the key stakeholders)
 SPC to be properly staffed to handle responsibilities
 May manage maintenance and operating obligations – may do so by competitively procured subcontracts
13
P3 Project Structure
Typical Project Structure
Authority
Project Agreement
Lenders
Project
Funding
Shareholders
SPC
Operations &
Maintenance
Contract*
Design-Build
contract
D&B
contractor (CJV)
*Not uncommon for SPC to self perform O&M i.e. no O&M subcontractor, as is the case in this transaction
14
O&M contractor
Simplistic Payment Structure
 Debt to equity ranges from 50:50 to 90:10 depending on risk profile
 i.e. brownfield / greenfield, availability / toll risk, etc.
 Debt is provided on a non-recourse basis
 Contractor(s) typically contract as part of a Design & Build Joint Venture
 Contracts supported by guarantees / bonding for construction risk
 Availability payments commence at the start of service delivery and are subject to performance regime through the Project
Agreement
Lenders
Interest & Principal
Public Sector
Debt
Milestone Payments
SPC
Milestone / Availability
Payments (User fees, if
applicable)
Equity
Distributions
Equity Investors
“Sponsors”
15
CJV
CJV
Guarantors
Principal Documentation
 Concession Agreement
 Design-Build Contract
 Back to back with Project Agreement
 Design-Build Contract Guarantees
 Operation and Maintenance (“O&M”) Agreement (if necessary)
 Operation and Maintenance Guarantee (if necessary)
 Interface Agreement (if necessary)
 Limited Liability Company Agreement
 Financing
 Loan/bond documents; Security documents
 Direct Agreements/Consents to Assignment
 Lenders’ Direct Agreement for Project Agreement
 Lenders’ Direct Agreement for Design-Build Contract
 Lenders’ Direct Agreement for Design-Build Contract Guarantees
 Authority Direct Agreement for Design-Build Contract
 Lenders’ Direct Agreements for O&M Agreements (if applicable)
16
Project Agreement
Project Agreements in Traditional Markets Follow Common Form
 UK: Tend to follow Standardization of PFI Contracts (“SOPC”)
 EU Countries: Often have their own national standards
 Canada: Varies by province but British Columbia and Ontario broadly modeled on SOPC
 Australia: National guidelines which provide a range of options at State level. Again, broadly modeled on SOPC
 United States: Wide range, no standard contractual framework
17
Contractor Security / Lender’s Requirements
Investment Criteria for Senior Lenders
 Senior lenders’ return is limited with no upside
 Very high gearing with no recourse to shareholders
 Hence senior lenders’ focus is on minimizing their risk
 Due Diligence
 Technical: Design, timetable, cost budget reasonable, construction methodology and appropriateness
 Legal: Contracts give the risk allocation, protections and control required
 Insurance: Requisite insurances are in place
 Contractor: Experience and capability to execute the contract
 Financial strength: Net asset value, credit rating
 Surety / Guarantees
 Levels of third party support given
 Other
 Size of investment vs. time required
 Market conditions
18
Lender’s Risk & Mitigations
What can go wrong?
Construction Cost Over-Run or Delay
Operating Performance
 Contract under-priced
 Too aggressive timetable
 Unexpected complications, e.g. site conditions worse
than expected
 Senior lenders and equity protections:
 Technical Advisor (“TA”) sign-off of contingencies in
cost and timetable
 Contractor held to fixed price turnkey contract
 Contractor liable for Liquidated Damages during delay
 In worst case scenario Contractor has Termination
liabilities
 Senior lenders in addition have buffer of equity return




Insolvency of Major Project Party
Cost Over-Runs at SPV Level
 Example: Jarvis situation in the UK
 Senior lenders and equity protections:
 Financial strength of subcontractors assessed upfront
 Parent Company Guarantees required
 Third party support required for weaker contractors
 Senior lenders in addition have buffer of equity return




19
Contract under-priced
Unexpected cost increases above indexation
Inability to meet required performance standards
Senior lenders and equity protections:
 TA sign-off of performance standards and
contingencies in costs
 Contractor held to fixed price contract
 Benchmarking/market testing for soft services
 Performance deductions passed through to operator
(whole fee at stake)
 In worst case scenario Operator has Termination
liabilities
 Senior lenders in addition have buffer of equity return
Management costs
Lifecycle costs if risk held at SPV level
Insurance costs
Senior lenders and equity protections:
 TA sign-off of adequacy of lifecycle budget
 Insurance premia sharing with Authority
 General SPV contingencies
Security Package
Security required by Funders and Equity
 Where project finance is used, the security normally required by the financiers (funders and equity) includes:
 Security over all the project cashflows and assets (including contractual rights) and equity in the project company;
 A direct agreement with the Authority, providing rights for lenders to step into Project Agreement in the event of insolvency
or other default;
 A direct agreement with the subcontractors, providing rights for the lenders to step into subcontracts in the event of
insolvency or other default; and
 Guarantees or bonding of the subcontractors’ obligations under the subcontracts (which may be provided to the project
company and secured in favor of the lenders);
Example Security Package Required by Funders for Similar Transactions
CJV Security Package
Cap on General Damages
 Percentage of Contract Sum
Cap on LDs
 Percentage of Contract Sum sufficient to cover 100% of the Availability Payment
abatement or unmitigated costs out to the Long Stop Date
Liquid Security
 Percentage of Contract Sum in the form of a letter of credit from suitably rated bank /
institution with refresh provisions
Parent Company Guarantee
 Required from creditworthy entities
20
Control & Monitoring
Controls & Monitoring Requirements
 Lenders exercise varying degrees of control over project finance borrowers
 Covenants – general undertakings requiring compliance with terms of project documents, consents etc
 Representations and Warranties – requiring borrowers to periodically certify that they have been in compliance (considered
a more active mechanism of control as borrower has to take positive action to certify)
 Agent (on behalf of syndicate) in a bank deal or Trustee in a bond deal will require the following to monitor project
performance:
 Monthly report from the technical adviser (TA) during construction, certifying construction costs to be drawn down and
compliance with program
 Periodic TA report during operations monitoring operating performance
 Periodic update to financial model to calculate key financial ratios (to permit equity distributions)
 Monitoring of insurances by insurance adviser to ensure insurance remains in place
 Annual audited and monthly/semi annual management accounts
 Typically a ‘sweep up’ provision requiring Borrower to provide any other information that the Agent/Trustee reasonably
requests
 Regulation of flow of funds through Depositary Agreement
21
Control & Monitoring
Priority of Payments Cash Waterfall (Representative Simplified Illustration)
Project Revenues
Project Revenue Account
Operations and Maintenance Expenses
Interest on Debt
Principal on Debt
Debt Service Reserve Account
Maintenance Reserve Account
Other Reserve Accounts
Equity Distributions
Project Revenues
RBC Capital Markets – Albuquerque Staff
Paul J. Cassidy
Managing Director
(505) 872-5991
paul.cassidy@rbccm.com
Erik Harrigan
Director
(505) 872-5992
erik.harrigan@rbccm.com
Andrew Stricklin
Associate
(505) 872-5996
jeremy.landrum@rbccm.com
Marlo Houk
Administrative Assistant
(505) 872-5999
marlo.houk@rbccm.com
Loretta Brush
Associate Vice President
(505) 872-5994
loretta.brush@rbccm.com
RBC Capital Markets, LLC
6301 Uptown Blvd. N.E., Suite 110
Albuquerque, NM 87110
(505) 872-5999
Fax: (505) 872-5979
23