Introduction to Project Finance Italian – Slovak Chamber of Commerce 18.07.2013, Bratislava
Table of Contents
Introduction to Project Finance Project Structure Project Agreements Rising equity
Loans Restrictions Tax incentives
Introduction to Project Finance - Investments in the clean technology: capital intensity, new technologies
- Best success of Project Finance: with long- term off- take agreements with quality- credit counterparties - Lenders loan money → project solely based on specific project's risks and future cash flows
- Non- recourse : lenders΄ inability to access the capital or assets of the Sponsor
Introduction to Project Finance - Large infrastructure projects - Too expensive/ speculative to be carried on a corporate
balance sheet - Maximize equity returns - Move significant liabilities off balance sheet - Protect key assets - Monetize tax financing opportunities
- For projects with revenue stream (e.g. Power purchase agreement PPA)
Project Structure- Project Finance Parties Name
Purpose
Parent Company
• Develops or sponsors the project, also the „Sponsor“
Project Company
• Holds all of the project´s assets, rights and obligations, owns the project
Holding Company
• Created for holding the equity of the Project Company, separate legal entity • Most liability at bankrupcy- remote Project Company level • Insulates the Sponsor and Holdco drpm Project Company´s counterparties
Benefits and drawbacks of Project Financing Benefits
Drawbacks
Debt held at the level of the Project Company
Document- intensive, timeconsuming
Rate of return can increase dramatically when project fully leveraged
Operating restrictions on Project Company (e.g. equity distribution prior to the payment of operating expenses)
Protection of key Sponsor assets (intellectual property, personnel, other project investments...) Tax benefits
Appropriate for Project Financing - Project of a sufficient size - Large revenue stream to support debt financing
- Enforceable receipt of revenue - Physical assets to ensure lender repayment - Technology risk - Contractual relationships with reputable companies - Divestiture opportunities
Project Agreements
Project Agreement - Lenders own the Project Company → Contractual rights to a seamless transition of ownership in case of foreclosure
- Consider commercial terms of the PPA, EPC, market technology risks to amortize the project debt
- Necessary protection against delays or performance defects
Internal Assessment The equity investment serves the sponsors´ and investors´strategic objectives:
- Company´s technology reliable - Pool of equity investors - Gaps in organisational structure ir operations - Timing, amount of future capital needs - Type of investment (passive investment/ active partner)
- Impact on existing grants - Control percentage
Added value Investor´s added value to the enterprise: - Relevant experience
- Capital infusion - Board of directors - Introduction to potential customers - Assistance in financial planning and forecasting - Conflict of interests between portfolio companies
Investment structure - Relevant entity for receiving the funds - Amoount of investment sufficient
- Equity security type - Board members - Dividend rights - Liquidation preference - Redemption right
- Protective provisions
Aligned expectations Mutually beneficial working relationship with aligned expectations on kez business issues:
- Market opportunity - Ability to execute the business plan - Investor´s commitment to capital needs - Appropriate liquidity event
Financing structures Syndicated loans - Group of banks
- Minimize risk
Project bonds - quicker, less expensive - Less restrictive
- Longer repayment period
Loan types Depends on the development stage of the project -
Construction loans
-
Term loans
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Working capital loans
-
Letter of credit
-
To minimize risk, loans amortize in full prior to the end term of PPA
-
Project company pays professional fees, administrative expenses
Security package - collateral security package in exchange for making of loans - Assets of the Project Company pledged to the lenders until
full repayment of loans (incl. personal property of the Project Company, accounts receivable, contractual rights, intellectual property) - Consent from Counterparties
Distribution of Revenues
Other conditions Operating restrictions Industry standards, debt obligations, documentation, insurance, ...
Potential defaults Conditions under which lenders exercise their remedies under the financing documentation, including the acceleration of the outstanding debt, foreclosure Conditions to closing
Lenghthy list of conditions prior to the close of financing
Tax incentives - Tax credits - Depreciation
- Tax Incentives Monetization
Conclusion -
complex, inter- related commercial and legal issues to ensure success and returns
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Team of professional advisors for assisting in executing a debt equity transaction, analyze options,
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Long- term debt commitment
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Maximize project returns through increased project leverage
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Remove significant liabilities from the Sponsor´s balance sheet
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In the initial development stage it is important to negotiate the best possible terms and conditions
Thank you for your attention.
Bc. Andrej MesĂĄroĹĄ mesaros@am-accounting.sk