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Agenda • • • • Introduction to Excel and Financial Modeling Key Concepts of Excel Modeling and Excel Usage Understanding financial statements Understanding Project Finance – – – – Definition and Relevant industries Key Characteristics of Project Finance Public Private Partnership Risk and Mitigation • Key Concepts in a RE Model • Modeling for Commercial Property • Homework assignment © Neev Knowledge Management – Pristine 1 www.edupristine.com Definition of Project Finance A typical definition “The financing of the development or exploitation of a right, natural resource or other asset where the bulk of the financing is to be provided by way of debt and is to be repaid principally out of the assets being financed and their revenues” • The following things need attention – There is special purpose company (SPV) – a single purpose company – whose principal assets and business are constituted by that project – Repayment of loan is essentially limited to the assets of the project being financed © Neev Knowledge Management – Pristine 2 www.edupristine.com Origins of Project Finance • Is this some new concept?? – The modern concept of Project Finance finds its usage more from 1980’s – The earliest evidence of project finance is found during Roman period • Uncertain sea voyages in Mediterranean ocean • To save from nautical perils traders took Fenus Nauticum (sea loan) with local lenders • Lenders would get the money back from the proceeds of sale of goods only; in case of ship not returning ……. Lenders were not paid • Lenders would send their men with traders to ensure fair play….. (a kind of trustee) – Origin of modern project finance – 1970s in Oil and gas sector in UK © Neev Knowledge Management – Pristine 3 www.edupristine.com Key industries that find themselves amidst the trend of Project finance and/ or Public Private Partnerships • • • • • • • • • • • Real Estate Oil and gas Petrochemicals Electricity Mining and natural resources Urban and rural infrastructure – Ports, Roads Rail Aviation and shipping Telecommunications Healthcare Waste management The list is endless and opportunities are immense © Neev Knowledge Management – Pristine 4 www.edupristine.com Characteristics of Project Finance • Project Finance is the financing of – often long-term and large projects – Increasingly those which provide public services or infrastructure – Based upon complex financial and contractual structures commonly involving many legal entities • Project Finance debt is often termed as "non-recourse" or “limited –recourse” – Typically secured by the project assets and the core project contracts • The cash flows from the project – Come only after the project is fully complete (takes more than a single financial year for completion) – are usually the sole means of repayment of the borrowed funds • Separate Entity and SPV Status – Risk of the transaction is generally measured by the creditworthiness of the project itself rather than that of its owners (Sponsors). • Two main types of Project Financing – Greenfield – a fresh start – Brownfield – expansion of an existing project © Neev Knowledge Management – Pristine 5 www.edupristine.com Key difference between Project Finance and Corporate Finance • One of the key differences, lies in the recourse that the lender has to the assets of the borrower. • In project financing this recourse is limited to an identifiable pool of assets, whereas in corporate financing the lender will have recourse to all the assets of the borrower • In Corporate finance, liquidation of the borrower is possible on a pari passu basis where as In the context of a project financing lender would only be entitled to this ultimate sanction if the project vehicle is an SPV. • For SPV with multiple activities, ring fence the assets associated with these activities © Neev Knowledge Management – Pristine 6 www.edupristine.com Why Project Finance – is it worth it? • Project finance is invariably more expensive than raising corporate funding • It takes considerably more time to organize and involves a considerable dedication of management time and expertise in implementing, monitoring and administering the loan during the life of the project Reasons for opting for project finance • To insulate sponsors from project failure and debt • Borrowing restrictions on corporate • Off balance sheet financing • Risk sharing in large projects – when balance sheet is not strong enough • Tax holidays and concessions in some jurisdictions • Nowadays its becoming a legislative necessity © Neev Knowledge Management – Pristine 7 www.edupristine.com Public Private Partnership • Providing infrastructure has been historically the prerogative and duty of Govts. • Off-late due to various operational inefficiencies and financial crunch Govts across the world have invited private sector players to develop key infrastructure Level of Private Sector Involvement © Neev Knowledge Management – Pristine 8 www.edupristine.com PPP Models Asset Ownership Capital Investment O&M Commercial Risk Service Contract Public Public Both Public Management Contract Public Public Public Public Lease Public Shared Private Shared Concession Public Private Private Private BOT / BOOT Both Private Private Private BOO Private Private Private Private Divestiture Private Private Private Private TYPE © Neev Knowledge Management – Pristine 9 www.edupristine.com Typical project life cycle • • • • • • • • • • • Identification of opportunity Identifying suitable PPP model Development of project documents (RFP, Concession agreements, share purchase agreement etc) Formation of SPV Taking initial project clearances on behalf of SPV Bidding process Transferring SPV to successful bidder Arranging debt by the SPV (Financial closure) Construction Operations after COD Transfer of assets back to the govt after completion of concession period © Neev Knowledge Management – Pristine 10 www.edupristine.com Characteristics of Project Finance under PPP mode • Multiple parties involved – Sponsors – Contractors – Suppliers – Governments – Global financiers, • From inception of an idea to Financial Close, a Project Finance deal can take years to negotiate • All about identifying risks, allocating them appropriately and ensuring that the responsible parties are adequately incentivized to manage their risks efficiently – Construction time, costs & specification – Operational cost, reliability – Supply reliability, quality, cost – Off-take volume, price – Politicial environment, war, local hostility, currency inconvertibility – Socio-environmental responsibilities © Neev Knowledge Management – Pristine 11 www.edupristine.com Key Stakeholders and SPV structure SPONSORS INSURERS HOST GOVERNMENT LENDERS SPV EXPERTS PROFESSIONAL S GUARANTORS PURCHASE R EPC CONTRACTOR OPERATO R SUPPLIER © Neev Knowledge Management – Pristine 12 www.edupristine.com Risks & Mitigants • Ground rules – Risk allocation – according to capacity and control – Never park risk to the company if it is an SPV © Neev Knowledge Management – Pristine 13 www.edupristine.com Risks & Mitigants • Funding Risk – Identification of sources for equity contribution. – Stipulation for minimum upfront equity contribution. – Disbursement only after financial tie-up for the project. • Regulatory Risk – All major statutory approvals including MoEF and forest clearance stipulated as a pre - disbursement condition – Concession agreement is reviewed commercially and risks identified – Suitable undertakings/guarantees are obtained from sponsors to negate any adverse affect of concession provisions – Financing of projects on time-tested concession formats approved by the Planning Commission • Land Acquisition Risk – – – – Minimum land acquisition stipulated as a pre-disbursement clause Projects in sensitive states avoided Land acquisition is the responsibility of Concession Authority Compensation is paid by the authority on account of any adverse delay • Market Risk – Independent consultant appointed by Lenders to conduct market potential/ traffic study – Project funding is structured based on cashflow projections to ensure smooth Debt servicing © Neev Knowledge Management – Pristine 14 www.edupristine.com Risks & Mitigants • Execution Risk – – – – Contracts for Civil works/Procurement of equipment on a fixed time fixed price basis. Contracts to be finalized before any disbursement Reputation of EPC contractor considered Suitable provisions for Liquidated damages/ penalty are incorporated in contract documents. • Technology Risk – Projects based on proven technology are financed – Recourse stipulated in case of emerging technologies • Explicit Political Risks – Most concession agreements / licenses have clear provisions classifying political risks into 2 categories: • Direct Political and Indirect Political • Mitigation mechanisms including compensation is specified in the agreement itself • Implicit Political Risk – – – – – – Policy Risk: Change in policies towards infrastructure like tax sops, concession agreements, grant policies Revenue/Toll Rate Risk: Change in toll rates Regime Change Risk Change in Applicable Laws / Tax Laws Cross Border Governing Law Enforcement Risk Concession Agreements / Licenses govern all aspects of projects under a contract based system and governments honor signed contracts © Neev Knowledge Management – Pristine 15 www.edupristine.com Contractual Arrangements to Mitigate Risk Parties Agreements Mitigation mechanisms Project Sponsors: Shareholders Agreement/Share Subscription Agreement, Sponsor Support Undertakings, Corporate Guarantees. They bear the risks of project design, construction, completion, operation, and maintenance and repayment to the lenders. The cost overrun risk is also borne by the sponsors. Customers Off-take Agreements When there are only a few potential customers for the project’s output, revenue risk is likely to be transferred to those customers by means of a long-term sales contract. Contracts may include: take-or-pay clause, minimum throughput agreement, tolling contract etc. The risk of payments is mitigated through a proper payment security mechanism. Government/ Statutory Authorities Concession/Implementation Agreements Construction Contractors EPC Agreement When a government grants a concession to a project company, there will be a Concession Agreement that gives the company the right to build and operate the project facility. Concession agreement may require the government to construct supporting facilities such as access roads, contains non-compete condition etc. The risk of project construction is mitigated to the construction contractors by entering into a fixed time fixed price contract with them and the contract adequately providing for liquidated damages (penalties) in case of delay in construction. © Neev Knowledge Management – Pristine 16 www.edupristine.com