Bonding a PublicPrivate Partnership Project in the United

Bonding a Public-Private Partnership Project in the United States SEPTEMBER 18, 2012 VIRTUAL SEMINAR PRESENTED BY: Paul Ranalli, David Mc. Vicker, Courtney T. Walker ZURICH SURETY UNDERWRITING

PRESENTER BIOGRAPHY Paul Ranalli is Senior Surety Account Executive/Practice Leader P 3 with Zurich Surety. He is a 26 year veteran of the surety industry. He began his career with HMS Insurance Associates of Hunt Valley, MD in 1986. He worked in the branch and home offices of USF&G/St. Paul in Baltimore and in the Columbus, Ohio branch offices of St. Paul/Travelers and Zurich NA. Mr. Ranalli joined Zurich in 2004 and is presently transitioning from field office account responsibility to P 3 Practice Leader for Zurich Surety. © 2012 Zurich American Insurance Company David L. Mc. Vicker is a Vice President with Zurich Surety and a 30 year veteran with the company. He has participated in the underwriting and bond issuance on numerous P 3 transactions. In 1980 he started with Zurich -- Fidelity & Deposit Company of Maryland -- in the Internal Audit Division and Comptrollers Department. He began his surety career with the underwriting team, holding various management positions in the Financial Guarantee and Contract Divisions. In 2006 Mr. Mc. Vicker became Senior Underwriting Officer in the Large Account Group and was promoted to Vice President, International Surety in early 2010 before becoming Vice President of Surety, responsible for contract underwriting for the Central Region of the U. S. Courtney Turnage Walker is an Assistant Vice President for Surety Product Underwriting for Zurich North America. She has been in the surety industry for over 20 years where she has been employed as a surety claims attorney, as outside counsel with a surety and fidelity specialty law firm, and as a risk manager for surety underwriting. Ms. Walker helped develop a P 3 bond form for Zurich and has been involved in the risk analysis of several P 3 projects. She is a member of the Louisiana and North Carolina Bar Associations, the American Bar Association and is active in the Fidelity and Surety Law Committee within the ABA. 9/18/2012 2

WHAT WE WILL COVER TODAY • P 3 History/Viability/Transactions (pp. 4 -6) • Types of P 3 Surety Bonds/Terms (pp. 7 -10) • P 3 Structure and Agreements (pp. 11 -12) • Stages of P 3 Process (pp. 13 -17) © 2012 Zurich American Insurance Company • Surety Underwriting Specific to P 3 Projects (pp. 18 -20) • The P 3 Client/Advantages of Surety Bonds for P 3 Security (pp. 21 -22) • Where is P 3 market going in the U. S. ? (p. 23) • Resources, Q&A (pp. 24 -25) 9/18/2012 3

© 2012 Zurich American Insurance Company HISTORY OF P 3 MARKET IN THE U.

© 2012 Zurich American Insurance Company P 3 – IS IT VIABLE FOR THE

© 2012 Zurich American Insurance Company P 3 – TRANSACTIONS PER STATE 9/18/2012 6

TYPES OF SURETY BONDS AVAILABLE FOR P 3 PROJECTS © 2012 Zurich American Insurance

P 3 TERMS TO KNOW Design-Build (DB): The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector. (Many do not consider DB's to be within the spectrum of PPP's). Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue. © 2012 Zurich American Insurance Company Operation & Maintenance Agreement (O. M. A): A private operator, under contract, operates a publicly-owned asset for a specified term. Ownership of the asset remains with the public entity. Build-Finance: The private sector constructs an asset and finances the capital cost only during the construction period. 9/18/2012 8

P 3 TERMS TO KNOW - Continued Design-Build-Finance-Maintain (DBFM): The private sector designs, builds and finances an asset and provides hard facility management (hard fm) or maintenance services under a long-term agreement. Design-Build-Finance-Maintain-Operate (DBFMO): The private sector designs, builds and finances an asset, provides hard and/or soft facility management services as well as operations under a long-term agreement. Build-Own-Operate (BOO): The private sector finances, builds, owns and © 2012 Zurich American Insurance Company operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory authority. Concession: A private sector concessionaire undertakes investments and operates the facility for a fixed period of time after which the ownership reverts back to the public sector. 9/18/2012 9

P 3 TERMS TO KNOW - Continued Lender's Direct Agreement (LDA): This is an agreement between the Owner, Project. Co and the Lender(s) which sets out the Lender's ability to "stepin" to the shoes of Project. Co in the event of a material breach or default by Project. Co under the terms of either the Project Agreement or the Credit Agreement. Request for Proposal (RFP): This is an announcement, typically often by a government agency, of a willingness to consider proposals for the performance of a specified project or program component © 2012 Zurich American Insurance Company Request for Qualifications (RFQ) : procurement tool routinely used by state and local governments and the private sector to select partners in major systems acquisitions, mainly those involving real estate development transactions. SPV- Special Purpose Vehicle aka Developer, Project Co. : the private entity that contracts with the public entity to design, build, finance and sometimes operate and maintain the project. 9/18/2012 10

A TYPICAL PPP STRUCTURE M. O. R. Owner P. A. Lender(s) © 2012 Zurich American Insurance Company M. O. R. Surety Bond Design Builder C. A. . A D. B Project Co . O. M . A. Operator M. O. R (Multiple Obligee Rider) P. A. (Project Agreement) C. A. (Credit Agreement) D. B. A. (Design Build Agreement) O. M. A. (Operation & Maintenance Agreement) 9/18/2012 11

AGREEMENTS IN A P 3 PROJECT TYPES OF AGREEMENT AGREED PARTIES Owner and Concessionaire or Project Co Credit or Direct Agreement Developer and Project Finance Lender Design Build Agreement Developer and Contractor Operate/ Maintain Agreement Owner/Developer and O&M Contractor © 2012 Zurich American Insurance Company Project Agreement Related Agreements and Schedules 9/18/2012 12

STAGES OF P 3 PROCESS STAGE 1: Request for Expression of Interest (RFEI) STAGE 2: Request for Qualifications (RFQ) © 2012 Zurich American Insurance Company STAGE 3: Request for Proposals (RFP) 9/18/2012 STAGE 4: Proponent Chosen STAGE 5: Commercial Close & Financial Close 13

3 P PROCESS – STAGE 1 & 2: RFEI / RFQ © 2012 Zurich American Insurance Company Understanding the Prime Team Members (roles, what they offer, prior P 3 experience, etc. ) Review the Teaming Agreement or Memorandum of Understanding (MOA) between Prime Team Members Overview of the project, anticipated term (Construction and O&M) Skin-in-the-game? Availability Payment or Concession? Anticipated nature of financing (Bond Issue, Bank, Bridge Loan, etc). Identity of Senior Lenders / Debt and Financial Arranger 9/18/2012 14

3 P PROCESS – STAGE 3: RFP © 2012 Zurich American Insurance Company Review of Project Agreement (PA), all related Schedules, Lenders Direct Agreements, and other support agreements. Project Co Structure – Project Team/ Prime Members, ownership, proportionate equity or LOC requirements, term of equity. How are equity/ LOC requirements to be funded / met, and the associated term of commitments. Copy of Financing/ Credit Agreement, or Pre-Sale Report if a Bond issue. Copy of any relevant project rating (ie. S&P, Moody’s, etc. ) A summary of the proposed security package/ performance supports. A copy of the Lender’s Technical Advisor (LTA) pre-RFP-close report. Proposed Financial Model, Cash Flow, Construction Sched. (if not in the LTA report). A copy of the Lender’s Insurance Advisor (LIA) pre-RFP-close report. Anticipated Project Cost Breakdown to include: cost of financing, cost of construction, project overheads, soft costs, life cycle (O&M) budget, contingencies, margin. 9/18/2012 15

3 P PROCESS – STAGE 4: PROPONENT CHOSEN © 2012 Zurich American Insurance Company It is during this window between the naming of a preferred proponent and commercial close in which significant negotiations occur on all commercial terms. Essentially, updates/ reconfirms all required in Stage 1 -3 Lead time is critical during this Stage (updates, including black-lined versions of all documents with each and every turn) Bond Forms negotiated among the Surety(ies), Contractor and Lender/Funder and Rating Agency. Multiple Obligee Rider negotiated with any co-obligees (typically the Owner and Lender) 9/18/2012 16

3 P PROCESS – STAGE 5: COMMERCIAL CLOSE & FINANCIAL CLOSE © 2012 Zurich American Insurance Company Commercial Close is representative of the day on which all project documents (including the credit/finance agreement, but not the financial model) need to be finalized and executed and is generally 60 days after the naming of a preferred proponent or winning bid. Financial Close is representative of the day on which the financial model is finalized, rates are set, and the financial structure becomes fixed and is generally no more than 30 days subsequent to Commercial Close. The current commercial trend is towards shortening this time frame (to remove the risk of adverse market conditions developing), and in some instances, Commercial Close and Financial Close occur on the same day, or within 24 hours of one another. 9/18/2012 17

UNDERWRITING CONSIDERATIONS SPECIFIC TO P 3 PROJECTS ü ü ü What is Relationship of Developer/SPV to the DE Contractor and/or O&M Contractor? What is Contractors past experience with SPV? What is Financing Structure of job? (Availability Payments or Concession Revenues as source of payment. Equity Financing, Bank Financing, Bond Issuance ) What are potential financial risks to Contractor (and Surety)? What are the bonded obligations? – limit to design/construct and exclude Concessionaire activities. Does Contractor have an Equity Interest in SPV? Are Dispute Resolution procedures defined in contract? © 2012 Zurich American Insurance Company ü 9/18/2012 18

SURETY U/W AREAS OF FOCUS – P 3 TRANSACTION ISSUES © 2012 Zurich American Insurance Company Pass thru of project agreement obligation to Design Build Agreement and O&M Agreement (normal contractual T&C’s ) Bonded obligation related to constructor not developer activities No obligation of finance guarantee or credit enhancement Impact of Lender’s rights on the Surety’s rights Funding terms and availability of funds in event of default Specific security requirements – liquidity, performance, other Multiple Obligee Rider Requirements O&M usually not bonded Sub/ supplier security Insurance/ contingencies 9/18/2012 19

SURETY U/W AREAS OF FOCUS – ENSURING APPROPRIATE BOND LANGUAGE EXCLUSIONS © 2012 Zurich American Insurance Company Financial regulations and constraints (aka Appleton restrictions) Bonded Obligations should not include non-construction obligations Financing Costs Breakage Fees Liquidated Damages Other Damages Operations & Maintenance Examine definition of Events of Default 9/18/2012 20

THE P 3 SURETY CLIENT © 2012 Zurich American Insurance Company Best in Class Contractors (excellent history of building) Financially strong credits (strong JV team) Sophisticated risk managers Typically larger contractors in scale Indemnity - all project level participants/ DB contract guarantors 9/18/2012 21

ADVANTAGES OF SURETY BONDS FOR P 3 SECURITY © 2012 Zurich American Insurance Company DB Contractor’s motivation for bonded P 3 project – Continuing Surety Relationship Surety expertise with troubled projects vs. a lender’s experience Significantly increased performance and financial security to owner and developer Reduced financial impact on contractor’s balance sheet with Surety Bond vs. cost and collateral for an LOC 9/18/2012 22

WHERE IS P 3 MARKET GOING IN THE U. S. ? © 2012 Zurich American Insurance Company FMI Research Group reports - “The number of construction projects in the US that are more than $1 billion has gone from zero in 2005 to 104 in 2011. "* PA latest state to pass P 3 legislation and 31 states have P 3 laws. Many state agencies are exploring P 3, but it is a tremendous learning curve P 3 procurement model will be a staple over the long term Public debt will be cheaper than P 3, in just about every instance. However, P 3 offers efficiency of the private sector in financing, design, construction, operations and maintenance *Source: 2012 Issue 2 FMI Quarterly , ‘What’s Ahead for P 3 s in the US? 9/18/2012 23

RESOURCES www. NCPPP. org National Council for P 3 www. fhwa. dot. gov/ipd/index. htm US Department of Transportation Innovative Program Delivery www. pwfinance. net © 2012 Zurich American Insurance Company Trade Journal : Public Works Financing – the journal of record for P 3 in infrastructure development since 1988 9/18/2012 24

QUESTIONS? © 2012 Zurich American Insurance Company If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenter directly: Paul Ranalli, Sr. Surety Account Executive/Practice Leader P 3 Zurich Surety Tel: 614 -934 -1249 E-mail: paul. ranalli@zurichna. com 9/18/2012 25