Project Financing Prof Ian GIDDY Stern School of

Project Financing Prof. Ian GIDDY Stern School of Business New York University

Asset-Backed and Project Financing Collateralized debt l Securitized loans l Non-recourse project debt l Basic question: Why should a company segregate the cash flows from a particular business, and make it selffinancing? l Copyright © 2003 Ian H. Giddy Project Financing 2

Project Financing Stand-alone, non-recourse, multi-stake, "production payment financing" l Structure? l Participants? l Funding sources? l Risks? l Copyright © 2003 Ian H. Giddy Project Financing 3

Project Financing (Summary) l l l 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 Copyright © 2003 Ian H. Giddy Project Financing 4

Financing Sources Sponsor n Loans n Equity Copyright © 2003 Ian H. Giddy Project Financing 5

Financing Sources Sponsor n Loans n Equity Copyright © 2003 Ian H. Giddy Stakeholder credits n Suppliers n Purchasers Project Financing 6

Financing Sources Sponsor n Loans n Equity Stakeholder credits n Suppliers n Purchasers Gov’t Development Banks, IBRD/IFC, Eximbanks Copyright © 2003 Ian H. Giddy Project Financing 7

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 Copyright © 2003 Ian H. Giddy Project Financing 8

Project Financing Definition l l l 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 Copyright © 2003 Ian H. Giddy Steps Project Identification & Resource Allocation Risk Allocation & Project Structuring Bidding & Mandating Contracts Due Diligence & Documentation Execution & Monitoring Construction Monitoring Term Loan Conversion & Ongoing Monitoring Project Financing 10

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 l Copyright © 2003 Ian H. Giddy Project Financing 11

Sample Structure Arranging Bank Sponsors / Shareholders SINGLE PURPOSE PROJECT COMPANY Equipment Warranties and Supply Agents Supplier Contractor Turnkey Construction Feed Stock Long Term (e. g. , fuel) Agreement Supplier Operator Copyright © 2003 Ian H. Giddy Operations & Maintenance Mgmt Offtake (e. g, power purchase) Agreement Syndicate Banks Other Project Participants: Purchaser Currency and Interest Rate Hedge Providers Multilaterals and EDA’s Legal Counsel Technical Consultants Project Financing 12

Don Pedro Hydro What is typical about this project financing? l What is special about this project financing? l Explain how it is possible for this to be financed with an 81/19 debt-equity ratio, even though the debt is in dollars and the revenues are in local currency. l Copyright © 2003 Ian H. Giddy Project Financing 13

Copyright © 2003 Ian H. Giddy Project Financing 14

Wednesday: Equity Financing Techniques Deutsche Telekom Mount Cameroon Ecotours Telkom SA Copyright © 2003 Ian H. Giddy Project Financing 15