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The following extract is from Practical Introduction to Project Finance by C.R.Tinsley published by Euromoney/DCGardner Self-Study Solutions. You can order it from IAF directly or from Euromoney Self-Study Solutions, Nestor House, London EC4V 5EX, England. Fax:+44-20-7779-8541 There are potentially 19 participants in a Project Financing. The Power point figure (click on Participants) shows these relationships for a typical build-own-operate power plant. 1. Sponsors Participants who provide:
like to join together to develop projects, often trying to earn extra equity from the provision of their (perceived) strength. 2. Borrower/SPV Many project financings are structured with a special purpose entity or borrowing vehicle which gathers support from the Sponsors pre-Completion. Post-Completion it becomes the sole borrower of the Project Financing. This is the key means of isolating recourse to the Sponsors post-Completion. A variety of structures apply:
A cost corporation can sometimes be structured for a tolling entity. In this circumstance, the cost corporation’s revenues are just sufficient to cover operating costs. Predictably, tax authorities resist this feature. 3. Financial Advisers Diverse groups hold themselves up as financial advisers. The main types are as follows:
The trick is to know when and if to use a particular adviser. In general, advisers with an embedded conflict of interest, such as a bank or equipment vendor, need careful management since the risk acceptance in another sector may be unknown or anathema to their primary aim. Financial advisory work is sometimes a loss-leader service for an entity which can collect a second fee or commission if the Project Financing proceeds. Nevertheless, early financial advice may be of most value by pointing to avenues and structures which should not be pursued. 4. Arranger/Lead Underwriters Once the Project Finance structure has been worked out, it is common to mandate an Arranger or Lead Underwriter group to pull the documentation and funding together. Usually one or two leaders carry the negotiations, although these days many roles are parcelled out in bank Project Financings such as:
Ego or capability may drive appointment to these roles. Through syndication, other participants become involved such as Managers, Co-Managers, and Participant Banks whose rank is solely related to the amount of financing provided. Syndication is dealt with more fully in the Structuring and Funding workbook. The Arranger may also be responsible for the ECA and MLA tranches or alternatively these agencies take the lead arranger/co-lead role. 5. ECAs/MLAs ECAs and MLAs may be involved through Project Financings by way of cofinancing or complementary financings or through buyer and supplier credits. They may also provide PRI. 6. Agent/Trustee In some cases, more usually in the United States of America, a separate entity is charged with the responsibility of managing the documentation, the bank accounts, and the reserve account provisioning. The agent in a bank transaction is usually one of the Arrangers/Lead Bank. 7. Lessors If a lease is structured, then the capability of the lessor and its presence for the life of the lease needs examination. Since the lessor is taking over depreciation of assets otherwise credited to the project’s tax position, care is required to ensure no tax risks arise from a failure by the lessor to live with its arrangement with the project entity as lessee. Also, early termination of leases may incur a penalty. 8. Independent Experts Some of the Sponsor’s feasibility study will have contained work by independent experts who may be called upon recertify their work. The project financiers may require independent reviews such as:
which may be encapsulated in one-off studies or may need constant patrolling during the construction, commissioning, and operation of the project. An independent engineer, originally hired to review the whole project and contract architecture, may be responsible for signing off on construction progress and Completion. 9. Lawyers Documentation of a Project Financing requires specialist legal skills and an understanding of the risks that are being allocated by the different participants in numerous documents. Many Project Financings have a cross-border component which requires international or multiple legal advice. Early legal advice, judiciously used, may be important to avoid structures and identify ownership, financing, and security routes that are not available or too expensive. However, some lawyers seem to feel compelled to use Project Financing’s complexity as an excuse for investigation of issues as broad as constitutional or jurisprudential matters rather than finding the way to thread through the legal minefields. 10. Government Many Project Financings involve a government, an agency, a minister, or regulatory authority either directly through the concession or indirectly through the provision of services, consents, or state company involvement. Government can also be involved in tax and foreign exchange arrangements, financial or performance guarantees to state or quasi-state entities, infrastructure/access rights, or as an intermediary with local governments/landowners. Some developments are conducted under legislation specific to that project. International treaty obligations may require government action. 11. Construction Contractor The construction company may be involved at each of:
These activities are usually policed by the owner’s engineer or representative who works with the construction company’s project manager. Under a turnkey contract, this entity is providing Completion support via Liquidated Damages ("LDs"), Retentions, Performance Bonds, and Delay-in-Startup ("DIS") insurances. 12. O & M Company Some companies thrive on using their management skills and are able to service a Project Financing during commissioning or after Completion. Sometimes these companies will provide performance guarantees through bonus and penalty/LD clauses. 13. Insurers The interplay of insurances on risk allocation for Project Financing is so extensive that it requires specialists either as brokers/advisers or with the insurance companies. Packages of insurances during construction, DIS, business interruption (post-Completion), environmental, third-party, and statutory insurances need careful assessment for cost, availability, deductibles, and settlements. Also the insurance documentation needs specialist legal skill since arcane wording and jargon is prevalent. 14. Swap Counterparties Swaps require other principals and intermediaries to exchange the risk being swapped. Credit analysis on those entities is required since payment and redelivery risks will occur in the future. Early termination of swaps may incur substantial unwinding costs. Commodity swaps may be used for supply or offtake product prices. 15. Suppliers Raw materials or equipment may be supplied by third parties under contracts or under preferential purchasing arrangements. It is important to gauge the ability of these parties to perform long term. 16. Equipment Vendors Many Project Financings require startup guarantees and post-commissioning performance warranties (a) directly, (b) through the construction contractor, or (c) the O & M company. Vendors may provide substantial LDs as well as significant tranches of supplier credits. 17. Offtaker The project’s output is often sold to one or more Offtakers under contract. The strength of the offtaker and its technical or strategic dependence on the output needs to be assessed for the life of the project, not just the life of the loan. 18. Transportation Company Suppliers or Offtakers may require access to third-party transportation facilities such as pipelines, railways, ports, transmission lines, satellites, etc. 19. Rating Agency If the Project Financing is by way of a rated security, then this agency will be intimately involved in assessment of the project structure using the same credit tools for Project Financing described in the Project Feasibility and Credit Factors workbook. Early advice before settling the ratings presentation is vital to ensure smooth compliance with the ratings agency criteria. |
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