Advanced Project Financing, Structuring Risks

479 Pages·2014·3.016 MB·English

by  Richard Tinsley

Advanced Project Financing
Structuring Risk
Second edition

Advanced Project Financing
Structuring Risk
Second edition
Richard Tinsley
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Published by
Euromoney Institutional Investor PLC
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London EC4V 5EX
United Kingdom
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Copyright © 2014 Euromoney Institutional Investor PLC
1st edition published 2000
ISBN 978 1 78137 265 4
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Contents
Preface to 1st edition xix
Preface to 2nd edition xxiii
About the author xxv
List of case studies xxvii
List of exhibits xxxiii
List of boxes xxxvii
Introduction 1
Project finance’s origins 1
Project finance defined 2
Type 1 and Type 2 project finance structuring 3
Balance sheet 5
Off balance sheet 5
Deconsolidation 5
Portfolios 5
Defeasance 6
Non-recourse 7
Completion test and option conditions 8
Limited recourse 8
Advantages 9
Capital shortage 9
Risk transfer 10
Deal sequestration 11
Ratings management 11
Securitised project financings 13
Better returns 13
Consortium control 13
Tailoring 14
Covenant busting 14
Flexibility 15
Workouts 16
Privacy 16
Project validation 17
Simple arithmetic 17
Longer term 17
Disadvantages 18
Documentation 18
Extra cost 18
Too long 19
Lender control 20
v
Contents
Higher insurance costs 20
Higher legal bills 21
Greater risk to lenders 21
Recourse 21
Summary 22
1 Structuring stages 24
Technical feasibility stage 24
Financial feasibility stage 29
Market feasibility stage 30
Approach to banks 30
Approach to bond underwriters 34
Board paper 35
Takeout (re)financing 35
Piercing the sovereign ceiling 36
Use in mergers and acquisitions 37
Equity/mezzanine 37
Project concept 37
Summary 38
2 Funding sources 39
Local currency funding 39
Banks 40
Bilateral agencies 40
Multilaterals 42
Multilateral political risk insurance 44
Capital markets 44
Developers 63
Mezzanine 63
Merchant financing 63
Islamic lending 63
Public-private projects 65
Leasing 65
Commodity-based lending 66
Equity 67
Summary 67
3 Cashflows 69
Modelling aspects 71
Interest bases 74
Spreads 75
Reserve styles 76
Cashflow controls 78
Operations summary 81
vi
Contents
Operating cashflows 82
Gross revenues 82
Opex 82
Financing reports 83
Financing costs 83
Capex 84
Modelling cashflows 84
Approaches 84
Typical sensitivities 85
Liquidated damages 87
Model periodicity 88
Input sheet 88
Model shortcomings 90
Summary 90
4 Financial advisers 91
Advantages and disadvantages 91
Need for an adviser 92
Advisory costs 92
Who are the financial advisers? 94
Summary 95
5 Credit ratios 97
Debt service cover ratio 99
Residual/tail 103
Interest cover ratio 106
Principal cover ratio 107
Present value ratios 107
Loan life ratio 108
Project life ratio 109
Residual life ratio 109
Debt:equity ratio 109
Payback 109
Discount rate 110
Leveraged internal rate of return 110
Choice of discount rate 111
Multi-tranche ratios 111
Accounting ratios 112
Telecoms 113
Summary 113
6 Risk systems 114
Insurance 117
Statistical 120
vii
Contents
Risk modellers 121
Benchmark 121
Checklist 122
Contractual linkage/jigsaw puzzle 123
Project finance 123
Summary 124
7 Sector profiles 126
Sector features 129
Analysis by sector 132
Power 132
Power cashflows 134
Tollways 137
Tollway cashflows 138
Railways 138
Railways cashflows 138
Resources 139
Resources cashflows 140
Telecoms 141
Telecoms cashflows 141
Satellites 142
Satellites cashflows 143
Prisons/hospitals 143
Prisons/hospitals cashflows 143
Airports/ports 143
Airports/ports cashflows 144
Water/waste water 144
Water/waste water cashflows 144
Stadiums/theme parks 145
Stadiums/theme parks cashflows 145
Summary 145
8 Structures 146
Risk 146
Contract 146
Trigger 147
Financed 147
Study 148
Avoided 149
Risk division 150
Document matrix 150
Interest 153
Principal 153
Drawdown styles 154
viii
Contents
Certification 154
Benchmarks 154
Anticipated cost to complete 154
Up-front – banks 154
Up-front – bonds 154
Special purpose vehicle 154
Unincorporated joint venture 155
Partnership 155
Trusts 156
Mezzanine 158
Subordinated debt 160
Working capital 160
Bridge loans 160
Multi-tranche 161
Commodity funding 161
Contract structures 162
Supplier credits 162
Buyer credits 163
Pre-export financing 164
Prepayment 164
Advanced payment 164
Leasing 165
Leveraged leasing 166
Wrap lease 166
Captives 166
Double-dip 166
Hire purchase 166
Lease tranches 166
Trigger structures 172
Deferral 173
Inverse order of maturity 173
Current order of maturity 173
Banked deferral 173
Clawback 177
Mandatory prepayments 177
Equity kickers 177
Financed structures 177
Equity 177
Dividend reserve 178
Subordinated debt 178
Convertible debt/initial public offering 178
Securitisation 178
Collateralised loan obligations 178
Revenues 178
ix