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Relationship between a Financier and

a Special Purpose Vehicle

By

Robert Johnson

Managing Director, Project & ExportFinance

September 30, 2005



2

Parties involved in a PPP

SPV(Project Co)

Government/Public Sector

Authority

Investors

Banks/

CapitalMarkets

Financial

Advisers

Lawyers

Other Consultants

Insurer Design Builder

Operator/

ServiceProvider

Sub-contractors Sub-contractors

Shareholders/

EquitySubscription Agreement

Public Sector

Private Sector

Construction

contract

Concession agreement

Debt

funding

Securities



3

Definition of ³SPV´ and ³Financier´

Special Purpose Vehicles (³SPVs´)

A company constructed with a

limited purpose or life

Frequently serves as conduits or

pass-through organizations or corporations

In relation to securitization, the

entity which holds legal rights over

assets transferred by the originator

Financier

Banks (acting as financialBanks (acting as financial

advisor and/or debt provider)advisor and/or debt provider)

Export Credit Agencies (ECAs),

multilateral agencies

Mezzanine / subordinated debt

Equity investors

Equity investors (the ³Sponsors´) typically want non-recourse or limited recourse

financing

The financier therefore has to rely on the SPV¶s cash flow as (primary) source of

repayment and its assets as security



4

Various roles for banks

Financial Advisor

Business valuation

Due diligence

Risk assessment

Bid preparation

Negotiation

Documentation

Structure financing

Market financing

Coordination / manage timetable

Lenders

Technical bank

Modeling bank

Insurance bank

Hedging bank

Security trustee

Facility agent

Intercreditor agent

Escrow agent



5

Value-add of a financial advisor

3. Analyse Project Level Risks & Cash

Flow Certainty

Completion and EPC contract

Feedstock, offtake & other operating risks

Financial modelling & sensitivity analysis

DSCR vs. tenor and downsides

6. Recommendation / Game Plan

Match option with Sponsor

objectives

Recommend approach to ensure

optimal solution is successfully

completed

2. Assess Project

Competitiveness

Scale and technology

Low cost and strategic producers

Markets for products

4. Structuring Implications

Optimal Debt: Equity ratio

Quantum of Recourse

Contingent Support

Impact on financing costs

1. Review Industry Factors

Assess how industry outlook

might impact lender appetite

5. Financing Options

Offshore vs. Onshore debt

Clean vs. ECA debt

Capital Market Alternatives

Other liquidity sources

SUCCESSFUL

FINANCING OF THE

PROJECT

SUCCESSFUL

FINANCING OF THE

PROJECT



6

Objectives for equity vs. debt

Level of leverage is determined by:

Project cash flows / projected debt service coverage

Level of sponsor / sovereign support Quality of risk mitigation

Sector outlook (particularly for cyclical industries)

Industry benchmarks and precedent transactions

Liquidity in the market

Country limits for banks

Time to Financial Close

Maximise Return on Equity

Simplified Process

Competition Among Lenders

Maximise Certainty of Financing

Less Onerous Covenants

EQUITY OBJECTIVES

Recourse to Sponsors

High Debt Service Coverage

Proper Risk Mitigation

Capital Recovery

Adequate Due Diligence

Lend at Attractive Margins

DEBT OBJECTIVES / CONCERNS

Fair

allocation

of risks,

returns and

responsibi-

lities



7

Contractual relationship ± Areas of focus

Level of recourse to sponsors

Conditions precedent for funding

Cash flow waterfall

Repayment mechanisms

Controls on the management of the SPV

Monitoring project performance

Security

Default scenarios and remedies



8

Level of recourse to sponsors

Relationship dynamic: Level of sponsor support may determine availability of financing, debt

capacity, tenor, pricing and/or other terms and conditions

Types of recourse to the sponsors include:

Completion guarantee

± Contingency equity commitment to cover cost overruns / construction

delay ± Falls away upon technical and financial completion tests

Cash deficiency support during operations

± Triggered by debt service coverage ratio tests

Sponsor guarantees during the operational phase of the project



9

Conditions precedent for funding

Relationship dynamic: All the arrangements for a functioning project has to be in place

Lenders must be comfortable with the economics and operatingenvironment of the project

Examples of conditions precedent (³CPs )́

Satisfactory fixed-price, turnkey EPC contract with appropriate liquidated

damages (³LDs´) Satisfactory operations and maintenance (³O&M´) agreement

Satisfactory reports from independent technical advisors, marketconsultants, legal counsel

Financing and security documents signed and in full force and effect

Satisfactory insurance arrangements

Satisfactory environmental impact assessment (³EIA´) or managementplan

Banks¶ approval of base case financial projections

Confirmation that no event of default has occurred or is continuing

Valid Government licenses, consents and waivers



10

Cashflow waterfall

Relationship dynamic: SPV typically must deposit revenues directly into lender-managed escrow

accounts, so that lenders can control distribution of cash flow according to

a strict ³cashflow waterfall´

Example of a cashflow waterfall

ÄOperating costs, maintenance capital expenditures taxes, statutory duties

and leviesÄInterest payments

ÄPrincipal repayments

ÄTransfer to Debt Service Reserve Accounts (DSRA)

ÄDebt service for working capital facilities or other

permitted indebtedness

ÄDividend to shareholders (must satisfy financial

tests prior to distribution)



11

Repayment mechanisms

Relationship dynamic: Set aside excess cash flow for repayment purposes for a rainy day

Compensation received from third parties if things go wrong is

immediately applied to repayment of debt

Accelerate repayment when project does well so that lenders can recover

capital more quickly

Examples of repayment mechanisms

Debt Service Reserve Accounts (e.g., forward looking 6 months¶ debt

service)

Mandatory prepayment upon receipt of liquidated damages from

contractors, insurance proceeds, etc.

³Cash sweep mechanism´



12

Control over the management of the SPV

Relationship dynamic:

Establish controls on the management of the SPV to ensure that lenders¶interests are adequately protected

Undertakings will be structured to take into account administrative convenience ± covenants typically have thresholds attached

SPV can seek lenders¶ consent to waive restrictions on a case-by-case basis

Examples of control provisions

SPV to use the debt facilities solely for purposes stated in the facilityagreement

No change of shareholding / mergers

No additional indebtedness

No new investments or acquisitions (except permitted capital expenditures)

No sale or disposal of assets

No creation of liens on property or assets / assignment of incomes or rights tothird parties

No change to SPV constitutional documents

No material change to key contracts

Arms-length transactions with related parties



13

Monitoring project performance

Relationship dynamic: Financiers must be kept up to date with the project¶s operational and

financial performance, so as to spot potential problems early on

SPV typically has to undertake to provide technical and financial

information to the lenders periodically

SPV must inform lenders of any material change in business conditions /

key contracts / legal disputes Examples of ³informational covenants´

SPV¶s annual projections based on the financial model, compiled using

assumptions acceptable to lenders

SPV¶s unaudited quarterly financials and audited fiscal year-end financial

statements

SPV¶s corporate information (e.g., minutes of board meetings) Updates to technical and market consultants¶ reports

Notice of proposed revisions to key contracts

Notice of adverse events (e.g., legal disputes, labor disputes, damage to

assets, event of default)



14

Security

Relationship dynamic: Financiers need to have all the rights, title and interests to the SPV¶s

assets

Typical example of security structure:

Rights to the SPV¶s rights to the project site

Rights to key project documents, including the Concession, the EPC

contract, product sales contracts, etc.

Pledge over the SPV¶s shares

Charge over SPV assets, property and fixtures, plant and equipment, etc.

Floating charge over current assets

Assignment of all insurance policies

Charge over all benefits accruing under hedging or risk management

contracts



15

Scenarios of default and remedies

Relationship dynamic:

Financiers will structure ways to accelerate repayment / exercise step-in-rights / enforce security if things go wrong with either the project /shareholders / key project parties

Most defaults scenarios include a ³cure period´

Waivers can be sought subject to agreement by lenders

Typical events of default include:

Non-payment of debt service Misrepresentation

Illegality

³Cross-default´

Termination of core project documents

Revocation of licenses or permits

Insolvency events Failure to maintain adequate debt service coverage levels

³Material adverse change´

Nationalization / Government default on Concession ± financiers wouldrecognize this is extremely unlikely in the case of Hong Kong!



16

Key takeaways

The earlier a financier gets involved the better Advise on project and contract structures to ensure bankable financing

Interests of financier and SPV are often aligned

Both want risks to be properly mitigated and transferred to parties that are

best positioned to address them

Risk allocation and monitoring has to be fair and sustainable to ensure a

working relationship

Has to be commercial to incentivize everyone to comply

Has to balance monitoring needs vs. practicality / administrative

convenience

Transparency, open communication and good human dynamics are key

Financing relationship lasts as long as 10 to 15 years

A well-structured and well-maintained financier-SPV relationship is conducive

to a successful PPP program



17

Thank you

Robert Johnson

Managing Director

Head of Oil & Gas and Petrochemicals, Asia

Standard Chartered Bank (Hong Kong) Limited

9th Floor Standard Chartered Bank Building

4-4A Des Voeux Road Central

Hong Kong

[email protected]

Tel (852) 2841 0357

Fax (852) 2523 4273

HP (852) 9880 7294

Grace Fung Oei

Head of Global Corporates & Public Sector

Client Relationships, Wholesale Banking

Standard Chartered Bank (Hong Kong) Limited

10th Floor Standard Chartered Bank Building

4-4A Des Voeux Road Central

Hong Kong

[email protected]

Tel (852) 2821 1513

Fax (852) 2523 5854

HP (852) 6336 3328

3- relation_financier spv(r johnson) std chartered

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