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Giddy/ABS Project Financing/1

Project Financing

Prof. Ian GiddyStern School of Business

New York University

Asset-Backed Securities

Copyright 1996 Ian H. Giddy Project Financing 3

Asset-Backed and Project Financing

l Collateralized debtl Securitized loansl Non-recourse project debtl Basic question: Why should a company

segregate the cash flows from a particular business, and make it self- financing?


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Project Financing

l Stand-alone, non-recourse, multi-stake,"production payment financing "

l Structure?l Participants?l Funding sources?l Risks?


Project Financing (Summary)

l Stand-alone, non-recourse "production paymentfinancing"

l Sponsor's vehicle company structures multi-stake finance

l Sources: govt development financing, IBRD/IFC,sponsor loans, supplier credits, customer credits,institutional investors, banks, lease financing,equity

l Risks: resource quantity, input costs, technical,timing, pre-completion, demand, operating, forcemajeure, political

l Risk sharing and mitigation


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Financing Sources

Sponsorn Loansn Equity

Stakeholdercredits

n Suppliersn Purchasers

Govt Development Financing, IBRD/IFC, Eximbanks

Banks, Institutional Investors, Leasing Companies


Project Financing

Definitionl Lending to a single purpose entity

for the acquisition and /or construction of a revenue-generating asset with limited or norecourse to the sponser

l Repayment of the loan is solelyfrom the revenues generated fromoperation of the asset owned bythe entity

l Security for the loanu the revenue generating assetu all shares and interests in theentityu real propertyu all contacts, permitsu authorizations, etc.; and,u all other instruments necessary

for continuing projectoperations

StepsProject Identification

& Resource Allocation

Risk Allocation &Project Structuring

Bidding & Mandating Contracts

Due Diligence &Documentation

Execution & Monitoring

Construction Monitoring

Term Loan Conversion & Ongoing Monitoring


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Benefits of Project Financing

l Limitation of Equity Investment toProjects Economic Requirement -Enhanced Returns

l Risk Sharing and Diversificationl Accounting Treatment Preserves

Corporate Borrowing Capacityl

Access to Long Term Financingl Tax Benefitsl Political Risk Mitigation


The Risks

l Politicall Resource & inputl Technicall Constructionl Legall

Economic

n Cost overruns n Completion delays n Mounting

interest expenses


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Eurotunnel: The Risks and the Remedies

Category Nature Remedy

Political NationalizationGovt interferenceTaxes & the like

LegalTreaty ratified

Technical ProcessEffect on completionRepairability

Use existing technology

Construction DelaysOverrunsRepairability

Use top expertsPerformance bonds

Legal Access to control in defaultFire, injury, etc liability

Security interestsDefault defn

Economic Price competitionRail links

Market studies


Sample Structure

Sponsors /Shareholders

SINGLE PURPOSEPROJECT COMPANY

EquipmentSupplier

Contractor

Feed Stock(e.g., fuel)Supplier

Warranties andSupply Agents

Operator

TurnkeyConstruction

Long TermAgreement

Operations &Maintenance Mgmt

Purchaser

SyndicateBanks

Other Project Participants:

Currency and InterestRate Hedge Providers

Multilaterals and EDAs

Legal Counsel

Technical Consultants

Offtake (e.g,power purchase)Agreement

ArrangingBank


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Asset-Backed and Project Financing

l Collateralized debtl Securitized loansl Non-recourse project debt -- future

payments rather than assets are thecollateral in the SPV

l Basic question: When is an asset worth

more to investors outside the company than inside it?


Case Studies

l Ras Laffan Qatar/Koreal YPF Argentina/Oil Trading Corpl West Java Power Project

Questions:u Who is the issuer?u What assets does it have?u What are the risks, and how are they

handled?


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Ras Laffan

l Who is the issuer?u Ras Laffan LNG Co. Ltd. (Qatar)u But Security Trustee (IBJ) plays unusually

major rolel What assets does it have?

u Natural gas reserves;u LNG take-or-pay Sale and Purchase

Agreement with Korea Gas;u Security Trust Agreement; Project

Coordination Agreement; loan refundagreement, etc.


Ras Laffan

l What are the risks, and how are theyhandled?u Qatar/regional interferenceu Qatar legal systemu Default on Agreementsu Completion/timingu

Operatingu Economic (LNG market)


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Ras Laffan: Natural Gas Project Finance

Ras LaffanLiquified Natural Gas

Korea Gas

Security Trustee

LNG

LNGpayments

Debt servicepayments

Ras LaffanLiquified Natural Gas

Korea Gas

Security Trustee

(New York)

Bondholders

Mobil QM(Mobil Corp.)

Qatargas(State of Qatar)

Joint venture agreement

30% 70%

ContractorsContractors

Contractors

LNG

LNGpayments

Debt servicepayments

Residualpayments

Contractpayments

BanksExport Credit

Agencies

Debt servicepaymentsRas Laffan


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YPF Argentina/Oil Trading Corp

l Who is the issuer?u Oil Trading Corp, Cayman Is. SPV

l What assets does it have?u No oil, just purchase and sale agreements

l What are the risks, and how are theyhandled?u Seller: Political, productionu Buyer: Credit, legalu Economic


Highly ratedUS oil buyer

Major Latin American Oil

Producer

Oil Trading Co.Cayman Islands Investors

Trust

Notes

Debt interestand principal

YPF/Oil Trading Corp.

Salesagreement

Oil

US$payments

Purchaseagreement

Oil


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West Java Power Project

l Who is the issuer?u Pratama SPV

l What assets does it have?u Loan to Dayalistrik Pratama

l What are the risks, and how are theyhandled?u Political; Engineering; Coal supply; Defaulton Purchase Agreement; Economic


West Java Project Financing

Project stage:l Uncompleted coal-fired power plant,

generating power l Has multi-year power purchase

agreeement with utilityl Currently has bank financingl Sponsors seeking to extend financing

and reduce cost by tapping the debtsecurities market


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West Java Project Financing

Proposal:l Sponsor issues infrastructure revenue bonds

to refinance bank loansl Bonds to be issued with 19 year maturities -

longer than the term on the bank loansl May have fixed rate; distributed in US, Euro or

domestic bond market

l Int. and principal secured by contract revenuesl May have 100% guarantee from monoline

insurance company


Govt of indonesia

PLNIndonesia

PD DayalistrikPratama SPV Investors

ASIA Ltd

Guaranteeof interestand principal

West Java Power Project

Guarantee

Rupiah paymentsfor electricity

Purchaseagreement

US$ Interestand principal

on loan

US$ Interestand principal

on bonds

Supplier, Contracor,Operator Agreements

BanksUS$ paymentson term loan


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Summary

l Collateralized debtl Securitized loansl Non-recourse project debtl Basic question: Why should a company

segregate the cash flows from a particular business, and make it self-

financing?


Other Future Flow Securitizations

l Credit card voucher receivablesl Remittance receivablesl Export receivablesl Airline ticket receivablesl Net international telephone settlement

receivables


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Ian H. Giddy

Stern School of BusinessNew York University44 West 4th Street, New York, NY 10012, USA

Tel [email protected]

http://giddy.org

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