Financing PPPs: Project Finance June 2006

P. 2

Index

Section I. Project Finance

Section II. Spanish Market Advantages

Section III. Risk Matrix

Project Finance

Section IProject Finance

P. 4

Definition

Definition: A form of financing projects, primarily based on claims against the financed asset or project rather than on the sponsor of the project. However, there are varying degrees of recourse possible. Repayment is based on the future cash flows of the project.

Sección I

Project Finance

P. 5

Principal Participants in a Project Finance

Sponsorsnational

Sponsorsinternational

Government BanksNational Banks

MonolinesInternational Banks

Capital Markets

Project Finance

Sección I

P. 6

Financing Structure

Shareholders

Construction Joint Venture Operating Company

CapitalDividends + interest

Principal + Interest

Payment

Payment CV + CF

Insurance company

Service supplier 1 Service supplier 3 Service supplier 3 Service supplier n

ServiceContracts

Project Company (SPV)Administration BanksConcession

AgreementFinancialcontracts

ConstructionContract

Operating & Maint.

Contract

Project Finance

Sección I

P. 7

Calendar

• Feasibility Study

• Contracts & Risk management

• Economic analysis and Financing structure

Financial Advisor: Banks

Financial Structure

Phase I

Risk analysis

Phase II

Financial closing

Phase III

• Term Sheet & IM

• Arrangers: Term Sheet & Contracts negotiation

• Financial closing

• Participants: Syndication

Process duration: 4 monthsProject Finance

Sección I

P. 8

Financial institution rules

Financial Underwriting

Funding in the Capital Markets

Other financial facilities: bridge, RCF,

Possibility of equity investments

Arrangement/Financing

Tender preparation

Advisory to the Sponsors

Feasibility study of the project

Risk analysis

Optimum economic, legal and tax structure

Other sponsor research

Legal structure

Coordination between different participants

Project presentation in the Capital Markets

Negotiation with the financial institutions

Advisory

Sección I

Project Finance

P. 9

Volume of operations

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

UK USA Australia Italy China Indonesia Brazil

USD

Mll

Spain Japan México

Volume operations (2004)Dealogic

Sección I

Project Finance

P. 10

Financing tools

Bank financing

No bank financing

• Securitization

• Bonds

Sección I

Project Finance

P. 11

Bank Financing (I)

► Main financial source

► Debt with SPV. Operative relationship with the sponsors, no financial relationship.

► High leverage ratios.

► Long repayment terms. Taking into account Cash Flows

► It is out of the balance financing for the sponsors, no effect in rating

► Pricing: Interest rate + margin

► Reference rate: DSCR

Sección I

Project Finance

P. 12

►The Financial model is the main tool to obtain the economic analysis and the financing structure.

►Main ratios to measure project capacity to face debt obligations:

Interest Coverage Ratio (“ICR”)

Cash Flow available for debt service

Interest

Debt Service Coverage Ratio (“DSCR”)

Cash Flow available for debt service

Debt service (principal, interest & commissions)

Loan Live Coverage Ratio (LLCR)

NPV of Cash Flows available for debt service (during debt) discounted at debt rate

Outstanding debt

Sección I

Project Finance Bank Financing (II)

P. 13

Leverage and Term

Debt / Equity vs term

IPP Spain (1)x

Deb

t/Equ

ity

Total term

40

50

60

70

80

90

0 10 15 20 25 30

Wind USA

x

Roads USA

x

Wind Spain

x

Underground

Spain

x

Roads Ireland

x

UK PPP’s

x

Ports Spain

x

Sección I

Project Finance

P. 14

Non Bank Financing

► The process of aggregating credit rights of the concessionaire, mainly right to collect tolls, revenues of the commercial areas and payments of the Administration into a negotiable security.

• Risk transfer to the investor.

• Different terms.

• Widely used in the international markets. No in Spain

• Advantages: cheaper financing cost and flexibility.

Securitization

Sección I

Project Finance

P. 15

►As the borrower is a SPV, the risk profile is complicated and not attractive for the bond market.

►This type of financing is used with a Monoline guaranty

►In Spain it has been used just in the “Autovía de los viñerdos” and M-45

Bonds

Sección I

Non Bank FinancingProject Finance

Project Finance

Section IISpanish market advantages

P. 17

The main differences with the UK modelSpanish Market

UK SPAIN

Concession Grant► Initial competition

► Concession terms negotiation

► Initial competition

► Initial terms stated and

then negotiation

► Financial Close prior to

concession grant

► Financial Close once the

Concession is granted

► Fixed from the beginningBinding terms

Financing

Section II

P. 18

Advantages of the Spanish Legal FrameworkSpanish Market

Legal framework helps to structure different financial schemes

Asset Responsibility Economic + FinancialEquilibrium

Section II

Project Finance

Section IIIRisk Matrix

P. 20

Main risksRisk Matrix

Building & Operational Risk:

► Building► Demand► Operating

Financial Risk

Section III

P. 21

Risk mitigation

Cost Construction Contract Fixed price

Delay Construction Contract Penalty clause

Technical performance Construction Contract Penalty clause

Operating Operation Contract Technical advisor will control the operation

Traffic Concession contract Fix tariff

Tariff / Law Concession contract Tariff will compensate traffic and law changes

Force Majeure Concession contract Concession agreement will cover these risk

Political risk Concession contract Concession agreement will cover these risk

Contracts will provide mechanisms to mitigate the risk:

Mitigation mechanismContract

Contractual structure & risk mitigation

Risk:

Section III

Risk Matrix

P. 22

Other risk mitigations

• Sponsors Technical & Financial solvency.

• Due diligence.

• EPC Contract.

Long warranty periods.

Penalty clauses.

• Operating & Maint. Contract.

Extension definition.

Length.

Cost limits.

Section III

Risk Matrix

P. 23

Advisors & Insurance Program

Insurance program

External Advisors

Traffic Advisor

Insurance Advisor

Legal Advisor

Technical Advisor

Audit Advisor

Construction

Operating

Damages

ALOP

Civil liability

ALOP

Civil liability

Force Majeure

Section III

Risk Matrix