Wall Street Prep Webinar

An Insiders Primer on
Project Finance
Seminar 1: The who and why, structure and funding sources

Introduction

A brief overview of project finance

What is project finance?
Who uses it and why?
Structure and participants
Introduction to seminar 2
Structuring a project finance deal
Risks

Key metrics

The instructor

Haydn Palliser
Managing Director
BEng (Hons), MAppFin
haydn.palliser@corality.com
+1 646 771 5937

Project finance involvement for 10+

years
Managed projects from various
angles including engineering,
contract management, financial
modeling, strategic and financing
advice, negotiating and arranging
financing
Project finance consultant across
energy, infrastructure and mining
An expert trainer, training teams in
project finance within banks, PE
firms, funds and corporates

Wall Street Preps Project Finance Partner

Corality Financial Group is a global consulting firm specialising in training, financial modeling,
model auditing and transaction support.
Thought leaders in the world of analytical consulting
Offices in London, Sydney, New York

Project finance trainers and leaders

Consulting

Training

Financial
modelling

Model audit

Transaction
support

Opportunities to learn more!

Corality runs public boot camps in project finance, including:
2-day best practice project finance modeling
2-day advanced project finance modeling
Project finance: concepts and applications
Project finance: transaction simulation masterclass
Financial modeling for renewable energy projects

PPP/P3/Infrastructure project modeling

Slide deck for the course

Download:
http://wsp_coursematerials.s3.amazonaws.com/Webinars
Technical issues during the presentation:
support@wallstreetprep.com

What is project
finance?

A brief overview of project finance

Project Finance is a means of financing projects with significant capital requirements and/or
which may not otherwise secure funding
Financing assets or groups of assets (projects) limited role
Relatively small companies are able to build large and complex projects

Non-recourse debt repayment, solely reliant on the cash flows of the project
Typically applied to projects in Power and Energy, Natural Resources, Utilities and Infrastructure
(Social and Economic) industries
It focuses on structuring risk through contracts to the parties most able to take it

But what is a project?

If you have procured all of the necessary:
- Components;
- Land;
Labour, etc.
Do you have a bankable* project?

*bankable = financeable project = a project which could raise third party finance, both debt and equity?

A brief overview of project finance

If you have procured all of the necessary components, land, labour, etc.; and
Have installed all of the components above; and
Your company produces the desired output

Do you have a bankable project?

No, not yet a bankable project!

a bankable project is a set of contracts, which:
Regulate the relationships between the various parties involved in the project, including
builders, operators, clients, suppliers, etc.
Regulate the risk sharing between the various parties involved in the projects

Regulate the obligations and remuneration between the various parties involved in the projects
Generate sufficient cash flow to repay your debt / provide a return

Bankable project

All required
permits

Developer

Grid Connection
Agreement

Financiers

Project
Company
(SPV)

Land Lease /
Right to Use

EPC Contract

Offtake
Agreement
Fuel Supply

Site Security

O&M Contract

Management
Contract

Insurance
Contract

Timeline and completion

Development

1 3 yrs

Construction

Financial Close

Operations

1-3 yrs

5 - 30 yrs

Completion

Refinancing

Closure

1 - 5 yrs

The majority of the work is performed during the development phase

Arranging finance takes ~3-6 months
It is important that all parties (contractors, suppliers and financiers) agree on
the contractual structure simultaneously occurs at the Financial Close day

Early involvement of a professional financial adviser and due diligence

consultants is critical to the success of the project
Completion and cash flow / contracted period

Characteristics of project finance

Capital Intensive tendency towards large-scale projects (industry focused)
Highly Leveraged typical gearing of 50-75% (mezzanine debt ensures return to equity holders)
Long Term duration can typically reach 15-35 years
Special Purpose Vehicle project company typically established by sponsor to own and operate

the project

Characteristics of project finance

Non-recourse Financing Lenders only repaid from project cashflow
Controlled Dividend Policy Income to cover OPEX, debt service, tax and ROE
Multiple Participants technical and geographical scale demands many players
Allocated Risk identification and allocation of key risks is crucial
Contracted cash flows
Expensive greater information requirements and contractual complexity increases overall
transaction costs

Why use project

finance?

Some alternative funding sources

Corporate debt (capital markets / debt)

Equity
Venture Capital
Convertible Notes
Shareholder Loans
Quasi debt / equity

Why Bother with Project Finance?

Can you achieve the same thing with corporate finance?
All required
permits

Developer

Grid Connection
Agreement
Land Lease /
Right to Use
Insurance
Contract

Projects

Financiers

Why Bother with Project Finance?

Can you achieve the same thing with corporate finance?
All required
permits

Developer

Grid Connection
Agreement
Land Lease /
Right to Use
Insurance
Contract

Projects

Financiers

Advantages:
Simpler
Easier
Disadvantages:
Hard to transfer the ownership to 3rd parties
Concentrated risk
A single project may bankrupt the Developer
Project > Developer
Off-balance sheet financing
Other Consideration:
Cost of Capital

Commercial drivers for project finance

Limited or no recourse

Risk sharing
Involvement of joint venture partners
Restrictions on level of corporate borrowing
Tax advantages
Local legislation

Characteristics of project finance

Non-recourse Financing Lenders only repaid from project cashflow

Controlled Dividend Policy Income to cover OPEX, debt service, tax and ROE
Multiple Participants technical and geographical scale demands many
players

Allocated Risk identification and allocation of key risks is crucial

Expensive greater information requirements and contractual complexity
increases overall transaction costs

Comparison to corporate finance

Common project finance funding sources

Traditional project finance banks

Capital markets
Debt funds
Asset or alternative funds
Government

More on this in seminar 2..

Structure and
participants

Project finance structure

Participants
Sponsor
o SPV owners (equity providers)
o Typically active in project (have a role)
o Financial capacity is still important
o Partnering and risk sharing
Borrower

o Special purpose vehicle (SPV)

o Enters into contracts

Participants
Construction contractor
o Fixed price / turnkey vs other structures, track record
Operator
o Provide operations and maintenance
o Experience, fixed price
Offtaker

o Credit risk
o Fixed price vs volume vs both

Participants
Financiers
o Experience critical (structure / metrics / problems)
o Multiple lenders and structures (seminar 2)
Advisors
o Helping bankability before going to banks
o Financial model is central to negotiation due to structure

o Legal, accounting / tax, insurance, technical, financial

Seminar 2

Wrap-up
Project finance is a viable and often compulsory alternative to capital intensive projects
Risk allocation is a major driver
Can provide additional leverage
Is a well defined process, know the right steps
Financial model is your main negotiation tool, metrics bespoke to project finance, scenarios!

Next steps
Seminar 2 (register now!) covers:
o Cash flow waterfall and project financing structure
o Risk structuring
o Financial modeling & metrics
Review the project finance courses on Wall Street Preps website
o Project finance modeling and theory courses

o Speak to Wall Street Prep for more information