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MSc(ICM)CV6214ProjectFinancingSourcesofCapitalandRiskManagementByAssocProfRobertTiongDeputyDirector,CentreforInfrastructureSystems,SchofCivil&EnvironmentalEngineering,NTURoom1c-72,tel:67905253,clktiong@ntu.edu.sgGovernmentContractorsConcessionCompanyRawMaterialSupplierInvestorsOperatorTypicalContractualStructureforBOTProjectBanksUsersofProductConcessionAgreementSupplyContractLoanAgreementShareholdersAgreementOperationContractConstructionContractOfftakeContractProjectCompanyEquityInvestorsGovernmentO&MOperatorFlowofFundsDuringBOTProjectOperationCommercialLendersConcession&ContractualAgreementsProfitRepatriationEscrowAccountTollsOperatorBuildfacilityRevenuespaidintoescrowaccountReturnonequityDebtserviceRoyalty&taxesO&McostsSourcesofProjectFinanceFunding•InternationalCommercialBanks•ExportCreditAgencies•InternationalCapitalMarkets•DomesticCommercialBanks•LeasingCompaniesWhichprojectseasiesttofinance?•Hardcurrencygenerating•Highcapitalequipmentimportvalue(exportcreditcover)•Highdomesticpriority(e.g.powerinSEAsia)•Assuredofftake•Proventechnology•Countrieswithlegal,tax,accountingframework“Financiability”ComparisonTypesofprojectinorderof“financiability”:-exportrefineries/petrochemicals-Power&watersupplyprojectswithgovernmentguaranteedofftake-Telecommswithinternationalrevenues-Road-RailProjectFinancing:Typesofcapitalanddebt•Therearethreetypesofcapitalusedinaprojectfinancing:1.equity2.quasi-equity,and3.seniordebtA.Equity•Representstheriskcapital•Itformsthebasisforlendersorinvestorsadvancingmoreseniorformsofcapitaltoproject•EquityinvestorsarethelastinpriorityforrepaymentB.Quasi-equity:subordinatedloans•Quasi-equityconsistsofsubordinatedloansandadvancestoaproject.Itisseniortoequitycapitalbutjuniortoseniordebtandsecureddebt.Quasi-equitymaybeconsideredasequitybyseniorlendersforpurposesofcomputingdebttoequityratios.•Subordinateddebtmaybeadvancedbyaninvestoraspartofitsoriginalinvestmentintheproject•Asubordinatedloanisoftenusedbyasponsortoprovidecapitaltoaprojectwhichwillsupportseniorborrowingsfromthirdpartylenders•Thesponsormay,e.g.beanownerofproject,asupplierprovidingsubordinatedtradecredit,auseranxioustogettheprojectoperational,orangovtagencyinterestedingettingtheprojectbuiltC.Seniordebt•Debtwhichisnotsubordinatedtoanyotherliability.Itisfirstinpriorityofpaymentfromthegeneralrevenuesoftheborrowerintheeventtheborrowergetsintofinancialdifficulty.Howeverseniordebtfallsinto2categories:•1.unsecuredloans;•2.securedloans.1.Unsecuredloans•Debtbackedbythegeneralcreditoftheborrower,andisnotsecuredbyaperfectedsecurityinterestinanyassetorpoolofassets.Suchanunsecuredloanwillusuallycontainanegativepledgeofassetstoprohibittheliquidandvaluableassetsofthecompanybeingpledgedtoathirdpartyaheadoftheunsecuredlenders.2.Securedloans•Securedloansareavailabletomostprojectswheretheassetssecuringthedebthavevalueascollateralwhichmeansthatsuchassetsaremarketableand/orcanreadilybeconvertedtocash.•Thecollateralofrealproperty,personalproperty,paymentsdueunderatake-or-paycontract,andassignmentofcontractualrightsareallusedascollateralunderprojectfinancing.Sourcesofequityanddebt•Possiblesourcesforloansandequityforprojectfinanceinclude:1.Internationalagencies2.Govtexportfinancingagenciesandnationalinterestlenders3.Hostgovernment4.Commercialbanks5.Institutionallenders6.Moneymarketfunds7.Commercialfinancecompanies8.Leasingcompanies9.Investmentmanagementcompanies10.Wealthyindividualinvestors11.Companieswhichsupplyaproductorrawmaterial12.Companiesrequiringtheproductorserviceproducedbytheproject13.Contractors14.TradecreditorsThesepossiblesourcesforloansorequitycapitalcanbedividedinto2groupsoflendersandsponsors•A.Commerciallenders:1.Banks2.institutionalinvestors(localmarketsforequityandbonds):(i)insurancecompaniesand(ii)pensionfunds3.Commercialfinancecompanies4.Leasingcompanies5.individuals6.Investmentmanagementcompanies7.Moneymarketfunds.B.Commercialsponsors1.Companiesrequiringtheproductorservice2.Companiessupplyingaproductorrawmaterialtotheproject3.Internationalagencies:(i)TheWorldBank,and(ii)areasdevelopmentbanks4.Govtexportfinancingagenciesandnationalinterestlenders:(i)export-importbanks,and(ii)othergovtagencies5.Hostgovernment:(i)govtagencies,and(ii)centralbank6.Contractors7.Tradecreditors8.Vendorfinancingofequipment1.TheWorldBankandareadevelopmentbanks•Providedebtoramixtureofequityanddebtforprojectfinancing.•AWorldBankloanoranareadeveptbankloanhascertainadvantages:1.Theloanstendtobeforlongermaturitytermsthanmightotherwisebeavailable2.Theinterestratestendtobelowerthanwouldotherwisebeavailable.Fixedinterestratesmaybepossible3.ParticipationoftheWorldBankoranareadeveptbankendorsesthecreditforotherpotentiallenders4.Aco-financingarrangementoracomplementaryfinancingarrangementmaybepossible,wherebycommercialbankloansarelinkedwiththeWorldBankorareasdeveptbankloans,withcrossdefaultclauses.Thedisadvantagesoftheseloansare:•Alengthyapprovalprocesswhichmaydelaytheprojectformonthsoryears•Examplesofareadeveptbanksare:AsianDevelopment(ADB),AfricanDevelopmentBank,Commonweal