PROJECT FINANCE STRUCTURING A DEAL
Private and Confidential: For Limited Circulation Only DISCLAIMER
• This presentation (“Presentation”) has been prepared by Synergy Consulting Infrastructure and Financial Advisory Services Inc. (“Synergy”) to provide helpful information on the subjects discussed for educational purpose only. • Synergy will not regard any person (whether a recipient of this Presentation or not) as a Client and will not be responsible for providing any advice or protections to any such person. • No representation or warranty, express or implied, is or will be given by Synergy or their respective directors, affiliates, partners, employees or advisors or any other person as to the accuracy, completeness or fairness of this Presentation and no responsibility or liability whatsoever is accepted for the accuracy or sufficiency thereof or for any errors, omissions or misstatements, negligent or otherwise, relating thereto. • Synergy does not undertake, and is under no obligation, to provide any additional information, to update this file, to correct any inaccuracies or to remedy any errors or omissions in this Presentation. • The Presentation should not be regarded as constituting an opinion on the situations discussed in the Presentation, nor relied upon as a basis to proceed, or not to proceed, with any specific action or remedy.
2 CONTENTS
1 DEAL STRUCTURE OVERVIEW 4 DEBT FINANCING
FINANCING OF PROJECT: 2 OVERVIEW
3 EQUITY FINANCING
Private and Confidential: For Limited Circulation Only 1.1 DEAL STRUCTURE OVERVIEW DEAL 1 STRUCTURING 1.2 FINANCING STRUCTURE OVERVIEW OVERVIEW 1.1 DEAL STRUCTURING OVERVIEW KEY ASPECTS
• Contractual structure •Minimum functional requirements •Risk Allocation •Design limits •Risk mitigation (Back to back risk transfer and insurance) •Plant efficiency guarantees / KPI regime
Legal Technical Structure Structure
Commercial Financing Structure Structure •Commercial framework (BOO/BOOT, Concession term etc.) •Senior debt financing
•Tariff structure including •Equity, EBL, SHL deductions / deemed payments •Payment guarantees, LCs •Government guarantees
5 5 1.2 FINANCING STRUCTURE OVERVIEW TYPICAL REQUIREMENTS
Deal Type
Bid Bid Negotiated Deal (with Lender Commitment) (without Lender Commitment)
• Senior Debt Financing • Senior Debt Financing • Senior Debt Financing
• Several bids require lender • Some bids in the region do not • No senior debt commitments are commitments ranging from a require lender commitment at bid typically sought at proposal stage minority up to 100% of debt stage. However, sponsors may be requirement required to submit bank LoIs to • Sponsors typically finalize the demonstrate lender interest and commitment from senior lenders • LoI from ECAs/DFIs may also be also to correctly incorporate likely before the commercial close submitted (though this is typically financing terms in their bid not considered as part of • Depending upon overall deal committed funding) • While some initial lender structure and negotiations, lender comments may be provided at requirements may need to be • Lender sign-off on project pre-bid stage (especially by DFIs) anticipated and included within documents is required pre-bid (i.e Detailed DD is commenced only project documents at significant lender legal DD is after the appointment of negotiations stage performed pre-bid) preferred bidder • Equity Financing • Equity Financing • Equity Financing • Procurer may seek an equity • EBL – typically LoIs are • Sponsor may submit EBL LoIs / commitment letter as a part of considered to be sufficient equity commitment letters to aforementioned short form demonstrate their level of proposal • Equity commitment letters commitment to the procurer 6 2.1 SOURCES OF FINANCING FINANCING OF 2 PROJECT: 2.2 KEY FINANCING CONSIDERATIONS OVERVIEW 2.1 SOURCES OF FINANCING INTRODUCTION
In order to meet the project’s funds requirement, cash is infused either in form of Equity or Debt
EQUITY PROJECT COST DEBT
1. OPTIONS FOR EQUITY FINANCING 2. OPTIONS FOR DEBT FINANCING
• Equity Bridge Loan • Loans from lenders including : • Cash Equity Infusion • Commercial Banks/Fis • Shareholders Loan • Multilateral Agencies/ DFIs • ECAs • Bonds
3. LOAN CLASSIFICATION: ON THE BASIS OF 4. LOAN CLASSIFICATION: ON THE BASIS OF DOCUMENTATION STRUCTURE
• Conventional Lending • Long Term Facility (Covered / Uncovered) • Islamic Financing • Mini Perm Facility
Private and Confidential: For Limited Circulation Only 8 2.2 KEY FINANCING CONSIDERATIONS
• The risk allocation structure under project documents needs to be acceptable to the developer, lenders Acceptable Risk Allocation and other stakeholders, for the project to be successfully financed by local / international lender community
• Lenders would also take into account the requirement of the project to the Offtaker on a long-term basis • Strategic nature of the project to the Offtaker would instill confidence and generate ample interest in Strategic Nature of Project the lender community & Project Need • Analyze the economic feasibility and viability of the project, vis-à-vis the region / country • Lenders are expected to review the need for the project based on the increase in demand of the produce in the market
• Environmental concerns and technology utilized will be key considerations for most development Environmental Concerns financial institutions and some international commercial lenders for providing funding to certain projects like coal fired power project
Credit Strength Of The • Credit strength of the Offtaker and sufficient credit support mechanism would be key to generate Offtaker sufficient interest from the lender community
• Mature technology in utility space which has proven its bankability through several successful Established Utility transactions in the region is generally preferred by the lenders Technology • Lenders are expected to be comfortable with such well established technologies in the utility space
Private and Confidential: For Limited Circulation Only 9 3.1 EQUITY CONTRIBUTION
3.2 BASE EQUITY SOURCES OF 3.3 EQUITY BRIDGE LOAN 3 EQUITY 3.4 SHAREHOLDER’S LOAN FINANCING 3.5 PREFERRED EQUITY
3.6 LETTER OF CREDIT 3.1 EQUITY CONTRIBUTION OVERVIEW
Equity Bridge Loan Shareholder’s Loan
Base Equity Equity Commitment Letter of Credit
Private and Confidential: For Limited Circulation Only 11 3.2 EQUITY BRIDGE LOAN KEY FEATURES
• Short term facility raised to bridge Sponsors’ equity investment in a project • Stop-gap measure until medium or long-term funding can be arranged. Also called swing loan or Definition gap loan (also delays the infusion of more expensive cash equity, into the Project) • Sponsors typically fund a portion / entire equity investment in a Project by way of an Equity Bridge Loan (increasingly being accepted as a bid optimization measure to boost IRRs)
• Provided for a short period of time (though the tenors have been increasing with the increased acceptance among the lenders, in the region with EBL tenors now ranging to up to 9 years) Features • Typically attracts higher interest rate as compared to other forms of debt • Bridge loans can be approved and disbursed quickly
• Funds can be arranged through bridge loans within a short span of time with comparatively less Advantages documentation (as opposed to, say, raising bonds)
Disadvantages • Expensive source of funding since the interest rates are higher as compared to other type of loans
Private and Confidential: For Limited Circulation Only 12 3.2 EQUITY BRIDGE LOAN CONTRACTUAL FRAMEWORK
EBL STRUCTURE
Senior Lenders Sponsors
Senior Debt Equity Investment Security Documents EBL Agreements / Security Documents
Project Company EBL Lenders
Equity Bridge Loan
Subordination Agreement
CONTRACTUAL FRAMEWORK
Contracts Participants Purpose
Facility Agreement • Project Company and EBL Lenders • Terms and conditions of EBL
Subordination • Subordinating rights of EBL Lenders to those of Senior Lenders in • Senior Lenders and EBL Lenders Agreement respect of Project asset and cash flows
• Project Company, Sponsors and EBL • Security provided to EBL Lenders along with terms and conditions Security Agreements Lenders for exercise of the same
Legend Cash Contract Private and Confidential: For Limited Circulation Only 13 3.3 BASE EQUITY KEY FEATURES
Definition • Contribution by shareholders to fund the cost of development and construction phase of the project
Drawdown • Can be upfront, pro-rata, partial pro-rata or back-ended as agreed in the financing documents
• No fixed repayments Repayment • Cash available after operating and financing activities are distributed to the shareholders, subject to restrictions on distribution in financing agreements
• Equity can be raised through a market equity sale process, a private placement to shortlisted Features & Advantages parties or through corporate debt • No covenants or obligations for Project Company associated with this funding
Disadvantages • Most expensive source of funding
Private and Confidential: For Limited Circulation Only 14 3.4 SHAREHOLDER’S LOAN KEY FEATURES
• Shareholder’s Loan is a subordinated and unsecured loan Definition • Generally provided for a fixed duration but some flexibility in terms of tenor if SHL is provided by providers of base equity
Drawdown • Post base equity drawdown or pro- rata with base equity, as agreed in financing documents
• Fixed repayments decided by shareholders but with an option of deferral in case if needed Repayment • Senior to base equity and junior to commercial bank debt and government tax authorities
• Interest rate (zero to high), tenor etc. are decided by shareholders; typically used to repatriate cash from Project SPV to shareholders • Not backed by collateral; Considered as equity while calculating leverage under financing Features documents; treatment may vary under project documents • In the event of debtor default the claim of lenders of shareholder’s loan is senior only to the claims of common shareholders
Private and Confidential: For Limited Circulation Only 15 3.4 SHAREHOLDER’S LOAN ADVANTAGES & DISADVANTAGES
ADVANTAGES
Aspect Impact Benefit For Sponsors
Distribution to • Allows shareholders to get steady cash in the years when there is dividend Shareholders lock up (in terms of shareholder’s loan repayment and interest)
Investment Tenor • Provides flexibility to shareholders to withdraw infused capital • Improves Sponsors’ IRR
• Reduces tax payable due to creation of tax shield on interest for Tax Shield shareholder’s loan (subject to tax laws of a particular country)
DISADVANTAGES
Aspect Impact For Sponsors
Voting Rights • Equity financing as shareholder’s loan does not provide voting rights
Security • Unlike senior debt, shareholder’s loan is not secured by collateral
• Repayments of shareholders loan are considered as repayment of equity. Hence, check on gearing ratio is required Leverage while paying shareholder’s loan, to ensure gearing ratio covenant in any year is not breached due to reduction in shareholder’s loan due to repayment
Private and Confidential: For Limited Circulation Only 16 3.5 LETTER OF CREDIT KEY FEATURES
• Short term instrument used by Sponsors to assure the senior lenders of their equity investment in Definition the project • Instrument used is a guarantee issued by a bank on behalf of Sponsor
Drawdown • LC balance is reduced as per the equity infusion schedule agreed under the financing agreements
• Typically used as credit support for projects having Early Generation Revenues or for back- ended/pro-rata equity contribution Features & Advantages • Guarantee is included as a contingent liability on the books of the Sponsors • No covenants or obligations for Project Company associated with this funding
• In case Sponsors are unable to infuse the committed amount to replace the LC, the default is on the Disadvantages books of the Sponsors • Consumes the guaranteeing ability of the Sponsors
Private and Confidential: For Limited Circulation Only 17 4.1 DEBT FINANCING OPTIONS
4.2 VARIOUS FINANCING STRUCTURES 4 DEBT 4.3 SELECT FINANCING TERMS FINANCING 4.4 KEY FINANCIAL RATIOS 4.5 OTHER FINANCING CONSIDERATIONS 4.1 DEBT FINANCING OPTIONS COMMERCIAL LENDERS
Parameter Description
• Commercial banks represent a primary source of funds for project financings and include major International, Description regional and local banks
• In arranging large amount of debt for financing infrastructure projects, the banks often form syndicates to distribute the debt exposure, as mostly a single bank may not have the appetite to underwrite the entire debt Funding Options • In some jurisdictions with lower credit rating, commercial lenders may require to lend under a covered tranche. In a covered tranche, debt payment obligations would be guaranteed by insurance cover from ECAs or MIGA or as PRGs
• Competitive pricing in developed countries where banks are comfortable with project financing Pricing • Pricing may be expensive / not available without cover in developing countries or countries with limited project finance precedents
• Varies significantly between different commercial lenders depending on the size of the project, country risk, project Commitment risk, liquidity and other commercial elements
Tenor • Mini perm as well as Long term financing going up to the tenor of offtake agreement
• Competitive pricing Advantages • Amenability to competitive and complex financing structures with longer tenors, balloons repayment, mini perm structures and lower hedging requirements
Other • Lenders may prefer supporting developers that have an existing relationship with them Considerations
Private and Confidential: For Limited Circulation Only 19 4.1 DEBT FINANCING OPTIONS MFIs / DFIs
Parameter Description
• DFIs / MFIs provide a crucial role in providing credit in the form of higher risk loans, equity positions and risk Description guarantee instruments to private sector investments in developing countries • They are usually owned or backed by national governments to promote sustainable growth
• The finance is generally offered in the form of long-term loans (between 10 and 25 years), equity investment and credit risk guarantees • Along with providing financing, DFIs often act in cooperation with governments and other organizations in providing, Funding Options (or financially contributing to/supporting), management consultancy and technical assistance • They aim to promote best practices in business, governance and environmental standards in the funds or companies they invest in
• DFIs will usually be funded by their shareholders, including government funds and will be backed by government Pricing guarantees. Their pricing is generally competitive in developing countries • In some cases commercial banks may offer better pricing than DFIs
Commitment • Commitment Levels would vary based on geography, project and their engagement with the respective country
Tenor • Usually long term financing with tenors that can go beyond 20 years depending upon tenor of concession
• Provide financing in regions where getting long term financing from other sources is difficult Advantages • Finance provided by DFIs act as a catalyst, which helps to attract and mobilize the involvement of other private investors
Other • May have longer Due-Diligence Process as compared to other lending sources Considerations
Private and Confidential: For Limited Circulation Only 20 4.1 DEBT FINANCING OPTIONS ECAs
Parameter Description
• Export Credit Agencies, commonly known as ECAs, are public agencies and entities that provide government-backed loans, guarantees and insurance to corporations from their home country that seek to do business overseas in Definition developing countries and emerging markets • One of the key source for debt financing in large scale projects
• Provides financing for infrastructure projects on a non-recourse basis through following facilities: • Equipment linked facility Funding Options • Equity linked facility • Each of the above financing facilities may be availed as cash facility, or as insurance and guarantee facility (as offered by respective ECAs)
Pricing • Pricing expected to be more competitive than commercial lenders
• Funding linked to the extent of equity shareholding by respective country’s corporations or to the extent of value of Commitment country sourced equipment
• Equity Linked Financing: Tenor is governed by individual ECAs Tenor • Equipment Linked Financing: Governed by OECD guidelines (for Renewable Projects: 18 years; for Conventional Projects: 14 years)
• Equity linked funding with competitive pricing and longer tenor Advantages • Ample liquidity for projects, in conjunction with commercial lenders
• May not accept competitive financing structures which may be acceptable to commercial lenders, thereby Other constraining structuring options for the entire loan tenor Considerations • May have longer Due-Diligence Process as compared to other lending sources
Private and Confidential: For Limited Circulation Only 21 4.2 VARIOUS FINANCING STRUCTURES FINANCING STRUCTURES - MINI PERM (1/2)
STRUCTURE
Debt Initial Maturity Completion of Debt Drawdown Date Repayment using Cash Sweep
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Senior Debt Closing Balance (with refinance) Senior Debt Closing Balance (without refinance)
KEY FEATURES SAMPLE TERMS
• Medium term financing instrument with typical tenors of 4-7 years (Initial Maturity Date)
• FC to Initial Maturity Date : 120 bps • Outstanding debt is expected to be repaid at Initial Maturity Date • Post Initial Maturity Date + 5 years: 250 bps
• As per the structure, the borrower is incentivized to refinance • Thereafter: 350 bps the outstanding debt at Initial Maturity Date (otherwise cash sweep kicks in under Soft Mini Perm structure/considered as a default in hard Mini Perm Structure)
Private and Confidential: For Limited Circulation Only 22 4.2 VARIOUS FINANCING STRUCTURES FINANCING STRUCTURES - MINI PERM (2/2)
TYPES OF MINI PERM
SOFT MINI PERM HARD MINI PERM
• Failure to refinance is not an event of default • Failure to refinance at Initial Maturity Date is an event of default • Post Initial Maturity Date, margins increases significantly making debt more expensive • Relatively less popular as refinancing risk is pushed on to the procuring authorities • Most, if not all, project’s cash flow is used to repay the loans thereby reducing returns to shareholders
ADVANTAGES & DISADVANTAGES OF MINI PERM
ADVANTAGES DISADVANTAGES
• Higher Liquidity due to wider participation of lenders having • Refinancing Risk: Sponsors are exposed to refinancing risk short to medium term lending appetite • Decreased Returns: In case debt is not refinanced at • Lower margins due to inherent nature of being short term competitive rates (assumed initially), returns to shareholders instrument reduces significantly till facility is repaid due to cash-sweep post Initial Maturity Period • Penalties applicable after Initial Maturity Date of loan incentivizes the borrower to refinance the debt prior to Initial Maturity Date
Private and Confidential: For Limited Circulation Only 23 4.3 SELECT FINANCING TERMS INTEREST RATE HEDGING
• Since the base rate of the debt interest generally fluctuates with time, the Project Company has to Requirement protect itself against the fluctuating interest rates which will impact debt repayment and financial ratios
• Interest rate swaps are used to hedge against fluctuating interest rates • Project company pays fixed interest rate on hedged principal amount to the hedging bank and the margin to the lending bank Determination • Hedging bank pays the floating rate to the lending bank • Thus the Project Company is protected against fluctuating interest rates and the risk is borne by the hedging bank
• The hedging agreement should be compliant with the International Swaps and Derivatives Association (ISDA) agreement Hedging Terms • ISDA has created standardized contracts to enter into derivatives transactions, to help companies across the world
PAYMENTS STRUCTURE
PROJECT COMPANY
Floating Rate Fixed Rate Floating Rate Margin
HEDGING BANK LENDING BANK
The Project Company pays hedging bank a fixed rate in return for floating rate & pays the hedging bank a floating rate margin
Private and Confidential: For Limited Circulation Only 24 4.3 SELECT FINANCING TERMS ADDITIONAL FEES
Upfront Fee: • Fee charged to cover administration and primarily the reserving of funds. • Usually payable at financial close or at first debt drawdown date
Syndication Fee: One Time Fees • Fee charged by the bank for arranging a syndicated loan, i.e. raising the required amount in the market
Underwriting Fee: • Upfront fee payable to insurers, reinsurers or underwriters of insurances taken out by the Project Company to protect itself against various risks
Commitment Fee: • Fee charged by lenders to their borrowers for unused credit or credit that has been promised at a specified future date • Payable during the construction period until the end of debt availability period Fees During Construction
Agency Fee: • Fee payable to lenders for various roles like inter-creditor agent, security agent, debt facility agent etc. • It’s an annual fee to be paid over the entire debt tenor
Agency Fee: Fees During Operation • Fee payable to lenders for various roles like inter-creditor agent, security agent, debt facility agent etc. • Its an annual fee to be paid over the entire debt tenor
Private and Confidential: For Limited Circulation Only 25 4.3 SELECT FINANCING TERMS METHODS OF DEBT DRAWDOWN: BACK ENDED
KEY FEATURES UTILIZATION SEQUENCE
• In this kind of drawdown structure equity is drawn first. Debt is drawn once all the equity amount has been exhausted and utilized to Base fund project costs (most amenable to the Base Equity Equity lenders)
• Most common structure followed in infrastructure projects due to upfront equity infusion by the Sponsor and thus providing Debt comfort to the lenders about appropriate funds Debt Facility Facility utilization
• Completion risk is mitigated by a few months (till the equity amount is fully drawn) Standby Standby Equity Equity • Interest during construction is lower (debt obligations come aboard later in the construction process and thus interest incidence is also deferred) and hence leading to lower project cost Standby Standby Debt Facility Debt
Private and Confidential: For Limited Circulation Only 26 4.3 SELECT FINANCING TERMS METHODS OF DEBT DRAWDOWN: PRO RATA
KEY FEATURES UTILIZATION SEQUENCE
• Both equity and debt are drawn on a pro rata basis to meet the project funding requirements (may be agreed after negotiations with the lenders while utilizing cash equity infusion in the Project) Pro-rata Base • Debt and Equity (in their respective ratio as per Equity the leverage decided at the Project FC from the Base Equity Debt Facility & financial model) are drawn from day 1 with the Debt beginning of the construction period Facility
• Leads to higher project costs since the financing costs are higher (due to higher IDC, with interest incidence starting from the very beginning of construction period)
Pro-rata • Lenders generally require an LC in this case Standby Standby Debt equivalent to the amount committed but not Standby Equity Equity & Facility invested by the equity shareholders (which may Standby still be better as opposed to infusing cash Debt equity upfront and thus beneficial towards IRR)
Private and Confidential: For Limited Circulation Only 27 4.4 KEY FINANCIAL RATIOS DEBT SERVICE COVERAGE RATIO (DSCR)
DEFINITION METHOD OF CALCULATION
DSCR = Net Operating Cash flows Total Debt Service • A quantitative measure used by lenders to determine whether a project's prospective net cash flow from operations in a Where, period can support (make timely service payment) the debt service for that period as per the indicated terms Numerator: EBITDA plus interest income less taxes less increase in working capital • It is the amount of cash flow available to meet interest and principal payments to service debt in a period Denominator: Principal repayments plus debt interest including interest on working capital
DSCR SIGINIFICANCE KEY ASPECTS
• Important covenant required by lenders under project • Generally a minimum DSCR level of 1.20 or 1.25 is acceptable financing. by lenders under project finance • A DSCR of less than 1 would mean operating cash flows are not sufficient to service debt. E.g. DSCR of 0.95 would mean • There may be provisions under the debt term sheet which may there is only enough operating cash to cover 95% of debt lead to event of default if the DSCR falls below a predefined service payments level (like 1.00 or 1.05) • Generally higher the DSCR the better, however each lender • The term sheet may also contain provisions for minimum has a different comfort level DSCR requirements to allow distribution of dividends. Project company can release dividends only when DSCR is above minimum required “Distribution DSCR” level
Private and Confidential: For Limited Circulation Only 28 4.4 KEY FINANCIAL RATIOS LOAN LIFE COVERAGE RATIO (LLCR)
DEFINITION METHOD OF CALCULATION
LLCR = NPV of Net Operating Cash flows Total Debt Outstanding • A quantitative measure used by lenders to determine whether a project's prospective net cash flow from operations over the Where, life of the loan can support (make timely service payment) the debt service as per the indicated terms Numerator: Net present value of future net operating cash flows (available for debt service over the remaining debt tenor) as at • It is a measure of ability to repay debt over the remaining life calculation date of the loan whereas DSCR provides snapshot of period wise debt service capability of the operating cash flows Denominator: Closing balance of debt facility as on calculation date
LLCR SIGINIFICANCE KEY ASPECTS
• Important covenant required by lenders under project • Generally a minimum LLCR level of 1.25 or 1.30 is acceptable financing by lenders under project financing
• An LLCR of 1.00x means that the CFADS, on a discounted • There may be provisions under the debt term sheet which may basis exactly matches the amount of outstanding debt lead to event of default if the LLCR falls below a predefined balance level (like 1.05 or 1.10)
• Generally higher the LLCR the better, however each lender has • The term sheet may also contain provisions for minimum LLCR a different comfort level requirements to allow distribution of dividend
Private and Confidential: For Limited Circulation Only 29 4.4 KEY FINANCIAL RATIOS PROJECT LIFE COVERAGE RATIO (PLCR)
DEFINITION METHOD OF CALCULATION
PLCR = NPV of Net Operating Cash flows Total Debt Outstanding • A financial ratio used to estimate the ability of the borrowing company to repay an outstanding loan Where,
Numerator: Net present value of future net operating cash flows (available for debt service over the life of the project) as at • It is a measure of ability to pay over “Project Life” whereas calculation date LLCR measures the ability to pay over the life of the loan Denominator: Closing balance of debt facility as on calculation date
PLCR SIGINIFICANCE KEY ASPECTS
• A commonly used debt metric along with LLCR in project • To provide cushion, lenders sometimes ignore the cash flows finance beyond a certain cut-off date to protect against uncertain future cash flows • An PLCR of 1.00x means that the CFADS, on a discounted basis, is exactly equal to the amount of the outstanding debt • The discount rate up to the loan life would be the cost of debt balance and a higher rate after that to account for the increased risk
• Generally higher the PLCR the better, however each lender • The debt term sheet may also contain provisions for minimum has a different comfort level PLCR requirements to allow distribution of dividend
Private and Confidential: For Limited Circulation Only 30 4.4 KEY FINANCIAL RATIOS DEBT TO EQUITY RATIO (D/E)
DEFINITION METHOD OF CALCULATION
D/E = Total Debt Liabilities Shareholder’s Equity • A financial ratio used to indicate the amount of debt Project Company (PC) has compared to its equity Where,
Numerator: Includes only interest bearing long term debt. Short term or non-interest bearing debt is ignored • It is a measure of company’s financial leverage, the proportion of debt and equity used by the PC to finance its assets Denominator: Total shareholder’s equity in the PC including retained earnings before PCOD
D / E SIGINIFICANCE KEY ASPECTS
• A high debt to equity ratio signifies higher debt service • In project finance, the debt to equity ratio is greater than 1 in requirements over the debt tenor almost all the cases, signifying a greater amount of debt than equity • Project Company should generate enough cash flows to service its debt else it would be declared bankrupt • In project finance, high leverage implies that lenders bear greater risk and hence are protected through various covenants and agreements
Private and Confidential: For Limited Circulation Only 31 4.5 OTHER FINANCING CONSIDERATIONS RESERVE ACCOUNTS
• Also known as Debt Service Reserve Account • Generally mandated by the Senior Debt lender to maintained by the Project Company SPV • Used as reserve by lenders in event of disruption of cashflows for Project Company, to the extent that debt cannot be service • Cash amount equivalent to principal and Interest payment for next specified no of period to be maintained in the account • The amount of cash held in the account changes every period with change in repayment profile and interest payable • Cash in Reserve account released at the end of Senior Debt tenor
TYPICALLY USED STRUCTIRES FOR DSRA FUNDING
• The DSRA funding requirement for the first period is capitalized as part of Project Cost Prefund • Cash transferred to DSRA account upon start of operations period • The increase of DSRA balance or release happens as per the repayment profile
• An LC is used throughout the senior debt tenor as a security against not maintaining cash in the DSRA LC account • LC amount revised every period in line with the DSRA balance required
• The DSRA funding requirement for the first period is capitalized as part of Project Cost • The DSRA amount is released into project accounts upon start of operations period Prefund Release • An LC is used throughout the senior debt tenor as a security against not maintaining cash in the DSRA account
Private and Confidential: For Limited Circulation Only 32 4.5 OTHER FINANCING CONSIDERATIONS CASH SWEEP
• Applicable usually in case of mini perm financing structure • Certain percentage (agreed in the financing agreement) of cashflows available for distribution are used to repay the senior debt • This repayment is over and above the scheduled repayment as agreed in financing agreements • Cash is credited to the Distribution account only after deduction of cash sweep amount • This reduces the effective senior debt tenor and also the distributions to shareholders during the senior debt tenor • Soft Mini perm : Cash is sweep is applicable when refinancing of senior debt is not successful after the initial maturity date • Hard Mini perm : Failure to refinance leads to an event of Default under the financing agreement
ILLUSTRATION
Debt Initial Maturity Completion of Debt Drawdown Date Repayment using Cash Sweep
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Senior Debt Closing Balance (with refinance) Senior Debt Closing Balance (without refinance)
After the initial maturity date of 8 (years) , accelerated repayment of senior debt occurs leading to reduction in effective senior debt tenor from 29 years to 20 years
Private and Confidential: For Limited Circulation Only 33 APPENDIX DEBT FINANCING OPTIONS ECA EXAMPLE - OVERSEAS INVESTMENT ASSURANCE
• Protects investors and financial institutions from economic losses resulting from political risks such as expropriation, exchange restrictions, war, political riot and breach of contract in the country where investment is made • The maximum tenor may be ~20 years • Covered percentage may be up from 50% to 100% depending upon the insurance coverage provider and cover utilized
Exchange War & Political Breach of Covered Risks = Expropriation + + + Restrictions Riot Contract
OVERSEAS INVESTMENT (DEBT) INSURANCE
Insurance Investor Cover Provider
Equity Investment
Financing Project Bank / Loan Company Commercial Agreement Lender
Private and Confidential: For Limited Circulation Only 35 CONTACT INFORMATION
1 2
Arpan Nalwaya Rohit Pandey Synergy Consulting Inc. Synergy Consulting Inc.
PHONE PHONE Mob: +91 9999038805 Mob: +91 8527997568
EMAIL EMAIL [email protected] [email protected]
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