Principles of project finance

Principles of Project Finance Principles of Project Finance E R Yescombe ConsultingLtd Yescombe London,U.K (proj ect.finance@yescombe.com) ACADEMIC PRESS An imprintof ElsevierScience Amsterdam Boston London New York Oxford Paris SanDiego SanFrancisco Singapore Sydney Tokyo Coverphoto credit: @Digital Vision,2002 This book is printedon acid-freepaper.@ Copyright @ 2002, YescombeConsulting, Ltd All Rights Reserved No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher Requestsfor permission to make copies of any part of the work should be mailed to: Permissions Department, Academic press,627.7Sea Harbor Drive, Orlando, F],orida 32887 -67 i Academic Press An impint of Elsevier Science 525 B Street, Suite 1900, San Diego, California 92101_4495,USA http://www.academicpress.com Academic Press 84 Theobolds Road, London WC1X SRR UK http://www academicpress.com Library of Congress Catalog Card Number: 2C{J/2104613 International Standard Book Number: 0-12-720g51_0 PRINTED IN THE UNITED STATES OF AMERICA 03 04 05 06 07 MM 02 Contents Chapter Introduction Chapter What Is Project Finance? $2.1 $2.2 $2.3 $2.4 $2.5 5 Development of Project Finance FeaturesofProjectFinance Project Finance and Privatization 11 ProjectFinance and Structured Finance 13 Why Use Project Finance? 14 $2.5.1 Why Investors Use Project Finance Parties to Third Finance of Project Benefits The $2.5.2 Chapter3 The Project Finance Markets 21 22 93.1 CommercialBanks 22 of ActivitY Areas $3.1.1 24 the Market in Banks $3.1.2 I7 vi Contents 93.2 $3.3 93.4 $3.5 $3.6 Bond Issues 27 Mezzanine and Subordinated Debt Lease Finance 28 Vendor Finance 30 Public-Sector Finance 31 27 Chapter4 Project Development and Management 33 $4.1 Sponsorsand Other Investors 33 $4.2 Project Development 36 $4.3 The Role of Advisers 37 $4.4 Joint-VentureIssues 38 $4.5 The Project Company 39 39 $4.5.1 Structure Agreement 94.5.2 Shareholder 40 andOperations $4.5.3 Management 4l $4.6 Public Procurement 42 43 $4.6.1 Prequalification for Proposals $4.6.2 Request 43 $4.6.3 Bid Negotiationto ConrractSigning 46 $4.6.4 CompetitiveBiddingfor OtherprojectContracts 4j Chapter Working with Lenders 49 $5.1 Commercial Banks 49 95.1.1 Advisers and Lead Managers 50 $5.1.2 Lettersof Intent 53 $5.1.3 Lendersand the Public-procurementprocess $5.1.4 Bank Roles 54 $5.1.5 FinancialModel 55 $5.1.6 Term Sheet,Underwriting, and Documentation $5.1.7 Information Memorandumand Syndication 95.1.8 Agency Operation 58 $5.2 Bond Issues 59 $5.2.1 The InvestmentBank and the RatingsAgencies 55.2.2 Rule 1444 61 95.2.3 WrappedBonds 62 95.2.4 Bond PayingAgents and Trustees 62 54 55 57 60 vll Contents 63 $5.3 Loans versus Bonds 63 $5.4 The Roles of the Lenders'Advisers 63 $5.4.1 Legal Advisers 63 $5.4.2 Lenders'Engineer 65 $5.4.3 InsuranceAdviser 66 $5.4.4 Model Auditor 66 $5.4.5 Other Advisers $5.4.6 Preappointmentoflenders'Advisers 67 $5.4.7 Use of Advisers'Time 66 Chapter ProiectContracts:(1) The ProjectAgreement 69 70 $6.1 Offtake Contract 70 Contract of Offtake Types $6.1.1 72 $6.1.2 PPA Structure 73 $6.1.3 Completionof the Plant '74 $6.1.4 Operationof the Plant 74 $6.1.5 Taritr 77 $6.1.6 TariffIndexation 77 $6.1.7 Penalties 79 96.2 Concession Agreement 81 $6.2.1 ServiceContracts 83 $6.2.2 Toll Contracts 86 56.3 Term of Project Agreernent $6.4 Control of Project Design and Construction, Contracts, 87 and Financing 88 $6.5 Compensation for Additional Costs 88 $6.5.1 Breach by the Offtaker or Contracting Authority 88 $6.5.2 Changein Specifications 89 $6.5.3 Changesin Law 89 $6.5.4 Latent Defects 89 56.6 Force Majeure 9l $6.7 Step-in by the Offtaker or Contracting Authority 9l Agreement the Project $6.8 Termination of 92 $6.8.1 Early Termination: Default by the Project Company the Offtaker by Default Termination: Early $6.8.2 96 or Contracting Authority 98 Maieure Force Termination: Early $6.8.3 98 Termination Optional $6.8.4 99 $6.8.5 Tax Implications of a Termination Sum Payment Contents $6.8.6 Final Maturity of a BOOT/BOT/BTO Conrract $6.9 Effect of Debt Refinancing or Equity Resale on the Project Agreement 100 100 $6.9.1 Debt Refinancing 101 $6.9.2 Equity Sale IO2 $6.9.3 Does It Matter? Chapter ProjectContracts:(2) Ancillary Contracts 105 105 $7.1 EPC Contract l\j $7.1.1 ScopeofContract Si 1.2 Commencementof the Works 108 108 $7.1.3 Owner'sRisks $7.1.4 ContractPrice, Payments,and Variations 109 $7.1.5 ConstructionSupervision ll0 110 $7.1.6 Completion 111 $7.1.7 ForceMajeure $7.1.8 LiquidatedDamagesandTermination 111 $7.1.9 Suspensionand Terminationby the EPC Contractor Il3 114 $7.1.10Security ll4 S7.l.1l DisputeResolution $7.2 Operation and Maintenance Contract(s) 115 I 15 9'7.2.1 Scopeof Contract 115 57.2.2 Services 116 51.2.3 FeeBasis 97.2.4 Incentivesand Penalties 116 57.2.5 Major Maintenance Contract ll7 $7.3 Fuel or Other Input Suppty Contract ll7 tll$7.3.1 SupplyBasis 97.3.2 PhysicalDelivery Risks t2O 120 $7.3.3 Pricing Basis tz} 57.3.4 Security $7.3.5 Force Majeure and Change of Law l2l $7.3.6 Default and Termination l2l $7.4 Permits and Other Rights 122 $7.4.1 Project Permits 122 57.4.2 Investment and Financing permits 124 91.4.3 Rights of Way and Easements 124 \7.4.4 SharedFacilities 124 99 Contents 125 $7.5 GovernmentSupport Agreement 127 Insurance $7.6 121 PhaseInsurances $7.6.1 Construction 130 Insurances Phase Operating $7.6.2 130 $7.6.3 Deductibles 131 Requirements Lender $7.6.4 132 Reinsurance $7.6.5 133 $7.7 Direct Agreements Chapter Commercial Risks I37 137 Categories of Project Finance Risk 137 Risk Evaluation and Allocation 139 Analysis of Commercial Risks l4O Commercial ViabilitY l4l Completion Risks l4I $8.5.1 Site Acquisition and Access I42 $8.5.2 Permits I43 $8.5.3 The EPC Contractor 146 $8.5.4 ConstructionCost Ovemrns 150 $8.5.5 Revenueduring Construction 150 $8.5.6 Delay in ComPletion 152 $8.5.7 InadequatePerformanceon Completion 152 Risks $8.5.8 Third-Party $8.5.9 Projects without a Fixed-Price, Date-Certain, 154 EPC Contract 155 Risks $8.6 Environmental 155 Risks $8.7 Operating 156 $8.7.1 Technology 157 Operation Project General $8.7.2 158 Overruns Cost Operating General $8.7.3 158 AvailabilitY Project $8.7.4 159 $8.7.5 Maintenance 160 Degradation $8.7.6 160 $8.8 Revenue Risks 161 Contracts Offtake $8.8.1 162 Agreements Concession $8.8.2 163 Contracts Hedging $8.2.3 163 $8.8.4 Contracts for Differences 164 Sales Contracts Long-Term $8.8.5 $8.1 $8.2 $8.3 $8.4 $8.5 aaa GlossaryandAbbreaiations equity and debt advances are paid and from which payments we made for the project's construction costs See 913.3.2 discount rate The rate usedto reduce a future cash flow to a current value, and calculateits NPV See$12.8.1 distributions Net cash flow paid to the investors as dividends, subordinated debt interest or principal, or repaymentof equity.See$13.5.3 dividend stop ratio(s) Cover ratio(s) below which the lenders prevent payment of distributions to the investors.See$13.5.3 dividend trap Inability of the Project Company to pay dividends, despite having cash available to so, because of accounting losses See due diligence Review and evaluation of Project Contracts and commercial, financial, and political risks See$2.5;$8.2 easement A right to use adjacent land, e.g., for discharge of water See$1.4.3 EBRD European Bank for Reconstruction and Development, an IFI covering Central and Eastern Europe and the CIS See$11.6.8 ECA export credit agency (or export-import bank) See $11.2; $11.s ECGD Export Credits Guarantee Department, the U.K ECA See $11.s.8 EDC Export Development Corporation, the CanadianECA See$11.5.3 Effective Date SeeFinancial Close Er2;7.2 domestic Relating to the country of EIA Environmental Impact Assessthe project.See$12.7.2 ment, a study of the effect of the DPC Contract Design, Procureconstruction and operation of the project on the natural and human enment, and Construction Contract; see EPC Contract vironment.See 97.4.1 drawing request The formal proce- EIB European Investment Bank, the dure for drawings on the debt by the long-term lending institution of the Project Company.See 513.3.2 EuropeanUnion See$11.6.9 Export-Import Insurance drawstop Suspension of drawings EID/MITI (loan advances)by the lenders after Division of the Ministry of Interan eventofdefault See$13.12 national Trade and Industry of Japan, now superseded by NEXI DSRA Debt Service Reserve Account, a Reserve Account with a S e e$ 1 cash balance sufficient to cover the EIF European Investment Fund, a partnership between EIB and prinext scheduled debt service payment.See$13.5.2 vate-sector financial institutions to provide support for European projDSU insurance Delay in Start-up insurance, i.e., insurance against the ects.See$11.6.9 loss of revenueor extra costs caused emergency step-in The right of the by a delay in completion after damOfftaker or Contracting Authority to age to the project.See 81.6.1 take over the running of the project 334 for reasonsof safety or public security See$6.7 enclave project A project whose products are exported, for which payment is receivedoutside the Host C o u n t r yS e e$ 1$; 1 Energy Charge The element of a Tariff intended to cover fuel costs S e e$ enyironmental risks Risk relating to the environmental effect of the construction or operation of the project See$8.6 EPC Contract Engineering, Procurement, and Construction Contract, a fixed-price, date-certain, turnkey contract under which the project is designed and engineered, equipment procured or manufactured, and the project constructed and erected.See$7.1 EPC Contractor The contractor under the EPC Contract.See$8.5.3 equity The portion of the project's capital costs contributed by the investors, which may be provided as share capital or subordinated debt See 82.2 equity bridge loan Finance provided by lenders during the construction period for the amount of the equity investment.See$13.3.1 equity IRR The IRR on the equity paid in by the investers, derived from distributions.See SI2.I2.I escrow account A bank account under the joint control of two parties; cf Reserve Accounts See $8.8.1; $1 EuropeanBank SeeEBRD events of default Events that sive the GlossaryandAbbreoiations lenders the right to drawstop or terminate the financing (or parties to Project Contracts the right to terminate them after due notice) See $ 1I exchange rate risks Macroeconomic risks resulting from changesin currency exchange rates See 59.3: pr2.7.7 512.3.4; export credits Guaranteesor insurance to lenders or direct loans to the Project Company, linked to export sales,providedby ECAs See911.3 expropriation Illegal takeover of the project or the Project Company by the Host Government.See$10.4 fare box guarantee Guarantee by the Contracting Authority of a minimum level of usageor real toll payments in a transportation project See 86.2.2 FIM Final Information Memorandum, the information memorandum on the Project Company used for syndication.See$5.1.7 Financial Adviser The Sponsors' adviser on arranging finance for the Project Company.See*5.1.2 Financial Close The date on which all Project Contracts and financing documentation are signed, and conditions precedent to initial drawing of the debt have been fulfilled See s13.8 financial model The financial model used by lendersto review and monitor the project See $5.1.5; Chapter 12 financial risks See macroeconomic risks FixedCharge SeeAvailabilityCharge 335 GlossaryandAbbreoiations floating interest rate An interestrate revised at regular intervals to the current market rate: cf LIBOR rate-fixing date.See $9.2 force majeure A natural or political event that affects the ability of one party to fulfil its contract, but that is not the fault of, and could not reasonably have been foreseenby, that party.See$6.6;$7.1.7; $8.10 Force Majeure insurance Insurance against the loss of revenue or extra costs causedby a delay in completion or intemrption in operation due to force majeure not covered by DSU or BI insurances.See 87.6.1 ratios Projection forward-looking of future ADSCRs, or the LLCR, once a project has begun operation, for the purposesofa dividend stop or default ratio calculation See$ I 3.5.3 fronting bank A bank acting as a channel for an interest rate swap See 59.2.7 Fuel Supply Contract An Input Supply Contract to supply the fuel for a project See 87.3 full cover Guaranteesor insurance for both political and commercial risks, provided to a lender by an E C A o r I F I S e e$ 1 gearing Seeleverage Guaranteed Investment ConGIC tract, a fixed rate of interest paid by a depository bank on the proceedsof a bond issue until theseare required to pay construction costs for a project.See$9.2.5 governing law The law governing a Project Contract or the financing documentation.See$10.7.1 government The central government of the country in which the project is located Governrnent Support Agreement A Project Contract that establishes the legal basis for the project, or under which the government agrees to provide various kinds of support See$7.5 or guarantees gross up Increasea payment to allow for tax deductions.See$6.8.5; $9.2.4 heat rate The amount of fuel required to produce a set amount of electrical power hedging An arrangement in the financial or commodity markets to protect the Project Company against adversemovementsin interest rates, currency exchange rates, or commodity prices See $6.1.1; $8.8.3; Chapter KreditversicherHermes Hermes ECA See A.G., the German ungs s1 s.6 host country The country in which the project is located (usually used in connection with a cross-border investment) See 91O.2 host government The governmentof the host country IADB Inter-American Development Bank, a regionallFI See$ 11.6.7 IBRD SeeWorld Bank ICB International competitive bidding proceduresof the World Bank; Seepublic procurement IDA International Development Association, an affiliate of the World Bank providing development finance to the poorest countries See $1 336 IDB Islamic Development Bank, an Islamic financing institution See $11.6.11 IDC Interest during construction, which is capitalized and forms part ofthe project cost budget.See 99.2 IFC International Finance Corporation, an affiliate of the World Bank dealing with the private sector See $11.6.2 IFIs International financing institutions.See$11.6 Implementation Agreement See Government Support Agreement Independent Checker An engineering firm not linked to any party to the Project Contracts,who confirms that project construction has been carried out as required by the Project Agreement and EPC Contract See51.1.5 IndependentEngineer SeeLenders' Engineer inflationrisks Macroeconomicrisks resulting from changesin the rate of price inflation See 99.1; 912.3.1; $1 Input Supplier The contractor under the Input Supply Contract Input Supply Contract A Project Contract for the supply of fuel or raw materials to the Project Company.See97.3;98.9.1 input supply risks Commercial risks relating to the availability and cost of input supplies for the project See$8.9 insurance SeeE7.6; $8.10.I intercreditor Relationship between different groups of lenders See $1 GlossaryandAbbreoiations Intercreditor Agreement See Common Terms Agreement interest rate cap A hedging contract that setsa maximum interestrate for the Project Company's debt See 89.2.2 interest rate collar A hedging contract that setsa floor (minimum) and ceiling (maximum) on the interest rate payable by the Project Company.See$9.2.2 interest rate risks Macroeconomic risks resulting from increasesin interestrates.See 59.2; $12.3.3 interest rate swap A hedging contract to convert a floating interest rate into a fixed rate See 99.2.1 investment bank A bank arranging but not providing debt See 93.2; $5.2.1 investment grade rating A rating of BBB- / Baa3 or above.See95.2.1 investment insurance Insurance against political risks, provided to investors or lenders by ECAs, IFIs, or private-sectorinsurers See $ I 1.4 investment risks Political risks relating to currency convertibility and transfer, expropriation, and political force majeure See 910.2 investors Sponsorsand other parties investing equity into the Project Company.See*4.I IPP Independent power plant See $6.1.2 IRR Internal rate of return, the rate of return on an investment derived from future cash flows See 912.8.2: 912.12.2 ISACE Istituto per i Servizi Assicurativi e il Credito all'Esportazione, GlossaryandAbbreztiations the Italian ECA See$11.5.7 ISDA International Swap and Derivatives Association, which produces standardform documentationfor interestrate swaps.See 89.2.1 Islamic financing Finance without payment of interest See $ 1I 6.1I ; $1 ITN Invitation to Negotiate.SeeRFP ITT Invitation to Tender.SeeRFP JBIC Japan Bank for International Co-operation, which provides export credits and untied financing S e e$ 1 Export-Import Bank of JaJEXIM pan, now supersededby JBIC KfW Kreditanstalt ftir Wiederaufbau, which provides CIRR funding for German exports and untied financing.See$11.5.6 LIC Letters of credit, a form of payment guaranteeissuedby a bank LDs Liquidated damages, i.e., the agreed level of loss when a party does not perform under a contract S e e$ $; Lead Manager(s) Bank(s) arranging and underwriting the debt See $ 1$; lease A form of debt in which the equipment being financed is owned by the lessor.See$3.4;13.13.4 lenders Banks or bond investors.See Chapters3 and lenderst advisers External advisers employed by the lenders.See $5.4 Lenders' Engineer An engineering firm advising the lenders.See$5.4.2 lessee The obligor under a lease(i.e., the Project Company) See 53.4 lessor The provider of finance under aad JJ/ a lease (equivalent to a lender) See $3.4;$13.13.4 leverage The debt:equity ratio See $1 LIBOR London interbank offered rate, one of the leading floating interest rates See 89.2 limited-recourse Finance with limited guaranteesfrom the Sponsors S e e$ Loan Life Cover Ratio, the LLCR ratio of the NPV of operating cash flow during the remaining term of the debt and the debt principal amount See 5129.2 LNG Liquefied natural gas lock-up ratio See dividend stop ratio LOI Letter of Intent, heads of terms for a Project Agreement or other ProjectContract Material adverse MAC clause change clause(s) in the financing documentation that give the lenders discretion to refuse to allow further drawings or to require repaymentof the debt followings a material adverse change in the prqect See $13.8;$13.11 macroeconomic risks Project finance risks related to inflation, interest rates, or currency exchange rates.SeeChapter9; $12.3 maintenance bond Seewarranties Maintenance Reserve Account A Reserve Account that builds up a cash balance sufficient to cover the major maintenance of the project S e e$ $; See Independent Maitre d'Oeuvre Checker 338 Marine Cargo insurance Insurance against damage to equipment in transit to the project site during construction.See$7.6.1 Marine DSU insurance Insurance against the loss of revenue or extra costs causedby a delay in completion after damage to the equipment in transit to the project.See 97.6.1 mark-to-market Calculating the breakagecost.See$9.2.1 MDB Multilateral developmentbank SeeIFI merchant power plant A power project that doesnot have a PPA, but relies on selling its power into a competitive market See 98.8.6 mezzanine debt Subordinated debt provided by third parties other than the investors.See$3.3;$13.13.5 MIGA MultilaterallnvestmentGuarantee Agency, an affrliate of the World Bank providing cover to lenders and investors against political risks.,See $11.6.4 mini-perm A loan for the construction period and first few years of operation of a project, to be refinanced in due course by longer term debt S e e$ MIRR Modified IRR, an IRR calculation with a reduced reinvestment rate for cashtaken out of the project S e e$ MLA Multilateral lending agency SeeIFI MLAs Minimum liquid asset requirements;seeMLRs MLRs The cost of banks' minimum liquidity ratio requirements, if any See 59.2.4 mobilization The transition from the GlossaryandAbbreaiations construction phase to the operating phaseof the project Model Auditor An independentfirm of accountants that reviews and certifies the financial model See $5.4.4 monoline insurance Insurance of an individual financial risk (rather than general casualty insurance) See5.2.3 MOU Memorandum of Understanding SeeLOI Natural force majeure An unforeseeable natural event affecting the project, e.g., fire, explosion, flood, unusualweatherconditions See96.6 negative arbitrage The loss ofinterest caused by having to draw the whole of a bond financing and then redeposit the funds until required See$5.3;$9.2.5 negative equity An cumulative accounting loss exceedingthe amount of the Project Company's sharecapital See 812.7.3 NEXI Nippon Export and Investment Insurance, the JapaneseECA S e e$ 1 NIB Nordic Investment Bank, the long-term lending institution of the Nordic countries.See$11.6.10 nominalreturn Thereturnonaproject or investmentincluding inflation (cf real return) See g9.l nonrecourse Finance with no guaranteefrom the Sponsors;cf limitedrecourse nonvitiation clause Provision in an insurance policy that the rights of lenders will not be affected by action by the Project Company that invalidatesthe insurance.See$1.6.4 Glossaryand Abbreoiations The notional principal amount amount of debt that is the subject of an interest rate swap See 89.2.1 NPV Net Present Value, the discountedpresentvalue of a streamof future cashflows See$12.8.1 NTP Notice to Proceed, a notice from the Project ComPanY to the EPC Contractor to begin the project works See 91.1.2 Operation and maintenance O&M O&M Contract Operation & MaintenanceContract, a Project Contract to operate and maintain the project on behalf of the Project ComPanY See57.2;$8.1.2 O&M Contractor The contractor under the O&M Contract OECD Organisation for Economic Co-operation and DeveloPment OECD Consensus An agreement under the agis of OECD to regulate credit terms offered by ECAs See 339 agency.See$9.3.5;S11.5.2 Ownerts Engineer The engineer supervising the EPC Contractor on behalf of the Project ComPanY See $7.1.5;$8.5.3 Owner's Risks The responsibilities of the Project CompanY under the EPC Contract.See$7.1.3;$8.5.4 p.e per annutn pari-passu security Security shared by different lenders on an equal and pro ratabasis payback period The period of time in which distributions to investors equal their original investment See $12.8.3 paying agent A comPanY distributing debt service payments from the Project Company to bond investors See 85.2.4 penalties LDs payableunder the Project Agreement.See 56.1.7 performance bond SecuritY Provided by the EPC Contractor for performance under the EPC Contract.See$7.1.10 performance LDs LDs PaYable bY the EPC Contractor if the completed project does not meet minimum required performance standards See $11.3.2 Offtake Contract A Project Agreement under which the Project Company produces a product and sells it to the Offtaker See $6.1 Offtaker The purchaserof the Product under an Offtake Contract $7.1.8;$8.5.7 operating cost budget The budget Completionrisks for operating costs (where these are performancerisks relating to the performance of the under the Project ComPanY's conproject.See$8.5.7 trol).See$8.7.3;$12.5 Permits The rights or Permissions operating phase insurances All required to construct and operatethe Risks, BI, and Force Majeure insurproject, invest in the project Comances.See$7.6.2 pany, or for the Project ComPanYto operating risks Commercial risks reborrow its debt.See$7.4; $8'5.2 lating to the operation ofthe project PFI Private Finance Initiative, the See$8.7 United Kingdom's PPP Program OPIC Overseas Private Investment Corporation, a U.S government PIM Preliminary Information Mem- 340 orandum, the information memorandum on the project used as a basis for obtaining financing bids from prospective Lead Managers See55.1.7 PLCR Project Life Cover Rario, the ratio of the NPV of operating cash flow and debt service during the remaining life of the project See 812.9.4 political Political force majeure violence affecting the project, e.g., war, terrorism, or civil unrest ,See $6.6;910.5 political risk cover Guaranteesor insurancefor political risks Seeg 1l I political risks Project finance risks related to political force majeure and other investment risks, change oflaw, and quasi-politicalrisks See $13.s.2 GIossary and Abbreoiations provides the Project Company with revenuesover the project's life, usually in the form of an Offtake Contract or ConcessionAgreement ,See Chapter Project Company The SPV created to construct and operate a project ^See $4.5 Project Company costs Costs of running the Project Company itself See$8.5.4 Project Contracts Contracts signed by the Project Company,which may include a Project Agreement, EPC Contract, Input Supply Contract, O&M Contract, Government Support Agreement, and insurance.,See Chapter Project Coordination Agreement SeeCommon Terms Agreement project cost budget The budget for construction, finance,and other capital costsof the project See 98.5.4; Power Purchaser The Offtaker under a PPA PPA Power Purchase Agreement, a 912.4.r type of Offtake Contract See 96.1.2 project finance A method of raising PPP Public-private partnership, a long-term debt financing for major contracts under which a privateprojects through "financial engisectorparty provides a service to or neering," based on lending against on behalf of the public sector ,See the cash flow generatedby the proj$ ;9 ; ect alone; it depends on a detailed pre-NTP works Preliminary works evaluation of a project's construcon the project (e.9., design) carried tion, operating and revenue risks, out by the EPC Contractor before isand their allocation between insuanceof the NTP See 97.1.2 vestors, lenders, and other parties prepayment Early repayment of the through contractual and other ardebt, which may be in connection rangements.See 92.2 with a refinancing.,See project finance risks See commer913.6 prequalification The first stage of a cial risks, macroeconomicrisks and procurement process See *4.6.1; political risks $8.5.3 Project IRR The IRR of rhe projecr private placement Bonds not quoted Company's cash flow before allowon a stock exchange.See 85.2.2 ing for debt service and distribuProject Agreement A contract that tions.See$12.8.2 34't Glossaryanil Abbreaiations project risks Seecommercial risks promoters SeeSponsors procurement Competitive public bidding for a Project Agreement See 54.6 pull tolling A Tolling Contract with an Offtaker supplying the fuel or raw materials (cf push tolling) See by the users of the project (cf shadowtolls) See$6.2.2;$8.8.7 refinancing Prepayment of the debt and substitution of new debt on more attractive terms (e.g., lower cost or longer maturity) See$6.9.1; 8r2.r2.4; $13.6.3 reinsurance Reinsuranceof liability by an insurancecompany.See Si.6.5 $7.3.1 purchasing power parity The as- relief events Temporary force majeure preventing the completion or sumption that the future exchange continuous operation of the project rate between two currencies will S e e$ ;$ reflect their inflation rate differenrepresentations and warranties Contials See 512.3.4 firmation by the Project Company push tolling A Tolling Contract with of the facts on which the financing is an Input Supplier (cf pull tolling) based.See$13.9 S e e$ Accounts conPut-or-Pay Contract An Input Sup- Reserve Accounts (or their lenders by the trolled ply Contract on a Take-or-Paybasis in which escrow agent) trustee or See87.3.1 cash part the Project Company's of QIB Qualified Institutional Buyer, an provide security to flow is set aside Rule institutional investor to whom for the debt or to cover future costs; 144abondscan be sold See$5.2.2 cf DSRA, Maintenance Reserve quasi-political risks Risks on the Account.See$10.3.3;$13.5.2 and commercial boundary between political risks, namely breach of Reserve Cover Ratio The equivalent of LLCR for a natural resources contract (by a host government or project See 512.9.5 public sector body), sub-sovereign risks, and creeping expropriation reserve risk The risk of insufficient extraction of supplies of natural reSee$10.7 sourcesrequired for the project See rate-fixing date The date on which a floating interest rate is refixed to the $8.9.4 reserve tail Proven reserves availcurrent market rate See 99.2 able after the final maturity of the rating agency A company providing debt.See$12.9.5 an independent view on the creditworthiness of the Project Company retainage The proportion of each payment under the EPC Contract reSee55.2.1 tained by the Project Company as real interest rate The interest rate securityuntil COD See$7.1.10 excludingof inflation See*12.3.3 real return The return on a project or revenue risks Commercial risks relating to generation of revenue by investment excluding inflation (cf the Project Company, derived from nominal return).See$9.1 volume and price of product sales, real tolls Tolls or fares paid in cash 342 or level of usage of the project See $8.8 RFP Request for Proposals,an invitation to bid in a public procurement See 94.6.2 right ofway A right ofaccessto adjacent land (e.g for a pipeline bringing fuel to the project) See 57.4.3 risk matrix Schedule of project finance risks and mitigations See $8.3 rollover risk The risk that an interest rate swap contract may not be amendedon acceptableterms if the amount of debt or repayment schedule changes.See 99.2.1 RPI Retail price index SeeCPI Rule 144a SEC provisions that allow trading in bond private placements with QIBs See$5.2.2 SACE Sezione Speciale per I'Assicurazione del Credito all'Esportazione, now superseded by ISACE SEC Securities and Exchange Commission (of the United States), which regulatesthe investmentmarkets.See95.2.2 senior lenders Lenders whose debt service comes before debt service on mezzanineor subordinateddebt, or distributions to investors, and who are repaid first in a liquidation of the project Company See $r sensitivities Variations on the Base Case assumptionscalculated by the lenders.See Sl2.ll SFF EIB's Structured Finance Facility, under which it will assumevarious project risks See$ 11.6.9 shadow tolls Tolls basedon usaqeof Glossaryanil Abbreoiations the project, but payableby the Contracting Authority rather than the general public (cf real tolls) See $ 2$ ; 8.8.7 Shareholder Agreement An agreement between Sponsors relating to their investment in and management of the Project Company See 94.5.2 Simest Societi Italiana per le Imprese all'Estero, which provides Italian CIRR interest subsidies and untied financing.See$ I1.5.7 site legacy risk The risk of preexisting contamination on the project site.See$7.1.4 site risks Risks related to the acquisition or condition of the project site S e e$ $ : $; a ; 8.5.6 sovereign risk A risk carrying the full faith and credit of a country (cf sub-sovereign risks) See$10.7.2 Sponsors The investors who develop and lead the project through their investment in the Project Company See S4.l SPV Special Purpose Vehicle, a separate legal entity with no activity other than those connected with its borrowing See 52.4 step-in rights Rights under a Direct Agreement for the lenders to take over managementof a Project Contract to protect their security; cf emergencystep-in, substitution See 91.7 subordinated debt Debt whose debt service comes after amounts due to senior lenders, but before distributions of dividends to investors: cf mezzaninedebt See 93.3; 912.7.2; $l r s subrogation Right of an insurer or Glossaryand Abbreoiations guarantor to take over an asset on which an insuranceclaim or guarantee has been paid See $7.6.4; $ 1 4$;1 subsovereign risks Risks relating to a public-sector body other than the Host Government.See$10.7.2 substitution Right under a Direct Agreement for the lenders to substitute a new entity to take over the Project Company's rights and obligations under a Project Contract See 87.7 A Support Services Agreement contract between the Project Company and one or more Sponsors to provide back-up technical support, spareparts, etc See 88.7.2 swap provider A bank providing an interest rate swap to the Project Company.See89.2.1;$13.13.1 syndication The process by which the Lead Managers reduce their underwriting by placing part of the loan with other banks.See$5.1.7 synthetic lease A form of lease (mainly in the United States) in which ownership of the equipment remains with the lesseefor tax purposes, but with the lessor for accounting purposes.See 93.4 TA Technical Adviser See Lenders' Engineer tait Continuing project revenuesafter repayment of the debt; cf reserve ta1l.See 512.9.4;8I3.2 Take-and-pay contract A contract under which the purchaser pays an agreed price for the product purchased, but is not obliged to purc h a s eS e e$ $; Take-or-pay contract A contract M3 under which the purchasermust buy the product or make a payment in lieu See$6.1.1;$7.3.1 target repayments A flexible repayment structure to allow for temporary cash flow deficiencies See $13.2.4 Payments under a Project Tariff Agreement; see Availability Charge and Variable Charge, or Unitary Charge.See$6.1.5:$6.1.6 term Duration of a Project Contract or the period until the final repayment date of the debt See $6.3; $13.2.1 term sheet Heads of terms for the project finance.See$5.1.6 Termination Sum The compensation payableby the Offtaker or Contracting Authority for the early termination of a Project Agreement See$6.8 InThird-Party Liabititylnsurance surance against damage or injury caused by the project to third Parties.See$7.6.1;$7.6.2 third-party risks Risks that failures by parties not involved with the Project Contracts may affect the completion or operation of the project.See$8.5.8;$8.9.1; $8.9.5 A Project Throughput Contract Agreement for the use of a pipeline S e e$ tied financing Seeexport credits Tolling Contract An Input Supply Contract in which the fuel or raw material is supplied free, and the Project Company is paid for processingit See$7.3.I See Contract Transportation Throughput Contract 344 turnkey contract A contract for design and construction of a complete project U.S Exim Export-Import Bank of the United States.See$ 1.5.I Unitary Charge A combined Availability and Variable Charge under a ConcessionAgreement.See 96.2.1 untied financing Financing or other support by ECAs or other public sector agencies not linked to exports.See$11.4 unwind cost Seebreakagecost Variable Charge The element of a Tariff intended to cover a project's variable costs (cf Energy Charge) S e e$ VAT Value addedtax See$12.7.5 vendor finance Debt provided by a supplier of equipment or servicesto the Project Company.See 93.5 GlossaryandAbbreoiations warranties Guarantees against failure of equipment, provided by the EPC Contractor.See97.1.10 withholding taxes Host Country taxes deductedby the Project Company before paying interest or dividends.See 99.2.4;912.1.6 working capital The amount of funding required for inventories and other costs incurred before receipt of salesrevenues.See$12.4.1 working capital loan A loan to cover working capital requirements See 512.4.2 World Bank International Bank for Reconstruction and Development, an IFI providing finance to governments.Seeg I 1.6.I wrapped bonds Bonds guaranteed by a monoline insurance company See$5.2.3 rsBN 0-t,e-??D851,-! ... Is Project Finance? $2.1 $2.2 $2.3 $2.4 $2.5 5 Development of Project Finance FeaturesofProjectFinance Project Finance and Privatization 11 ProjectFinance and Structured Finance 13 Why Use Project. . .Principles of Project Finance Principles of Project Finance E R Yescombe ConsultingLtd Yescombe London,U.K (proj ect .finance@ yescombe.com) ACADEMIC PRESS An imprintof ElsevierScience... billion of investments in projects around the world were financed using project finance techniques(cf $2.1) "Project finance" is not the same thing as "financing projects," becauseprojects may be financed