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Chapter 1 Introduction
Chapter 2 What is Project Finance?
§2.1 Development of Project Finance
§2.2 Features of Project Finance
§2.3 Project Finance and Privatization
§2.4 Project Finance and Structured Finance
§2.5 Why Use Project Finance?
§2.5.1 Why Investors Use Project Finance
§2.5.2 The Benefits of Project Finance for Third Parties
Chapter 3 The Project Finance Markets
§3.1 Commercial Banks
§3.1.1 Areas of Activity
§3.1.2 Banks in the Market
§3.2 Bond Issues
§3.3 Mezzanine and Subordinated Debt
§3.4 Lease Finance
§3.5 Vendor Finance
§3.6 Public-Sector Finance
Chapter 4 Project Development and Management
§4.1 Sponsors and Other Investors
§4.2 Project development
§4.3 The Rôle of Advisors
§4.4 Joint-Venture Issues
§4.5 The Project Company
§4.5.1 Structure
§4.5.2 Shareholder Agreement
§4.5.3 Management and operations
§4.6 Public Procurement
§4.6.1 Prequalification
§4.6.2 Request for Proposals
§4.6.3 Bid Negotiation to Contract Signing
§4.6.4 Competitive Bidding for Other Project Contracts
Chapter 5 Working with Lenders
§5.1 Commercial Banks
§5.1.2 Advisors and Lead Managers
§5.1.3 Letters of intent
§5.1.4 Lenders and the Public Procurement Process
§5.1.5 Bank Rôles
§5.1.6 Financial Model
§5.1.7 Term Sheet, Underwriting and Documentation
§5.1.8 Information Memorandum and Syndication
§5.1.9 Agency Operation
§5.2 Bond issues
§5.2.1 The Investment Bank and the Ratings Agencies
§5.2.2 Rule 144a
§5.2.3 Wrapped Bonds
§5.2.4 Bond Paying Agents and Trustees
§5.3 Loans versus bonds
§5.4 The rôles of the lenders’ advisors
§5.4.1 Legal advisors
§5.4.2 Lenders’ Engineer
§5.4.3 Insurance advisor
§5.4.4 Model Auditor
§5.4.5 Other advisors
§5.4.6 Preappointment of Lenders’ Advisors
§5.4.7 Use of Advisors’ Time
Chapter 6 Project Contracts: (1) The Project Agreement
§6.1 Offtake Contract
§6.1.1 Types of Offtake Contract
§6.1.2 PPA structure
§6.1.3 Completion of the plant
§6.1.4 Operation of the plant
§6.1.5 Tariff
§6.1.6 Tariff Indexation
§6.1.7 Penalties
§6.2 Concession Agreement
§6.2.1 Service contracts
§6.2.2 Toll contracts
§6.3 Term of Project Agreement
§6.4 Control of Project Design and Construction, Contracts and Financing
§6.5 Compensation for Additional Costs
§6.5.1 Breach by the Offtaker or Contracting Authority
§6.5.2 Change in specifications
§6.5.3 Changes in Law
§6.5.4 Latent Defects
§6.6 Force majeure
§6.7 Step-in by the Offtaker or Contracting Authority
§6.8 Termination of the Project Agreement
§6.8.1 Early Termination: Default by the Project Company
§6.8.2 Early termination: default by the Offtaker or Contracting Authority
§6.8.3 Early termination: force majeure
§6.8.4 Optional Termination
§6.8.5 Tax Implications of a Termination Sum Payment
§6.8.6 Final maturity of a BOOT, BOT or BTO contract
§6.9 Effect of debt refinancing or equity resale on the Project Agreement
§6.9.1 Debt refinancing
§6.9.2 Equity sale
§6.9.3 Does it matter?
Chapter 7 Project Contracts: (2) Ancillary Contracts
§7.1 EPC Contract
§7.1.1 Scope of contract
§7.1.2 Commencement of the Works
§7.1.3 Owner’s Risks
§7.1.4 Contract price, payments and variations
§7.1.5 Construction Supervision
§7.1.6 Completion
§7.1.7 Force majeure
§7.1.8 Liquidated damages and termination
§7.1.9 Suspension and Termination by the EPC Contractor
§7.1.10 Security
§7.1.11 Dispute Resolution
§7.2 Operation and Maintenance Contract(s)
§7.2.1 Scope of Contract
§7.2.2 Services
§7.2.3 Fee basis
§7.2.4 Incentives and Penalties
§7.2.5 Major Maintenance Contract
§7.3 Fuel or Other Input Supply Contract
§7.3.1 Supply Basis
§7.3.2 Physical Delivery Risks
§7.3.3 Pricing basis
§7.3.4 Security
§7.3.5 Force Majeure and Change of Law
§7.3.6 Default and Termination
§7.4 Permits and Other Rights
§7.4.1 Project Permits
§7.4.2 Investment and Financing Permits
§7.4.3 Rights of Way and Easements, etc.
§7.4.4 Shared Facilities
§7.5 Government Support Agreement
§7.6 Insurance
§7.6.1 Construction phase insurances
§7.6.2 Operating Phase Insurances
§7.6.3 Deductibles
§7.6.4 Lender requirements
§7.6.5 Reinsurance
§7.7 Direct Agreements
Chapter 8 Commercial Risks
§8.1 Categories of Project Finance Risk
§8.2 Risk Evaluation and Allocation
§8.3 Analysis of commercial risks
§8.4 Commercial Viability
§8.5 Completion risks
§8.5.1 Site Acquisition and Access
§8.5.2 Permits
§8.5.3 The EPC Contractor
§8.5.4 Construction cost overruns
§8.5.5 Revenue during Construction
§8.5.6 Delay in Completion
§8.5.7 Inadequate Performance on Completion
§8.5.8 Third-Party Risks
§8.5.9 Projects without a Fixed-Price, Date-Certain, EPC Contract
§8.6 Environmental risks
§8.7 Operating risks
§8.7.1 Technology
§8.7.2 General Project Operation
§8.7.3 General Operating Cost Overruns
§8.7.4 Project Availability
§8.7.5 Maintenance
§8.7.6 Degradation
§8.8 Revenue risks
§8.8.1 Offtake Contracts
§8.8.2 Concession Agreements
§8.8.3 Hedging Contracts
§8.8.4 Contracts for differences
§8.8.5 Long-term sales contracts
§8.8.6 Price and volume risk
§8.8.7 Usage Risk
§8.8.8 Risks for the Offtaker or Contracting Authority
§8.9 Input Supply Risks
§8.9.1 Input Supply Contracts
§8.9.2 When Is an Input Supply Contract Not needed?
§8.9.3 Water and Wind
§8.9.4 Mineral Reserves
§8.9.5 Other Utilities
§8.9.6 Waste Disposal
§8.10 Force majeure
§8.10.1 Force majeure and insurance
§8.10.2 Temporary force majeure
§8.10.3 Permanent force majeure
§8.11 Contract Mismatch
§8.12 Recourse to the Sponsors
Chapter 9 Macroeconomic Risks
§9.1 Inflation
§9.1.1 Inflation-indexed financing
§9.2 Interest rate risks
§9.2.1 Interest Rate Swaps
§9.2.2 Interest rate caps and other instruments
§9.2.3 Scale and Timing of Interest Rate Hedging
§9.2.4 Additional costs
§9.2.5 Redeposit Risk
§9.2.6 Interest Rate Hedging before Financial Close
§9.3 Exchange Rate Risks
§9.3.1 Hedging of Currency Risks
§9.3.2 Finance in more than one currency
§9.3.3 Conversion of Local Currency Revenues
§9.3.4 Fixing of Security in Local Currency
§9.3.5 Catastrophic Devaluation
Chapter 10 Political Risks
§10.1 Projects and politics
§10.2 Classification of Political Risk
§10.3 Currency Convertibility and Transfer
§10.3.1 Enclave Projects
§10.3.2 Countertrade
§10.3.3 Use of offshore Reserve Accounts
§10.4 Expropriation
§10.5 War and Civil Disturbance
§10.6 Change of law
§10.6.1 Change of Law Risk in Project Contracts
§10.6.2 Funding the Costs of a Change of Law
§10.7 Quasi-political risks
§10.7.1 Breach of Contract and Court Decisions
§10.7.2 “Sub-sovereign” (or “sub-state”) Risks
§10.7.3 Creeping Expropriation
Chapter 11 Political Risk Guarantees, Insurance, and Finance
§11.1 Mitigation of Political Risks
§11.2 Export Credit Agencies
§11.3 Export Credits
§11.3.1 Export Credit Structures
§11.3.2 The OECD Consensus
§11.3.3 Assumption of Risks and Scope of Cover
§11.3.4 Cash Collateralization
§11.3.5 Benefit of ECA Support
§11.4 Untied Cover and Financing
§11.4.1 Political Risk Insurance for Equity Investment
§11.4.2 Development Finance Institutions (DFIs)
§11.5 ECA Structures and Products
§11.5.1 United States (U.S. Exim)
§11.5.2 United States (OPIC)
§11.5.3 Canada (EDC)
§11.5.4 Japan (NEXI / JBIC)
§11.5.5 France (COFACE)
§11.5.6 Germany (Hermes / KfW)
§11.5.7 Italy (ISACE / Simest)
§11.5.8 United Kingdom (ECGD)
§11.6 International Financing Institutions (IFIs)
§11.6.1 The World Bank
§11.6.2 International Finance Corporation (IFC)
§11.6.3 International Development Association (IDA)
§11.6.4 Multilateral Investment Guarantee Agency (MIGA)
§11.6.5 Asian Development Bank (ADB)
§11.6.6 African Development Bank (AfDB)
§11.6.7 Inter-American Development Bank (IADB)
§11.6.8 European Bank for Reconstruction and Development (EBRD)
§11.6.9 European Investment Bank (EIB)
§11.6.10 Nordic Investment Bank (NIB)
§11.6.11 Islamic Development Bank (IDB)
§11.7 Private-sector Insurance
Chapter 12 Financial Modeling and Evaluation
§12.1 Model Inputs
§12.2 Model outputs
§12.3 Macroeconomic Assumptions
§12.3.1 Inflation
§12.3.2 Commodity Prices
§12.3.3 Interest Rates
§12.3.4 Exchange Rates and Currency of the model
§12.3.5 GDP and/ traffic Traffic Growth
§12.4 Project Costs and Funding
§12.4.1 Project Costs
§12.4.2 Project Funding
§12.5 Operating Revenues and Costs
§12.6 Loan Drawings and Debt Service
§12.7 Accounting and Taxation Issues
§12.7.1 Capitalization and Depreciation of Project Costs
§12.7.2 The Dividend Trap
§12.7.3 Negative Equity
§12.7.4 Timing of Tax Payments
§12.7.5 Value-Added Tax
§12.7.6 Withholding Tax
§12.7.7 Exchange Rates and Tax
§12.7.8 Inflation and Tax
§12.8 Equity returns
§12.8.1 Net Present Value
§12.8.2 Internal Rate of Return
§12.8.3 Using NPV and IRR Calculations for Investment Decisions
§12.8.4 Non cash Investment
§12.9 Debt Cover Ratios
§12.9.1 Annual Debt Service Cover Ratio
§12.9.2 Loan Life Cover Ratio
§12.9.3 Average ADSCR and LLCR
§12.9.4 Project Life Cover Ratio
§12.9.5 Reserve cover ratio
§12.9.6 Calculating Cover Ratios
§12.10 The Base Case and Changes in Assumptions
§12.11 Sensitivity Analysis
§12.12 Investors’ Analysis
§12.12.1 Investors’ Returns
§12.12.2 Timing of Equity Commitment
§12.12.3 Effect of Equity Resale
§12.12.4 Benefit of Refinancing
Chapter 13 Financial Structuring and Documentation
§13.1 Debt:equity ratio
§13.1.1 Level of debt
§13.1.2 Effect of Cover Ratio Requirements
§13.1.3 Projects without Equity
§13.1.4 Calculation of Debt:Equity Ratio
§13.2 Debt Service
§13.2.1 Term of Financing
§13.2.2 Average Life
§13.2.3 Repayment Schedule
§13.2.4 Flexible repayment
§13.3 Drawdown of Debt and Equity
§13.3.1 Priority of drawing
§13.3.2 Procedure for Drawing
§13.3.3 Contingency Funding
§13.4 Interest Rate and Fees
§13.5 Control of Cash Flow
§13.5.1 The Cash Flow Cascade
§13.5.2 Reserve Accounts
§13.5.3 Controls on Distributions to Investors
§13.5.4 Cash Sweep
§13.5.5 Cash Clawback
§13.6 Debt Prepayments and Refinancing
§13.6.1 Loan Commitment Reduction
§13.6.2 Partial Prepayment
§13.6.3 Refinancing
§13.7 Security
§13.7.1 Mortgages and contract assignments
§13.7.2 Security over Project Company Shares
§13.8 Financial Close – Conditions Precedent
§13.9 Representations and warranties
§13.10 Covenants
§13.10.1 Positive covenants
§13.10.2 Negative covenants
§13.11 Events of Default
§13.12 Waivers, Amendments, and Enforcement on default
§13.13 Intercreditor issues
§13.13.1 Interest Rate Swap Providers
§13.13.2 Fixed-Rate Lenders
§13.13.3 Lenders with different security
§13.13.4 Lessors
§13.13.5 Subordinated or mezzanine lenders
Glossary and Abbreviations