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PPP Americas 2010 Funding for PPPs Cassio Schmitt Santander Global Banking & Markets Confidential | May 2010.

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Presentation on theme: "PPP Americas 2010 Funding for PPPs Cassio Schmitt Santander Global Banking & Markets Confidential | May 2010."— Presentation transcript:

1 PPP Americas 2010 Funding for PPPs Cassio Schmitt Santander Global Banking & Markets Confidential | May 2010

2 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 2 Agenda PPP Americas 2010 PPP Projects – Investment Opportunities Sources of Financing for PPPs in Brazil Risk Mitigation and Guarantees Case Study: Line 4 of the SP Metro

3 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 3 Investment Opportunities PPP Americas 2010 First phase - Investment in PPP Proyects The PPP Law was approved in Brazil at the end of 2004, officially instituting the public- private partnership program in Brazil. PPP interest has gone through different phases in the last years, from great expectations to difficult practical implementation issues. A few number of projects have been auctioned or structured until now: Metro - Line 4 of the São Paulo Metro (State level) Water & Sewage – Rio das Ostras (Municipality level) Road Concession – MG 050 (State level) Prison – Itaquitinga Integrate Ressocialization Center - PE (State level) Hospital – Hospital do Suburbio – BA (State level) Irrigation – Pontal/PE Irrigation Project (State level) What is the perception on PPPs as a brand name? General view is not positive. There is yet a lot do, and need to start presenting results.

4 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 4 Investment Opportunities PPP Americas 2010 A new phase for PPPs – World Cup and Olympics New wave of strong demand for investments in urban mobility (public transportation), tourism and neighborhood development and arenas has emerged. State governments and municipalities have listed a significant number of projects, which add up to approximately R$ 80 billion in investments, to prepare their cities for the World Cup and the Olympics (next 6 years). PPPs will be concentrated in arenas and transportation systems (metros, monorails, etc.) Source: Federal and State Governments and Municipalities (estimates)

5 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 5 Investment Opportunities PPP Americas 2010 Metro - Expansion Line 2 – Vila Prudente to the City of Tiradentes through a monorail - Implementation of sections of Line 4 - Construction in Line 5 CPTM - Airport Express train - Connect Luz to Cumbica airport - Extension - 28 Km - Modernization of Lines 7 and 12 São Paulo State Source: Portal da Copa 2014, CPTM Airports - Construction of Terminal 3 of Guarulhos Airport - Additional landing runway at the International Viracopos Airport Road system - South tranche of Rodoanel toll road?

6 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 6 PPP Americas 2010 Investment Opportunities PPP Challenges Time frame needed to present a sustainable PPP model. Risk sharing - ex. Traffic risks – Metro Line 4 Payments related to performance (QID) Guarantees that the contributions of the public sector will be paid - Guarantee Fund (ex. CPP - Companhia Paulista de Parcerias) Financial capacity of the Governments: public sector long term payment commitments. Public commitments limited to 3% of the Net Current Revenues Difficulties in structuring these projects: significant demand on governments.

7 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 7 Sources of Financing for PPPs PPP Americas 2010 In local currency BNDES Commercial banks In US dollar Commercial banks Bridge loans – Fiscal advantages and guarantee analysis BNDES (offers specific lines of financing for infrastructure) BNB, CEF Regional Development Funds (FNO / FDA / FNE / FCO) Multilaterals (IDB and IFC A/B loan) ECAs Capital Markets Long term financing – Cash flows and guarantee analysis Funding Alternatives – Short and Long Term Bridge loans have become a key instrument to improve infrastructure investment returns (such as PPPs), since structuring long term financing in Brazil requires time (at least 12 months).

8 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 8 Sources of Financing for PPPs PPP Americas 2010 Debt Structures in Brazil 1) Onlending with BNDES Funding or guarantee BNB loans 2) B Loans: under the umbrella of multilateral agencies (MLAs), commercial banks can offer long term financing to projects. 3) In the case of leverage restrictions at the SPC level from Senior Lenders, additional debt can be offered to the holding company. 4) Subordinated Debt: To reduce equity contributions and increase returns to shareholders Sponsor SPC BNDES / BNB Banks¹ Multilateral ECAs B Lenders 2 Equity Project Long-term Financing Debt Capital Markets Commercial Bank Debt³ Subordinated Debt 4

9 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 9 Sources of Financing for PPPs PPP Americas 2010 Long Term AlternativesCurrencyIndexTenor BNDES BRL / Currency Basket TJLP +Up to 25 years International Capital MarketsUSDFixed InterestUp to 10 years Local Capital MarketsBRLInflation +Up to 5 years Multilateral AgenciesUSDLibor +Up to 10 years ECA Facility (Exim)USDLibor +Up to 12 years Local Bank MarketBRLCDI +Up to 7 years * Subject to entity policies and market liquidity Long Term Sources of Funding in Brazil

10 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 10 Sources of Financing for PPPs Project financing through local debt capital markets is still under development in Brazil. If compared to other financing long term alternatives for projects, traditional debt through DCM is not yet competitive. Risk differentiation: construction x operation risks Mitigation factor: sponsor quality and rating of the transaction Market and demand concentration: low asset liquidity PPP Americas 2010 Local Debt Capital Markets Target investors: Asset Managers / Pension Funds – have the capacity to better perform medium and long term credit analysis. Pension Funds (20 active): Prefer assets indexed to inflation and with longer tenor (5 – 7 years). Asset Managers (40 active):Prefer assets indexed to CDI (interbank rate) and with shorter tenure (2 – 4 years). Debentures – Average Tenor years years years years years years years

11 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 11 Risk Mitigation and Guarantees PPP Americas 2010 Project Risk Management In PPPs, we still need to manage construction risks, the same as in common concessions which are financed through Project Finance structures

12 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 12 Risk Mitigation and Guarantees PPP Americas 2010 Risk Allocation Main Parties SPC EPC Contractor Government Selected Risks Political / Legal Social Environmental Whos responsible? ____________________________________________________________ Delays in obtaining environmental licenses and agency authorizations due to the lack of documentation; Public Attorneys civil actions which stop construction and cancel licenses due to social and environmental matters; Delays in the construction of toll plazas due to the lack of definition of the project area; Port workers strikes (delaying equipment delivery), etc.

13 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 13 Risk Mitigation and Guarantees PPP Americas 2010 Alternatives for Private Sector Participation Tenor of up to 35 years Revenue Tariff Revenue Tenor of up to 35 years Public Contribution Common Concession (ex. Federal Toll Roads) Administrative PPP (ex. PPP Alto Tietê) Tenor of up to 35 years Revenue Public Contribution (up to 70%) Tariff Sponsored PPP (ex. PPP Metro Line 4) Concession (Law 8.987/95) - well tested modality - sectors: transportation and energy PPP (Law /04) - few projects implemented - sectors: water & sewage, transportation, prisons, hospitals and administrative centers.

14 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 14 Case Study: Line 4 of the SP Metro PPP Americas 2010 Project Highlights One of the first PPP projects in Brazil 30 year PPP concession of SP Subway – Line 4 Public Sector: civil construction works Private Sector: supply of rolling stock, communication and ticketing systems, O&M Phase I: 5 Stations (Butantã, Faria Lima, etc) and 14 trains – 700th pass/day Phase II: Morumbi, Vila Sônia, investments in line C and 15 trains (demand forecast) – 900th pass/day (after minimum 4 years from Phase I) Revenue model Ticket revenues (100% for exclusive passengers and 50% for integrated passengers) 48 monthly Government payments – defined auction winner Non fare revenues (advertisement, etc) Inflation adjusted (IGPM+IPC 15 y, then IPC) O&M quality parameters should be attained

15 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 15 Case Study: Line 4 of the SP Metro PPP Americas 2010 Risks and Mitigation factors (1-2) Minimum Revenue Guarantee: downside protection to private investors, and government may share upside.

16 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 16 Case Study: Line 4 of the SP Metro PPP Americas 2010 Risks and Mitigation factors (2-2) Risk Mitigation: Construction/rolling stock supply delays: state or private investor reimburse losses Buses and subway networks will be integrated, avoiding competition between them State EPC contract for civil works (both phases) and investments in rolling stock for line C (phase II) Centralized fare collection by independent company FX protection Early termination and step in rights Dispute resolution – 3 member mediation committee or binding arbitration (International Chamber of Commerce) State payments guaranteed by Cia Paulista de Parcerias (CPP) Financing Choice of equipment is also related to defining LT financial sources (multilaterals, BNDES, ECAs, available according to supplier) IDB A/B loan selected by Sponsors IDB is also a strategic lender for the Brazilian government

17 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pg 17 Case Study: Line 4 of the SP Metro PPP Americas 2010 Financing Conditions LT IDB Financing Limited recourse A/B loan – 15 y USD 69 MM IDB A-loan and 12 y USD 240 MM B- loan, funded by 7 financial institutions (oversubscribed) USD 59,5 MM IDB A-loan for Phase II Amortization schedule accommodates eventual delays on civil works Guarantees: Sponsor support agreement until completion Project Guarantees: shares, rolling stock, rights, etc Financial hedge Collateral agent – Deutsche Bank

18 SANTANDER PRESENTE EM MAIS DE 40 PAÍSES Pág 18 Contact Details PPP Americas 2010 Todas as informações apresentadas neste documento são de natureza genérica e não têm por finalidade abordar as circunstâncias de nenhum indivíduo específico ou entidade. Embora tenhamos nos empenhado para prestar informações precisas e atualizadas, não há nenhuma garantia de sua exatidão na data em que forem recebidas nem de que tal exatidão permanecerá no futuro. Essas informações não devem servir de base para se empreender qualquer ação sem orientação profissional qualificada, precedida de um exame minucioso da situação em pauta. Cassio Schmitt Project & Acquisition Finance – Head Santander Global Banking & Markets Av. Juscelino Kubitscheck, 2235, 27th floor São Paulo, SP – Brazil


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