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PROJECT FINANCE Simon Par Keeling, Société Générale Paris.

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Presentation on theme: "PROJECT FINANCE Simon Par Keeling, Société Générale Paris."— Presentation transcript:

1 PROJECT FINANCE Simon Par Keeling, Société Générale Paris

2 What do we mean by a Project? u Investment made by a "sponsor ", either:  a company  or often a joint-venture u in a long term project / concession, which is either:  "greenfield" development  or a sizeable increase in capacity or significant refurbishment/extension of an existing plant u which will generate a well defined stable cash- flow

3 Project Finance : General Definition u Financing of a specific investment, the reimbursement of which is linked to and based upon the future cash-flows of the project, with limited recourse to the Sponsors of the project company u Project needs to be well defined conceptually and contractually u For Banks, Project Risk is between Capital Risk and Asset or Corporate Financing

4 How do companies finance their Projects?

5 Types of Project where Project Finance can be used u Private companies (well defined projects with appropriate counter party risks) u Government / local authority privatisation (PFI/PPP type projects)  roads  waste collection  water treatment

6 Drivers for a Project u Government / local authorities  Budget considerations - Project passed to private sector via a long term concession  Design, construction, financing & operation passed to private sector (DBFO)  An appropriate level of project risk passed to private sector u Sponsors  Equity investment and returns  Construction and operating contracts  Balance-sheet considerations

7 Project Finance Structure

8 Project Finance Features u Debt service relies on future cash flows of a particular project instead of corporate operations ("limited recourse")  Insulation of the "Project"  Project Risks identification  Project Risks allocation between sponsors, outside investors, banks, insurers, etc... u For the banks, this leads to an "investor like" approach  Project rationale analysis  What are the most appropriate financing structure and instruments to reconcile various objectives ?  Schedule / Cost optimization  Banking due diligence

9 Project Approach (1) u Sponsors objectives and project's rational u Risk analysis :  General risks : country, economic, political  Corporate risks : financial and contractual obligations

10 Project Approach (2)  Specific risks : »regulatory »technical »construction completion (delays, cost overruns, performances) »supply, reserves »operations (performances, availability, operating costs) »market (volume, price, traffic) »financial risk (exchange, interest, liquidity, transferability risks) »Force Majeure

11 Project Approach (3) u Overall contractual structure (required entities, fiscal optimization) u Cash flow analysis and sensitivities u Allocation of risks between parties  contracts  guarantees  specific supports  insurances u Independent advisers  Technical, Legal, Insurances

12 Project Approach (‘4) u Documentation  Contracts, Agreements  Security Agreements (pledge of shares, of revenues, assignment of contracts, mortgages, offshore project accounts, etc.)  Cash flows allocation order u Syndication

13 Construction Companies Case by case approach, within a typical frame Contractor Operator Shareholders Governmental Authority Consumers / Offtaker Performance Bond Banks Concession / Project Company Lenders Insurance Companies Sub-contracts Pledge of shares Revenues Concession Agreement Construction Contract Support Agreements Credit FacilitiesSecurities O&M Contract Supplier Shareholders Agreement

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