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African Legal Support Facility/Pan-African Lawyers Union (ALSF/PALU)

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Presentation on theme: "African Legal Support Facility/Pan-African Lawyers Union (ALSF/PALU)"— Presentation transcript:

1 African Legal Support Facility/Pan-African Lawyers Union (ALSF/PALU)

2 Barrister Duga Titanji,Ph.D

3 Introduction 1. The main terms involved in project finance: 2. From government’s point of view, the advantages and disadvantages of BOT projects and under what circumstances a government will be concerned about a BOT structure. 3. The principal risks involved in project finance. 4. Project bankability. 5. Lenders’ main concern about BOT project finance. 6. Security issues in project finance. 7. To what extent do the issues for lenders in BOT projects differ from the issues for lenders in other projects? 8. From a commercial lender’s view, what are the main distinctions between lending to a private sector borrower and a sovereign borrower? 9. How does a sponsor support the projects? 10. The risks undertaken by host government in sanctioning and participating in BOT projects. Barrister Duga Titanji,Ph.D

4 Barrister Duga Titanji,Ph.D

5 What is a project finance? Types of project finance;
The Nature of project Finance; Why project finance and why project finance for Africa? Project finance versus other forms of corporate finance; The parties to a project finance deal; Identifying the risks and the appropriate measures to curb risks; The project finance structure and the role of the corporate lawyer in project finance; Barrister Duga Titanji,Ph.D

6 What is project finance?
The term Project Finance is generally used to refer to a non-recourse or limited recourse financing structure, in which debt equity and credit enhancement are combined for the construction and operation or the re-financing of a particular facility; In such a case, lenders base credit appraisals on the projected revenues from the operation of the facility; rather than the general assets or the credit of the sponsor of the facility and rely on the assets of the facility including any revenue producing contract and other cash-flow generated by the facility as collateral debt; In such projects the debt terms are not based on the sponsor’s credit support or the value of his physical assets in the project. Barrister Duga Titanji,Ph.D

7 There are basically two types of project finance operations:
Project Finance can therefore be defined as financing of natural resource projects or other assets or undertaking which is repaid principally from the cash flow generated from the project or the financed asset. It is normally used to refer to the provision of loan or other non-equity finance for the purpose of implementing projects. There are basically two types of project finance operations: Non-recourse; and Limited recourse project finance. Barrister Duga Titanji,Ph.D

8 Non-recourse Project Finance
This refers to financing based entirely on the merit of a project, rather than the credit of the project sponsors; The credit appraisals of the non-recourse project finance and lending, is therefore predicated on the underlying cash flow from the revenue and proceeds of project contracts, independent of the non-project assets of the project sponsor; In a non recourse debt system, the project sponsor (owner), has no direct legal obligation to repay the project debt or make interest payments if the project cash flow proves inadequate to service debt. Barrister Duga Titanji,Ph.D

9 Limited recourse Project Financing
Since under non-recourse project finance there is no liability on the project sponsor there are certain instances where the project sponsor will be expected to assume limited obligations and responsibilities for the success of the project; This is known as limited recourse project finance; How much recourse is necessary is determined by the inherent risks presented in the project and ability of the credit market to assess the risk. Barrister Duga Titanji,Ph.D

10 The Nature of Project Finance
The typical project finance model is the BOT project; BOT projects come in different “models” depending on the precise structure or activity; Some examples are BOOT (Build Own Operate Transfer), where the sponsor owns the project assets and transfers ownership to the government; LOT (Lease Operate Transfer) where existing assets are leased to the operator; ROT, (Rehabilitate Operate Transfer) where the asset exists prior to the implementation of the project, and the purpose of the project is its rehabilitation (e.g., oil barges). Barrister Duga Titanji,Ph.D

11 Why Project Finance and Why Project Finance For Africa?
To limit recourse to direct balance sheet obligations; An appropriate answer to risk sharing between parties; Project finance is usually suitable for industrial developments requiring substantial upfront capital investments; To achieve high leverages / longer tenors It is particularly important for African Countries Barrister Duga Titanji,Ph.D

12 Complex structures are not always integrated locally;
African Governments are not always well suited to deal with all project risks; Complex structures are not always integrated locally; Limits public expenditure; Would help African states realise development projects without directly disbursing funds; Barrister Duga Titanji,Ph.D

13 Project Finance Compared with other Forms of Corporate Lending
Objective Lend money Target A Company Depends on The credit worthiness of the whole company Case of default Recourse against the Company and/or its shareholders Objective Provide funds for the realisation of a specific project Target A special purpose vehicle company undertaking the project Depends on Adequacy of the project cash flow to repay its debt Case of default Limited or non recourse against shareholders Barrister Duga Titanji,Ph.D

14 Techniques of Corporate Finance
Equity; Quasi-Equity; Debt Financing; Bonds; Sources of debt Financing Single Lender Financing; Multi Lender Financing; Export Credit Agency; Development Finance Institutions (DFIs) Joint Venture/Offtake agreements; Infrastructure Financing; Other debt Finance institutions Barrister Duga Titanji,Ph.D

15 Understanding the Parties to a Project Finance Deal
The project company/borrower: a special purpose company, incorporated under the laws of the country in which the project is to be implemented and owned by the project sponsors; Project sponsors: who will provide the equity finance for the project, in the form of share capital and who will also provide or procure additional finance in the event that the cost of carrying out the project exceeds the amount originally estimated and financed; Project lenders: usually a syndicate of international banks making foreign currency loans; Barrister Duga Titanji,Ph.D

16 Contractors: who will be responsible for constructing the project.
Equipment suppliers: Where equipment is supplied under separate contracts from the construction contract, in respect of plant and equipment incorporated in the project e.g. gas turbines for power stations, or computer equipment for control and manufacturing systems. An operator, to operate and maintain the project, and/or a project manager (in either case usually one of the project sponsors); Suppliers of raw materials (in the case of manufacturing project) or unrefined or unprocessed commodities, e.g. unrefined oil in the case of an oil refining project; Purchasers of the project product; The host government, as the grantor of exchange control consents, tax holidays, operating licences, planning consents and other necessary authorisations. Barrister Duga Titanji,Ph.D

17 Risks and Risk Mitigation
Credit Risk Mitigation: - stand-by facilities, performance bonds and completion guarantees. Completion Risk Mitigation: -substantial penalties for delayed completion; contractor and/or equipment suppliers are not paid in full unless and until plant and equipment meets the required performance criteria; cost overruns are realistically assessed and financed by sponsors or other sources of finance; loan is disbursed following “milestones”, etc. Economic/Marketing Risk Mitigation: long term sales or processing contracts; Hedging of currency risks; factoring of appropriate margins to meet material fluctuations; Barrister Duga Titanji,Ph.D

18 Financial/Currency Risk Mitigation – quote in hard currency;
 Political Risk Mitigation: make sure licences are clearly and unambiguously worded, political insurance etc.  Legal Risk Mitigation: Use “best practice” techniques to mitigate practical risks. Environmental Risk Mitigation : Environmental Impact Assessments Barrister Duga Titanji,Ph.D

19 The Project Finance Structure and the Role of the Corporate Lawyer in Project Finance
Barrister Duga Titanji,Ph.D

20 The Contractual Structure
Project contracts Concession agreement Construction contract on a turnkey basis (EPC) Off-take agreements Supply agreements Operating and maintenance agreement (O&M) Finance documents: Loan Agreement/Common Term Agreement; Intercreditor agreement; Equity support; Security documents. Barrister Duga Titanji,Ph.D

21 The Security Package Basic security package include:
Pledge of shares of the shareholders in the Borrower Pledge of all assets of the Borrower Assignment of project contracts & insurance Pledge of Borrower’s accounts and receivables Direct agreements with the parties to the commercial contracts Adequate Intercreditor protections Unanimous voting on fundamental aspects (duration, pricing) Identify conflict of interest between creditors and negotiate adequate compromises Barrister Duga Titanji,Ph.D

22 Role of the Corporate Lawyer
Term Sheet negotiation; Drafting of Documents: Loan Agreements; General Finance Documents; Security Documents; All Project Documents; Assistance in security perfection formalities; The Preparation/drafting of conditions precedent to draw down; Barrister Duga Titanji,Ph.D

23 Quick Check-list of Issues to Address in the Loan Agreement
1The Interpretation Clause 2. Availability and Drawdown of Loans 3. Conditions Precedent 4. Joint and Several Obligations 5. Financial Terms a. Interest b. Repayment and Prepayment 6. Events of Default 7. Representations and Warranties 8. Covenants 9. Provisions Relating to the Maintenance of the Lender’s Profit 10. Governing Law and Jurisdiction Barrister Duga Titanji,Ph.D

24 Barrister Duga Titanji,Ph.D

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