Access to Capital - Debt Financing

Transcription

1 Platts Energy Conference 2013 The Bank Of Nova Scotia Access to Capital - Debt Financing

2 Scotiabank s Caribbean Footprint Started in 1889 Scotiabank s current Caribbean Presence 22 Countries 382 branches & offices 903 ABMs 11,700+ employees Bahamas Turks & Caicos Belize Cayman Jamaica Haiti Puerto Rico BVI Anguilla St. Maarten Dominican USV Antigua Republic I St. Kitts Dominica Netherlands Antilles St. Vincent St. Lucia Grenada Barbados Trinidad & Tobago Guyana

3 Overview Basic Debt Financing Structures Debt Financing Sources; AND Debt Financing Issues for the Caribbean Energy Sector 3

4 Basic Debt Financing Structures Sovereign; Corporate; and Project Finance. 4

5 Sovereign Debt Ratings Since 1975, an average of 1% of investment-grade sovereigns have defaulted on their foreign-currency debt within 15 years, compared with 30% of those in the speculative-grade category. An October 2010 IMF report found that "CRAs* quite accurately rank sovereign default risk". The IMF report also noted that all sovereigns that have defaulted since 1975 had speculativegrade ratings at least one year before default. Standard & Poor s RatingsDirect on the Global Credit Portal March 13, 2012 *Credit Rating Agencies 5

6 Caribbean Region Investment Grade Countries Moody s Country Barbados The Bahamas The Caymans Trinidad & Tobago PREPA Puerto Rico WAPA US Virgin Islands Investment Grade Baa1 A2 Aaa A1 BBB+ Baa2 6

7 Project Finance Basic Requirements Experienced sponsor with the technical, managerial and financial ability to deal with problems. Borrower is a special purpose company established to own and operate the asset financed. Minimum 25% equity contribution. Fixed priced, date certain EPC contract. Long term power purchase agreement with investment grade counter party. Contingencies and cost overrun guarantees required. Minimum 1.40 average, base case projected debt service coverage ratio ( DSCR ). Minimum 50% to 75% interest rate hedge. 7

8 Project Finance Cost Considerations Projects are expensive to finance as they are complex, time consuming and requires: - independent engineers, - insurance consultants, - market consultants, - environmental consultants, - financial model auditor, - external legal counsel, internal legal counsel. Typically requires project costs of at least US$50 to US$100 million. 8

9 Caribbean Energy Market Populations by Country Country Cuba Dominican Republic Haiti Puerto Rico Jamaica Trinidad & Tobago Population (millions) 21 others Less than Source The Caribbean Tourism Organization with data supplied by member countries as at June 27,

10 Caribbean Project Finance Issues Most projects are too small to qualify for project finance. Most countries do not have investment grade power purchase counter parties. The electricity sector in many Caribbean countries is mostly state owned. 10

11 Debt Financing Sources Foreign Aid / Concessional Financing Multi-Lateral Agencies ( MLA s such as World Bank, Inter- American Development Bank, Caribbean Development Bank) Development Financial Institutions ( DFI s ) Export Credit Agencies ( ECAs ) Commercial Banks Debt Capital Markets (bond investors) 11

12 Debt Financing Sources Spectrum CCC+ B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A A+ AA- AA AA+ Foreign Aid / Concessional Financing Multi-Lateral Sovereign Debt Export Credit Agencies Multi-Lateral Private Sector Debt Development Financial Institutions Commercial Banks Debt Capital Markets 12

13 Export Credits Basic Features Can be used for project finance, corporate borrowing structures or sovereign; Repayment terms (after project completion) 10 to 18 years; Floating rate (LIBOR-based) or Fixed Rate (Commercial Interest Reference Rate) structures; Large tickets, often larger than individual banks will hold. 13

14 Development Financial Institutions Development Financial Institutions are government entities with a general mandate to finance the private sector for investments that promote development. DFIs aim to be catalysts, helping companies in countries where there is restricted access to domestic and foreign capital markets. DFIs specialise in loans with longer maturities and other financial products. 14

15 Long repayment terms; Debt Capital Markets Generally fixed interest rate financing; Minimum bond issue size tends to favour larger projects e.g. more than US$150 million bond issue; Focus is on higher rated credits; Not well suited for construction projects (negative carry). 15

16 Basel III Current Commercial Banking Issues The first Basel agreement on global banking regulation, adopted in 1988, was 30 pages long and relied on simple arithmetic. The latest update, known as Basel III, runs to 509 pages and includes 78 calculus equations. Basel III requires banks to hold more capital and liquidity. 16

17 Basel III Impact on Caribbean Energy Financing Increased pricing due to higher funding costs Shorter tenors More selective loan portfolios resulting in fewer structured financings 17

18 10 to 15 year amortization; Mini Perm Structure 5 to 7 year term, resulting in a large balloon payment at maturity; Refinancing risk at maturity is mitigated by a cash sweep; After 5 to 7 years the project has been completed and operating for two to four years; Bond markets are the primary refinancing source. 18

19 Multiple Debt Financing Sources Cooperation Issues MLAs can only lend to borrower in member countries which rules out Caribbean borrowers in Cayman Islands, US Virgin Islands, British Virgin Islands, Turks & Caicos, Aruba, Curacao, Anguilla, Aruba, Martinique, Guadalupe, and Turks & Caicos. MLAs, DFIs and some ECAs have industry issues such as financing coal-fired power plants. OECD Consensus does not allow for any single payment to exceed 25% of the original loan amount - - which generally rules out mini-perm structures. MLAs, DFIs and ECAs require commercial banks to lend for the same term (or close to the same term) which makes it difficult to structure debt with shorter term commercial bank tranches together with longer term MLA, DFI and/or ECA tranches. 19

20 Summary Criteria affecting Debt Financing Options Borrower: Sovereign, Corporate, Project; Currency of loan versus currency of cash flow; Country Rating/PPA counter party rating; Supply source (export credits); Tenor / Mini Perm Structure; Size of debt requirement / number of lenders; 20