Project Finance in Europe. Hitotsubashi University Tokyo, 18 June 2014

Transcription

1 Project Finance in Europe Hitotsubashi University Tokyo, 18 June 2014 Investment Banking

2 Section 1 1. Introduction to SMBC 2. What is Project Finance? 3. Overview of Project Finance Market 4. How to Analyse Projects 5. Introduction to Export Credit Agencies and MLAs 6. Challenges faced by PF market due to Euro crisis 7. The Way Forward 8. Selected Case Studies Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 1

3 Global Coverage Amsterdam Marketing : 3 officers Dusseldorf Marketing : 1 officer London (Project Finance) Marketing : 46 officers Credit : 24 officers (ECA & Advisory) Marketing : 12 officers New Delhi Total 316 officers (as of April 2014) Toronto Marketing : 5 officers Milan Marketing : 3 officers SMBC Capital India Marketing :1 officers Hanoi Marketing : 1 officer Tokyo New York (Project Finance) Marketing / Credit : 54 officers (ECA) :Marketing: 9 officers Paris Marketing : 7 officers (Project Finance) Marketing : 16 officers Credit : 15 officers (ECA) Marketing : 11 officers Mexico City Marketing : 5 officers Doha Staff : 2 officers Seoul Marketing : 9 officers Bogotá Marketing : 5 officers Bangkok Hong Kong Singapore Marketing : 1 officer Marketing : 32 officers Credit (ind. Agency) : 15 officers Marketing : 3 officers Credit : 3 officers Sydney Jakarta Marketing : 12 officers Credit : 7 officers Marketing : 2 officers Lima Marketing : 2 officer Santiago Marketing : 3 officers São Paulo Marketing : 7 officers Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 2

4 SMBC Project Finance Credentials League Table 2013 SMBC was ranked 4th as Global, 5th as Americas, 2nd as EMEA and 9th as Asia Pacific Mandated Arranger. Global Mandated Lead Arranger Mandated Arrangers US$ (m) % 1 Mitsubishi UFJ Financial Group 11, State Bank of India 10, China Development Bank 8, Sumitomo Mitsui Banking Corporation 7, Mizuho Financial Group 7, Korea Development Bank 5, Credit Agricole 5, Barclays 4, HSBC 4, ING 3, Americas Mandated Lead Arranger Mandated Arrangers US$ (m) % 1 Mitsubishi UFJ Financial Group 4, Barclays 2, Deutsche Bank 2, Goldman Sachs & Co 2, Sumitomo Mitsui Banking Corporation 1, Mizuho Financial 1, Credit Suisse 1, Bank of America Merrill Lynch 1, Credit Agricole 1, RBC Capital Markets 1, EMEA Mandated Lead Arranger Mandated Arrangers US$ (m) % 1 China Development Bank 7, Sumitomo Mitsui Banking Corporation 3, Mitsubishi UFJ Financial Group 3, Mizuho Financial 2, UniCredit 2, Credit Agricole 2, BNP Paribas 2, HSBC 2, Standard Chartered 2, Societe Generale 1, Asia Pacific Mandated Lead Arranger Mandated Arrangers US$ (m) % 1 State Bank of India 10, Korea Development Bank 5, Mitsubishi UFJ Financial Group 3, Mizuho Financial 2, Westpac 2, NAB 2, CBA 2, Axis Bank 2, Sumitomo Mitsui Banking Corporation 2, ANZ 2, (Source): Thomson Reuters Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 3

5 SMBC Project Finance Credentials League Table 2012 SMBC was ranked 3rd as Global, 2nd as Americas, 3rd as EMEA and 5th as Asia Pacific Mandated Arranger. Global Mandated Lead Arranger Mandated Arrangers US$ (m) % No of deals 1 Mitsubishi UFJ Financial Group 11, State Bank of India 10, Sumitomo Mitsui Banking Corporation 7, Mizuho Financial Group 6, Korea Development Bank 5, HSBC 4, Credit Agricole CIB 4, Societe Generale 4, BNP Paribas SA 3, BBVA 3, Americas Mandated Lead Arranger Mandated Arrangers US$ (m) % No of deals 1 Mitsubishi UFJ Financial Group 4, Sumitomo Mitsui Banking Corporation 1, Mizuho Financial Group 1, BBVA 1, Morgan Stanley 1, Citigroup 1, HSBC 1, Itau Unibanco 1, Credit Suisse 1, Credit Agricole CIB EMEA Mandated Lead Arranger Mandated Arrangers US$ (m) % No of deals 1 State Bank of India 10, Mitsubishi UFJ Financial Group 4, Korea Development Bank 4, Mizuho Financial Group 3, Mandated Arrangers US$ (m) % No of deals 1 Societe Generale 2, BNP Paribas SA 2, Sumitomo Mitsui Banking Corporation Asia Pacific Mandated Lead Arranger Sumitomo Mitsui Banking Corporation 2, Credit Agricole CIB 2, UniCredit 2, Mitsubishi UFJ Financial Group 2, Gazprombank 1, Lloyds Bank 1, HSBC 1, VTB Capital 1, , ICICI Bank 2, IDFC 2, Axis Bank 2, NAB 2, CBA 2, (Source): Thomson Reuters Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 4

6 Awards : Global Bank of the Year 2012 SMBC is awarded as Global Bank of the Year 2012 by PFI Magazine for This is the 2nd time that SMBC won this award following Global Bank of the Year Global Bank of the Year Sumitomo Mitsui Banking Corporation Sumitomo Mitsui Banking Corporation (SMBC) has picked up this year s Project Finance International Global Bank of the Year award for its wide range of lead-arranging and advisory mandates across all jurisdictions and asset classes. The bank booked a healthy spread of assets and took part in a range of innovative new deals, and advised on a decent range, too. (Source: PFI Yearbook 2013 Global Awards) Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 5

7 Awards : Deal of the Year 2013 SMBC plays key roles on Deal of the Year projects awarded by the Infrastructure Journal. Deal of the Year Overall & Social Infrastructure Deal of the Year - Mining Winner Alder Hey Children s Health Park Winner Minera Antucoya Deal of the Year -Renewable Deal of the Year - Power Winner London Array Offshore Wind Farm OFTO Winner Chaglla Hydroelectric Power Project Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 6

8 Awards : Global MLA of the Year 2012 SMBC was awarded the Social Infrastructure MLA of the Year 2012 by the Infrastructure Journal. Transport Deal of the Year Energy Acquisition of the Year Winner Eurasia Tunnel Winner Open Grid Europe Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 7

10 What is Project Finance? GENERAL DEFINITION The financing of an asset (or project ) whereby the lender relies purely on the underlying cashflows being generated by the asset as the sole source of repayment for the loan. Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 9

11 Corporate vs Project Finance Cashflow Borrower All Assets Corporate Loan CORPORATE FINANCE Lenders Lenders provide loan directly to the Borrower/Company Lenders have full recourse to the balance sheet of the Borrower/Company Lenders are typically unsecured Sponsor Borrower SPV Project Loan Capex Project Cashflow PROJECT FINANCE Lenders Security Lenders Project vehicle (SPV) set up by Sponsor(s) Lenders provide loan to SPV (the Borrower ) Lenders have full recourse to the cashflows of the SPV but not to the balance sheet of the Sponsor(s) Lenders will typically have security over the SPV assets Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 10

12 Main Differences Parameter Corporate Finance Project Finance Pricing Low High Tenor Short Long Complexity Low High Security No Yes Recourse Full Limited/Non Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 11

13 Possible Sectors for Project Finance Assets that are financed via PF typically have certain standard characteristics that give comfort to lenders: KEY CHARACTERISTICS Stable & Predictable Cashflows Experienced Sponsors KEY APPLICATIONS PPPs (social, transportation etc) Oil/Gas Renewables Petrochemicals Power & Utilities Metals & Mining Transport Infrastructure Proven Technology Robust Contractual Structure NON-APPLICATIONS Internet start-up Toy manufacturer Restaurants Airline operator Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 12

14 Typical Project Structure (Power Project) Sponsors Shareholders Agreement Corporate Financing Financing Agreement Lenders Corporate Lenders Financing Agreement SPV Feedstock Supply Fuel Suppliers EPC Agreements Sales Contract O&M Agreement EPC Contractors Electricity Company Operator Commercial & contractual structures tend to be unique to each project Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 13

15 Sources of Project Finance Commercial Banks MLAs ECAs/ DFIs Project Bonds Islamic Finance DEBT PROJECT Mezzanine Shareholder Loans Cash EQUITY Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 14

16 Key Providers of Project Financing Commercial Banks Export Credit Agencies Multilaterals ODA* Providers / Development Finance Inst s Banks with project finance businesses Funding purely on commercial principles Examples: Japanese Banks SMBC, BTMU, Mizuho, Sumitomo Trust, Mitsubishi UFJ Trust European Banks HSBC, ING, BNP, SocGen, Credit Agricole, Natixis Other AsiaPac Banks DBS, OCBC, ANZ, NAB, CBA, SBI Caps Financial institutions of a specific country typically encourages trade flows / exports for that country Tied to home country link (e.g. export content, project sponsors) Examples: Japan: JBIC, NEXI Korea: KEXIM, K-Sure US: US Exim Australia: EFIC Germany: Hermes, KFW France: COFACE Supra-national organizations whose shareholders are countries To support member countries, with special focus on developing countries Examples: Global World Bank, International Finance Corporation Regional Asian Development Bank, African Development Bank Usually governmentfunded organizations from developed countries Goal is to enhance economic development in developing countries Particular focus on projects that private sector may not fund Examples: Japan: JICA France: PROPARCO, AFD US: USAID *ODA = Overseas Development Assistance Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 15

19 Syndicated Loan Market in 2013 PF Loans by Deal Type (USD Bn) Club Deals (22%) Syndicated Loans (USD Bn) Project Finance (16%) Syndicated Loans (78%) Others (84%) Source: Bloomberg L.P. (APAC ex Japan; 2013 data) Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 18

20 The Project Finance Market in 2013 Project Finance Loans (USD Bn) Project Bonds (USD Bn) Americas (25%) EMEA (44%) Americas (54%) EMEA (40%) Asia Pacific (31%) Asia Pacific (6%) Source: Thomson Reuters Project Finance International; (2013 Data) Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 19

21 European PPP Market Lowest for a decade The European debt crisis had an adverse impact on the number of PPP projects being financed in Europe Volume and number of PPP projects in the EU declined, reaching its lowest levels in a decade The number of mega-projects have reduced by half Project finance only reduces the upfront cost for the governments to develop the project Comparison Value of Deals 17.9 billion 11.7 billion Deals Average Deal Value 213 million 177 million The ultimate cost of financing the projects lies with the government that pays availability payments to the Project Company The unsustainable European budgets inhibit governments from launching many infrastructure projects to the private market No. of Large Deals (> 500 million) 7 4 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 20

22 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 2 1 Current Themes: Sector Telecoms (1%) Industry (9%) Mining (2%) 4 20 Power (31%) EMERGENCY PPP (7%) Oil, gas & Petrochemicals (14%) 18 Infrastructure (28%) Source: Thomson Reuters Project Finance International; (2013 Data)

23 Current Themes: ECAs / Multilaterals ECAs / Multilateral Financing as a proportion of all PF Loans 35% 30% 30% 25% 20% 15% 10% 5% 5% 17% 10% 7% 15% 0% Source: Thomson Reuters Project Finance International; ( data) Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 0

25 Key Credit Considerations Lenders will only be repaid through the cashflows generated by a project - as such, lenders need to analyse the project s risks and fundamentals very carefully 1. Risk Analysis Necessary to identify the kind of risks in the project 2. Risk Mitigation It is then necessary to try and mitigate those risks identified 3. Cashflow Model A Base Case model is built to reflect the financing structure and expected cashflows Know Your Project = Due Diligence Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 2

26 Project Risk Analysis A project contains many different kind of risks Lenders need to conduct risk analysis to find our what kind of risks they are exposed to (risk matrix) Then lenders need to consider risk mitigations to make the project bankable Political/ Country Risk Legal/ Regulatory Risk Force Majeure Risk Construction Risk Project Technology/ Operation Risk Feedstock Risk Market Risk Interest Rate Risk Foreign Exchange Risk Offtaker Risk Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 18

27 Construction/Completion Risk Risk The risk that a project is not completed or suffers cost overruns Cost overruns Delays in completion, abandonment Fixed price date certain,turnkey-single point EPC contract Mitigants Creditworthy and experienced EPC (construction) contractor Completion guarantees, liquidated damages and performance bonds Contingency/cost-overrun facility The use of qualified independent experts Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 4

28 Technology/Operations Risk Risk The risk that the project will not operate at the projected level of efficiency: Type of technology used Experience/skill level of operator Proven technology with operating history (reviewed by independent engineer) Commercial performance testing Mitigants Extensive O&M agreement (including operator s guarantees, performance bonds and liquidated damage) Experienced O&M contractor Due diligence on operating/cost assumptions Independent engineer review Sufficient DSCR buffer Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 5

29 Feedstock/Reserve Risk The risk that feedstock supply is interrupted, insufficient or not available to run the project: Availability of feedstock/reserves Risk Quality and cost of feedstock Supplier s ability/desire to perform Shortage of shipping vessels (if relevant) Closures of pipelines supplying a project or a refinery Long-term take-and-pay/take-or-pay contracts Mitigants Reliable suppliers Reserve studies/feedstock availability due diligence Alternate sources of supply Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 6

30 Market Risk Risk The risk that a project will not generate sufficient cash flows to meet financial obligations, in a timely manner, during the term of the financing: Demand volatility Pricing fluctuation Offtake/supply agreements (pre-agreed volumes and pricing) Mitigants Take-or-pay contracts Demand/price forecasts Low cost producer High debt service coverage ratio to sustain fluctuations Cash sweep mechanisms Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 7

31 Force Majeure Risk Risk Risk of events outside the control of sponsor which delay/halt development or production or reduce cash flow through reduced sales and/or increased costs: Natural disasters, fire, explosions, earthquakes, floods, war, strikes and lock-outs, civil disturbances Political interference events Mitigants Insurance coverage for loss of assets and loss of cashflow Export credit/multi-lateral agencies protection Government support/undertaking for political events Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 8

32 Lenders Due Diligence Consultant Inputs As lenders are not specialists in non-financial fields (e.g. legal, technical, environmental, etc), lenders typically appoint consultants/advisers to help evaluate project risks and advise the lenders Are the contracts complete and legally binding? Can the banks perfect security? Is my plant adequately insured & reinsured? Are all the assumptions & logic in the financial model correct? Legal Advisor Insurance Advisor Model Auditor Does the project comply with Equator Principles? Is there sufficient demand to generate necessary cash flows? Do they have right technology? Are construction costs/contingencies/ timelines reasonable? Environmental Advisor Market Consultant Technical Consultant Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 9

33 Project Finance as an Asset Class Low default rates High recovery rates Period of study Projects in the study 4,425 Well structured 54.2% Proportion of PF deals during the study period Relatively attractive pricing Potential for cross sell Strong investor demand Cumulative default rates consistent with investment grade / high speculative grade corporate credits 10 yr 80% Average ultimate recovery Ultimate recovery in two thirds of cases 100% Source: Moody s Investor Services Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 10

35 Key Advantages of utilizing ECA programs Followings are the Key Advantages Longer Term Tenor Achievable ECA loans or commercial bank loan covered by ECA insurance/guarantee basically could achieve longer tenors compared with clean corporate finance loan such as door to door 10 years or more Competitive Pricing Structure As the ECAs are government financial institutions, they are able to extend competitive pricing with long term tenor Funding Larger Amount ECAs are able to finance larger amount compared with typical corporate loan Diversification of the Funding Sources Procurement of ECA finance will lead to diversify and increase the additional funding sources Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 12

36 Multilateral ECAs Toronto London Amsterdam Düsseldorf Paris Milan New York Seoul Tokyo Mexico City Colombia Shanghai Hong Kong Hanoi Singapore Asia & Oceania Japan JBIC NEXI America USA US-Exim OPIC Canada EDC São Paulo Europe UK France Germany Italy Netherland Spain Denmark Finland ECGD Coface Euler Hermes Sace Atradius CESCE EKF Finnvera Johannesburg Sydney Korea KEXIM K-Sure China China Exim Bank Sinosure Australia EFIC Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 13

37 Japanese ECAs - JBIC and NEXI JBIC and NEXI are Japanese Export Credit Agencies ( ECAs ), providing programs to support exports & investments by Japanese companies. Japan Bank for International Cooperation ( JBIC ) JBIC was created as governmental agency in 1999 after a merger of Export and Import Bank of Japan ( JEXIM ) and Overseas Economic Cooperation Fund ( OECF ). It was further reorganized with other Japanese governmental financial institutions in October In April 2012, it was reorganized as a policybased financial institution wholly owned by the Government of Japan. Nippon Export and Investment Insurance ( NEXI ) NEXI is a governmental agency established in 2001, succeeding the insurance services operated by Japanese Government (Ministry of Economy, Trade and Industry METI ), for the purpose of improving the efficiency and transparency of METI s operations. Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 14

38 Summary of JBIC Program (OIL and ENRF) 1. Overseas Investment Loan (OIL) 2. Energy and Natural Resource Finance (ENRF) Structure Structure Borrower Loan Project Company Loan Equity Commercial Banks Equity Offtake contract Commercial Banks Japanese company Guarantee Japanese Firms Equity Back Finance Key Features JBIC has a unique programme called Overseas Investment Loan Programme ( OIL ), which aims to support investment or business activities by Japanese companies overseas. The proceeds of the loan can be used not only for the capital expenditure project(s), but also for the working capital necessary for the project(s). The borrower can raise funds at a competitive pricing by using this programme. In general, Parent companies guarantee will be required Project Company Japanese Firms Key Features Offtake contract Payment Loan Escrow account Commercial Banks Repayment This program is for Japanese firms who import resources based on long-term contracts or acquire their interests in developing resources. The project for natural resources (Oil, Gas, Coal, Metal etc.), which Japanese firms involves with long term contract. The project for infrastructure which is not separate from securing of resource(rail way, port, pipeline etc.). Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 15

39 Summary of NEXI program (OULI and INRE) 1. Overseas Untied Loan Insurance (OULI) 2. Insurance for Natural Resource &Energy (INRE) Structure Political Risk Insurance (PRI) Commercial Risk Insurance (CRI) Up to [97.5]% Up to [90]% Insurance Key Features Political Risk Insurance (PRI) Commercial Risk Insurance (CRI) Up to [100]% Up to [97.5]% Insurance Borrower Loan Commercial lenders, ECAs Project Company Loan Commercial lenders, ECAs with Japan Interest ( JI ) Off take contract Key Features As opposed to Buyer s Credit program, NEXI OULI program is available to the project where there is no export from Japan. In addition, since the program is not bound by OECD guidelines, those terms such as amount, interest rate, tenor, repayment schedule etc can be flexibly decided. The program is aimed at developing economic cooperation between a foreign country and Japan by supporting project which contribute to the local economy of the foreign country as well as Japanese economy. Japanese Firm Key Features Payment Escrow account Repayment NEXI INRE program is aimed at supporting securing the energy and mineral resources to Japan and enable to give much lower price and higher coverage ratio compared with past products. The program is available to the project for importing the energy or mineral resources which Japanese firm involved. In principle, escrow account arrangement may be required. Lower price and higher coverage may be adapted. Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 16

40 Korean ECAs Although Tied Financing is available, participation of Korean ECAs in IPP projects in the region have generally been through the Untied Financing programs provided by Korea Exim Bank ( KEXIM ) and Korea Trade Insurance Corporation ( K-Sure ). Requirement for Untied Financing is minimum ownership of 20% and/or Korean O&M contractor, feedstock supplier, offtake participation, etc. It is determined on a case by case basis with consideration of the overall level of Korean participation. KEXIM: Overseas Business Credit ( OBC ) Under the OBC program, typically up to a maximum [50]% of the total senior debt amount can be provided in a combination of direct loan + comprehensive guarantee. Preferred ratio for direct loan and cover is usually 55:45, but there is flexibility to alter the ratio. K-Sure: Overseas Business Credit Insurance ( OBCI ) Under this scheme, there is no direct loan offered, but K-Sure usually provides [95-100]% comprehensive cover for both political and commercial risk. Ichthys LNG Project K-EXIM OBC Financing (Year 2012) Ichthys in Australia is an example of a project where K-EXIM and K-Sure provided financing under the OBC program and OBCI program respectively. SMBC acted as MLA, ECA Coordinator, Documentation Bank, Coface Agent, Atradius Agent, KEXIM & KSure Agent. The cost of the project was USD35bn and it was funded with debt and equity in the ratio of 57:43. The tenor of the debt was 16 years door-to-door. Out of the total debt of USD20bn, KEXIM direct loan was USD680m, KEXIM covered loan USD292m and K-Sure covered loan USD972m. The project had a 15-year LNG SPAs for 100% of the LNG capacity of 8.4 mmtpa, mainly to Sponsors Inpex and Total have over 95% in the Project, while Japanese offtakers Tokyo Gas, Osaka Gas, Chubu Electric Power and Toho Gas hold the remaining minority interest. JOGMEC Capped undertaking of INPEX s obligations Sales of plant liquids LNG sales Inpex Total Japanese LNG buyers Project loans Borrower Ichthys LNG Pty Ltd Repayment Senior loan disbursement Senior loan repayment Completion guarantees Sales of field liquids Upstream Unincorporated JV Inpex Total Other Completion guarantees Lenders Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 17

41 Chinese ECAs Factors that encourage Chinese ECA involvement include: Close diplomatic relationship between China and host country of the project. Chinese Interest in the project. Relevance of the project to the prevailing policy on energy security and investment in natural resources. The two main ECA schemes are: Direct loan from China EXIM ( CEXIM ): Traditionally, mainly driven by China Interest and State policy as explained above. Buyers Credit from Sinosure: This is backed by imports from China, and Sinosure would provide up to 95% political and commercial risk insurance cover for loans provided by Chinese banks. It is rare for CEXIM and Sinosure to work together on the same transaction. APLNG China Exim (Year 2012) LNG plant with two LNG trains, each with a nominal design capacity of 4.5 million mmtps of LNG, will be used to produce LNG from Coal Seam Gas. The Project is located near Gladstone in Queensland, Australia SMBC was an MLA on this transaction The project is sponsored by ConocoPhillips, Origin, and Sinopec. Total project cost is USD13bn, 66% financed though a USD8.5bn debt. The USD8.5bn project finance financing includes a USD2.8bn US Exim loan, a USD2.9bn China Exim loan and a bank tranche for USD2.9bn. Loan tenor is 16 years. The project has the usual LNG transaction structure, 16-year door-to-door tenor, pre-completion sponsor support and a comprehensive completion test regime, and 20 years take-or-pay offtake contracts in respect of 100% of output US EXIM CEXIM ConocoPhillips Origins Sinopec Completion Guarantee Facility Agreement 100% APLNG Borrower MGSA Guarantee LNG Buyers LNG Sale & Purchase Agreements Banks EPC Contract EPC Contractorss MSGA Uptream Gas Marketing Co 100% Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 18

42 European ECAs Coface (France) Coface s Credit Insurance Program covers both principal installments and interests due under the guaranteed loan. The guarantee will cover up to 97.5% of the total value. SACE (Italy) Issues guarantees and insurance coverage for political, catastrophic, economic, commercial and exchange risks. SACE provides up to 100% comprehensive cover for both political and commercial risk. Hermes (Germany) Provides Export Credit Guarantees which covers up to 97.5% for political risks and up to 95% for commercial risks. ECGD (UK) UK s export credit agency provides credit insurance policies, political risk insurance on overseas investments and guarantees on bank loans. Coverage is up to 100% for political and commercial risks Nghi Son Refinery and Petrochemical Project Coface, SACE, Hermes, ECGD (Year 2013) 2nd refinery project in Vietnam, Nghi Son refinery will be built 180km South of Hanoi, with 200,000 barrel-a-day crude processed capacity. SMBC acted as Documentation & Coordination Bank, Coface, SACE, ECGD, KEXIM Facility Agent, Onshore Account Bank, Bookrunner. The project is sponsored by Idemitsu Kosan, Kuwait Petroleum International, PetroVietnam and Mitsui Chemicals The total project cost of USD9bn was financed through a 16 years door to door facility split into 10 different tranches. ECA direct loans took up about half of total debt raised, with participation from 7 ECAs from Asia and Europe (JBIC, NEXI, KEXIM, ECGD, Coface, Hermes, SACE). The remaining 50% debt were ECAs covered loans. 31 banks are participating with SMBC, BTMU and Mizuho taking the largest allocations. The EPC Contractor is a consortium comprising Technip (France), JGC Corp and Chiyoda Corp (Japan), GS Engineering & Construction Corp and SK Engineering & Construction (South Korea) Strong offtake arrangement for refined products and petchemicals products, via long-term, takeor-pay basis with shareholders. ECA Direct Loan (JBIC, KEXIM) ECA covered loan (JBIC, NEXI, KEXIM, ECGD, COFACE, SACE, Hermes Completion Guarantee, Contingent Working Capital Facility Facility Agreements Sponsors Borrower Offtake Contracts Fuel Products Offtaker Petrochemical products Offtakers Government of Vietnam Incentives, Guarantees EPC Contract EPC Contractors Supply Agreement Crude Supplier Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 19

44 Impact of European Crisis on Project Finance The British government undertook an overall review of PFI program, which culminated in the announcement of PF2 The effect the review was to postpone / cancel significant number of PFI procurement on certain sectors such as waste, highway maintenance, peripheral school deals and a couple of big ticket rolling stock deals (e.g. IEP and Thameslink) Governments such as Portugal and Spain are in a cost savings mode to try and salvage their tattered fiscal deficits As part of bailout package, Portugal had triggered a wave of privatisation of the government owned assets, with the sale of TAP and airport operator ANA The Spanish government revised laws to cut subsidies and to tax the energy project sector that are currently operational The Change in Law has added a further disincentive for private players to participate in the infrastructure sector in those countries Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 21

45 Spanish Government - History of Changes in Law Law Date Summary RDL 14/ Dec 2010 Production hours available for feed-in tariffs ( FIT ) are capped according to zone and project type; applies 1 Jan Dec 2013 Law 15/ Dec 2012 Imposition of flat 7% energy tax on electricity produced by all producers Electricity produced using fuel/gas does not qualify for FIT Gas tax of 0.65/Gj RDL 2/ Feb 2013 Eliminates the market price premium set out under the special regime, such that producers now sell at FIT only Replacement of the inflation adjustment index to an index which excludes processed foods and energy Lobbying actions to date have proved unsuccessful in influencing the Spanish government s position Spanish investors are not legally able to bring about a claim against the Government for the above implementations However foreign investors are currently in arbitration in courts in the UK and Switzerland Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 0

46 Global Financial Crisis Other than inducing the European fiscal crisis, the Global Financial Crisis (GFC) had also become a catalyst for changing the business model for banks The collapse of the syndication markets has broken the business model of underwriting entire deals and subsequently selling down completely to other banks (e,g, Macquarie, Babcocks) New regulations and tighter restrictions on banks have increased the cost of doing business Implications of Basel III Number of banks active in the Project Finance space has significantly reduced Mitigants Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 1

47 Comparison of Banking Market Before the Financial Crisis Pricing pushed down to around 50 bps Pricing is normally flexed downwards Banks didn t have liquidity premiums built into their pricing models Tenor Stretched beyond 30 Years Large Net Take Amounts Significant appetite by banks for PPP transactions Underwriting actively seen in deals After the Financial Crisis French, German and Spanish banks - inactive Continuous award pressure on pricing: > 300 bps Tendency towards shorter tenors with refinancing, cashsweeps Increased aversion to market risk Club deals Underwriting remains challenging Scarce liquidity distorting financing terms available in the market Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 2

48 European PPP Market in 2012 Financing Terms Source: EPEC Source: EPEC Loan margins continue to increase reflecting higher liquidity cost and a higher perceived default risk of the European governments Loans tenors much shorter compared with pre-crisis levels Higher financing costs and shorter tenors making projects economically unviable Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 3

49 Potential List of Banks Currently Active in the European PF Space The European governments are trying to introduce measures to reduce the risk profile of the project and therefore cost for banks to finance project finance Reducing the cost gives incentive for potentially a large pool of banks to enter the market and therefore providing more favourable financing terms 4 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

50 European Models to Boost Liquidity The French Model The French government introduced the Dailly tranche concept into PPP structures The Dailly tranche is a tranche of senior debt that is guaranteed by the State Banks perceive the risk as State risk instead of project risk. The risk asset used to fund loans for the banks is reduced and the benefit translates into banks able to provide large ticket size at competitive pricing for funding under Dailly tranche The German Model Germany makes extensive use of the forfeiting model The authority waives its right to reduce or suspend the payment of element of service charge that covers debt service leaving the non-forfeited portion exposed to project risk Typically forfeiting is only applied post project completion Lenders treat the portion of debt subject to forfeiting post completion as State risk State guarantees reduce risk asset for the banks and therefore boost liquidity However the poor health of European government's budget limits the number of projects that guarantee can be provided Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 5

52 Future Trends: Infrastructure & PPPs The Asia-Pacific region requires US$8 trillion in funding for infrastructure projects between 2010 and 2020 (ADB estimates) Key drivers: Economic growth Urbanisation Resource needs Communication Climate change Public Private Partnerships (PPPs) Source: Asian Development Bank and Asian Development Bank Institute, Infrastructure for a Seamless Asia, 2009 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 7

53 Future Trends: Basel III Requirements Minimum Capital Ratio 8% (6% Tier 1 and 2% Tier 2) Gross Leverage Ratio Maximum leverage of 33.33x capital Liquidity Coverage Ratio Liquid assets to cover 30 days acute stress Net Stable Funding Requirement Stable funding for minimum of one year against long term loans Implications Increased cost of lending Long term debt increasingly less attractive Requirement for greater transferability of loans Bonds more attractive Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 8

54 The Way Forward Project Bonds Liquidity for long term limited recourse financing remains scarce Through the various recapitalization program, European banks are showing increasing appetite for PPP projects atlas for smaller amounts and shorter tenors Sponsors have started to look at shorter tenor loans, adding more emphasis on mini-perm structures - refinancing risk guaranteed by Sponsor Projects bonds are seen as a long term viable option asset liability management Due to the Solvency II act project bonds need to achieve a rating of at least A to make it profitable for investors European institutions such as the EIB have created Bond Initiative Programs to support project bond by supporting subordinated debt tranches A first loss piece This helps the project bonds achieve a higher rating than they would have originally obtained However, project bonds bring their own complexity into the financing structures Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 9

55 Project Bonds Various Possible Structures Potential Structures Description Pros and Cons of Each Structure Sole project finance bonds Bond issued in capital markets to finance the Project. Bonds will be traded publicly. May enjoy longer tenor Passive monitoring Requires credit rating(s) Volatile markets, less certain Construction risk to be borne by the investor Negative carry cost during construction stage. Combination of project finance loan & project finance bond Bond issuance and bank loan combined to provide funding for project. Potential intercreditor issues between bond investors and project finance loan providers. Prolonged discussions at a prebid stage to get both sets of lenders comfortable with the project. Disbursement timing may differ Complexity to manage two different types of lenders This option may not be practical given the relatively small project size 10 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

56 Project Bonds Various Possible Structures Potential Structures Project finance bond with miniperm Project finance bond with bridge loan Project finance bond with a credit support Description Initially provide short term bank loan with balloon; intend to refinance with bond issue at optimal timing. Initially provide bridge loan with intention to refinance with bond issue. Issue PF bond with a financial institution providing credit enhancement. Pros and Cons of Each Structure May have disbursement flexibility and enjoy longer tenor Lenders to the mini-perm tranche must be comfortable to take the refinance risk Attract a larger pool of bond investors that are only able to take operation risk of the project May not be tender compliant (as authority has had a preference for fully committed financing over the entire concession length May have disbursement flexibility and enjoy longer tenor Bridge loans could be guaranteed by the Sponsors or be structured in a non-recourse manner. Less flexibility to time the refinance of the bridge facilities May not be tender compliant (as authority has had a preference for fully committed financing over the entire concession length Issuer may be able to benefit from low finance cost Allocation of risk between guarantor and bond holder needs further consideration Investors asked to consider two very different credits, a project and (a) financial institution (s) Investors may prefer to assume entire project risk and be compensated for it 11 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

57 Project Bonds EIB Bond Initiative Concept Sponsors Equity Investors buys or underwrites project bonds Senior Debt in form of Project Bonds Shareholder Agreement Either loan or contingent credit line Subordinated Debt Special Purpose Company Concession Agreement Risk Sharing EPC Turnkey Contract Operating & Maintenance Agreement Provision of subordinated tranche increases the credit quality of the senior tranche 12 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

58 Project Bonds EIB Bond with Bank Guarantee Sponsors Commercial Bank Guarantee Equity Investors buy or underwrite project bonds Commercial Banks Guarantee Bond Investors during Construction Period Senior Debt in form of Project Bonds Shareholder Agreement Either loan or contingent credit line Subordinated Debt Special Purpose Company Concession Agreement Risk Sharing EPC Turnkey Contract Operating & Maintenance Agreement Commercial banks provide completion guarantees to bond holders 13 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

59 Challenges with Implementation of Project Bonds Intercreditor arrangements between the subordinated debt and the bond investors Timing of issuing Project Bond and be able to achieve Financial Close within the RfP timeframe Information transparency to bond holders Information dissemination procedures Processing of waivers, consents, drawdawn requests requires timely decision from investors Limited secondary market for pricing and liquidity bond holders may have to hold instrument till maturity Requirement to obtain a credit rating of at least A to attract investors at reasonable pricing Termination payment regime in the concession agreement to include calculations which keep the bond investors whole in all termination scenarios Pension funds and insurers may not have the expertise to appraise construction risk banks to guarantee the bond holders during the construction period 14 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

61 Case Study Mersey Waste Project United Kingdom Financial Summary Major Shareholders: Sembcorp (40.0%) Sita (40.0%) Itochu (20.0%) Amount: GBP 270 mn Mandated Lead Arranger Tenor: Pricing: Total Debt: 28 years starting margin 300 bps 270m Project Summary: The PFI project consists of the design, build, finance and operate (DBFO) of an energyfrom-waste (EfW) plant capable of treating 450,000 tonnes per year of Merseyside s municipal waste at Wilton International in Teesside, in addition to a waste transfer station at Knowsley, Merseyside. The scheme involves sending Mersey waste across the country by train to Teesside. The Sita, Sembcorp and Itochu team signed this deal one month after signing a similar deal to cover the West London area. Signing Date End December 2013 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 16

62 Case Study IEP 2 Project United Kingdom Financial Summary Major Shareholders: Hitachi (70.0%) John Laing (30.0%) Amount: GBP 2,200 mn Mandated Lead Arranger Tenor: 29.5 years Total Debt: 2,200m Project Summary: This is a PPP project entailing the design, manufacture, commissioning, and bringing into service of 122 Super Express Trains, alongside the provision of appropriate depot and maintenance facilities. The Project will deliver 30% more peak hour seating capacity and significantly reduced journey times from London to Scotland as compared to the current services. The Intercity Express Programme (IEP) will replace the old 125 trains on the UK network with IEP trains running to the south-west and IEP2 up to Scotland and has been divided into 2 tranches (IEP with 57 trains and IEP 2 with 65 trains). There were some technical differences on the trains between IEP and IEP2 and on the depots. On the financing side, loan pricing was down to below 200bp from 250bp on IEP. Signing Date End April 2014 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 17

63 Case Study Paris Court of Justice France Amount: EUR 770mn Mandated Lead Arranger 2013 Major Shareholders: Bouygues Group Entities (32.1%) Tenor: Total Debt: DIF Infrastructure II (37.7%) Uberior Infrastructure Investments (30.2%) 30 years 675.0m Debt: Equity: 90:10 Pricing: Uncovered Dailly Tranche 250 bps (during construction period) stepping upto 300 bps after year bps The 5-year construction facility would be refinanced by a 554m Dailly tranche and a 41m uncovered project debt tranche Project Summary: The project was tendered as a PPP contract with the French State, through the Ministry of Justice. It consists of the design, build, renovation, operation, maintenance and financing of the New High Court of Justice in Paris and a new building for the criminal department of Paris Police. The Project benefits from a strong political support: it is part of the Greater Paris renewal urban plan and a modernization program for French Justice. The aim of the Project is to build a larger site, to increase the 6,000 visitors capacity in the original site to a 8-9,000 capacity, and regroup it with the related divisions of the Police (notably the criminal department). Signing Date 1 March 2013 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 18

64 Case Study Somerset BSF Project United Kingdom Financial Summary Major Shareholders: Somerset County Council (10.0%) Building Schools for the Future LLP (10.0%) BAM PPP Investments UK BV (80.0%) Amount: GBP 70mn Mandated Lead Arranger Tenor: 27.8 years Total Debt: 70.0m Project Summary: This is a PFI project entailing the design, build, finance, operation and maintenance of the Bridgewater Schools at the Robert Blake and Chilton Trinity sites accommodating 2,010 students. The new school will be built on the existing site. The Project has significant socio-economic value by providing learning facilities to the population in the Somerset area. Phase 1 of the program (the Project ) comprises of the design, build, finance and maintenance of three secondary and special needs schools, located in two sites in the county and accommodating 2,010 students. Followed by a operation concession period of 25 years. Signing Date End June 2012 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved. 19

65 Case Study Germany - A9 Thuringia General Second of the second stage A-Model projects First availability based A-road project Located in Thuringia Includes widening of a 19km section and the operation and maintenance of a total of 46.5km 20 years concession term (usually 30 years) Start-up financing provided by the authority by way of milestone payments Payments from the authority consist of a flat, non-inflation indexed financing element and inflation indexed services payments Bonus/ Malus mechanism related to level of road availability and the quality of services Funding Structure Total project cost understood to amount to approx. 220m Start-up financing of approx. 85m Commercial bank debt financing of approx. 120m The financing package included a debt service reserve facility and a construction bridge facility to bridge the authority s milestone payments Senior debt tenor: 19.5 years Pricing starting at around 170bps stepping up to around 200bps DSCR starts at 1.20x Club deal consisting of BBVA and KfW IPEX-Bank Financing was closed in September 2011 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

66 Case Study Federal Ministry of Education and Research Berlin General First federal PPP project involving construction of a new government building Availability based payment mechanism The building is required to meet very strict environmental standards and the construction design involves innovative technical elements (e. g. building integrated PV panels) Located in the government district of Berlin Includes the construction and operation of a ministry building for 1000 staff 30 years concession term Start-up financing provided by the authority by way of milestone payments Payments from the authority consist of a flat, non-inflation indexed financing element and inflation indexed services payments Bonus/ Malus mechanism related to building availability and the quality of services Funding Structure Total project cost understood to amount to approx. 120m Start-up financing of approx. 34m Commercial bank debt financing of approx. 78m The financing package included a project loan to finance the portion of the construction cost not accounted for by equity and milestone payments Senior debt tenor: 29.5 years Pricing starting at around 180bps stepping up to around 190bps DSCR starts at 1.15x Club deal consisting of SMBC and DZ Bank Financing was closed in August 2011 Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

67 Case Study Shuweihat 3 IPP Project Project Summary Structure Project Shuweihat 3 IPP Project (1,600 MW) (UAE) Sponsor Borrower Abu Dhabi Water & Electricity Authority (ADWEA) Sumitomo Corp KEPCO SPC owned by above sponsors Sumitomo Corporation KEPCO 51% 49% ADWEA Lenders SMBC, Mizuho, BTMU, BNP Paribas, HSBC, NBAD, Samba Foreign Shareholder Local Shareholder ECA JBIC and KEXIM 40% 60% EPC Contractor Offtaker Operator JV of Siemens and Daewoo Abu Dhabi Water & Electricity Company (ADWEC) *25-year PPA JV of Sumitomo Corp and KEPCO JBIC KEXIM Loan Borrower Power Purchase Agreement Gas Electricity ADWEC Signing Date May 2011 Expected COD [March 2014] Commercial Banks EPC Contract O&M Contract Total Project Cost Total debt amount tenor USD 1,400 mil USD 1,162 mil JBIC Direct Loan : USD 400 mil KEXIM Direct Loan: USD 400 mil Commercial Loan: USD 362 mil 23 years EPC Contractor (Siemens and Daewoo) O&M Contractor (Sumitomo and KEPCO) Copyright 2014 Sumitomo Mitsui Banking Corporation. All Rights Reserved.