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Asset-Backed Securities

Project Financing
Prof. Ian Giddy
Stern School of Business New York University

Asset-Backed and Project Financing Collateralized debt l Securitized loans l Non-recourse project debt l Basic question: Why should a company segregate the cash flows from a particular business, and make it selffinancing?
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Project Financing Stand-alone, non-recourse, multi-stake, "production payment financing" l Structure? l Participants? l Funding sources? l Risks?
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Project Financing (Summary)

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Stand-alone, non-recourse "production payment financing" Sponsor's vehicle company structures multi-stake finance Sources: govt development financing, IBRD/IFC, sponsor loans, supplier credits, customer credits, institutional investors, banks, lease financing, equity Risks: resource quantity, input costs, technical, timing, pre-completion, demand, operating, force majeure, political Risk sharing and mitigation
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Financing Sources
Banks, Institutional Investors, Leasing Companies

Sponsor
n Loans n Equity

Stakeholder credits
n Suppliers n Purchasers

Govt Development Financing, IBRD/IFC, Eximbanks

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Project Financing
Definition
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Steps
Project Identification & Resource Allocation Risk Allocation & Project Structuring Bidding & Mandating Contracts Due Diligence & Documentation Execution & Monitoring Construction Monitoring Term Loan Conversion & Ongoing Monitoring
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Lending to a single purpose entity for the acquisition and /or construction of a revenuegenerating asset with limited or no recourse to the sponser Repayment of the loan is solely from the revenues generated from operation of the asset owned by the entity Security for the loan u the revenue generating asset u all shares and interests in the entity u real property u all contacts, permits u authorizations, etc.; and, u all other instruments necessary for continuing project operations

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Benefits of Project Financing

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Limitation of Equity Investment to Projects Economic Requirement Enhanced Returns l Risk Sharing and Diversification l Accounting Treatment Preserves Corporate Borrowing Capacity l Access to Long Term Financing l Tax Benefits l Political Risk Mitigation
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Copyright 1996 Ian H. Giddy

The Risks Political l Resource & input l Technical l Construction l Legal l Economic
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n n n

Cost overruns Completion delays Mounting interest expenses

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Eurotunnel: The Risks and the Remedies

Category Political Nature Nationalization Govt interference Taxes & the like Process Effect on completion Repairability Remedy Legal Treaty ratified Use existing technology

Technical

Construction Delays Overruns Repairability Legal Economic Access to control in default Fire, injury, etc liability Price competition Rail links

Use top experts Performance bonds Security interests Default defn Market studies

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Sample Structure
Sponsors / Shareholders SINGLE PURPOSE PROJECT COMPANY Equipment Supplier Contractor Feed Stock (e.g., fuel) Supplier Operator
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Arranging Bank

Warranties and Supply Agents Turnkey Construction Long Term Agreement

Offtake (e.g, power purchase) Agreement

Syndicate Banks

Other Project Participants:

Purchaser

Currency and Interest Rate Hedge Providers Multilaterals and EDAs Legal Counsel Technical Consultants
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Operations & Maintenance Mgmt

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Asset-Backed and Project Financing Collateralized debt l Securitized loans l Non-recourse project debt -- future payments rather than assets are the collateral in the SPV l Basic question: When is an asset worth more to investors outside the company than inside it?
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Case Studies Ras Laffan Qatar/Korea l YPF Argentina/Oil Trading Corp l West Java Power Project
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Questions:
u Who

is the issuer? u What assets does it have? u What are the risks, and how are they handled?
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Ras Laffan
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Who is the issuer?

u Ras

Laffan LNG Co. Ltd. (Qatar) u But Security Trustee (IBJ) plays unusually major role
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What assets does it have?

u Natural

gas reserves; u LNG take-or-pay Sale and Purchase Agreement with Korea Gas; u Security Trust Agreement; Project Coordination Agreement; loan refund agreement, etc.
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Ras Laffan
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What are the risks, and how are they handled?

u Qatar/regional

interference u Qatar legal system u Default on Agreements u Completion/timing u Operating u Economic (LNG market)

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Ras Laffan: Natural Gas Project Finance

Ras Laffan Liquified Natural Gas LNG Korea Gas LNG payments Security Trustee Debt service payments

Copyright 1996 Ian H. Giddy

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Mobil QM (Mobil Corp.)

Joint venture agreement 30% 70%

Qatargas (State of Qatar)

Contractors Contractors Contractors

Ras Laffan Liquified Natural Gas LNG

Contract payments

Korea Gas LNG payments Security Trustee (New York)

Residual payments

Ras Laffan

Debt service payments Bondholders Banks

Debt service payments Export Credit Agencies

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YPF Argentina/Oil Trading Corp

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Who is the issuer?

u Oil

Trading Corp, Cayman Is. SPV oil, just purchase and sale agreements

What assets does it have?

u No

What are the risks, and how are they handled?

u Seller:

Political, production u Buyer: Credit, legal u Economic

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YPF/Oil Trading Corp.

Major Latin American Oil Producer

Sales agreement
Oil Trading Co. Cayman Islands

Notes

Investors

Oil Purchase agreement Oil Debt interest and principal

US$ Highly rated payments US oil buyer

Trust

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West Java Power Project

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Who is the issuer?

u Pratama

SPV

What assets does it have?

u Loan

to Dayalistrik Pratama

What are the risks, and how are they handled?

u Political;

Engineering; Coal supply; Default on Purchase Agreement; Economic

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West Java Project Financing Project stage: l Uncompleted coal-fired power plant, generating power l Has multi-year power purchase agreeement with utility l Currently has bank financing l Sponsors seeking to extend financing and reduce cost by tapping the debt securities market
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West Java Project Financing Proposal:

issues infrastructure revenue bonds to refinance bank loans l Bonds to be issued with 19 year maturities longer than the term on the bank loans l May have fixed rate; distributed in US, Euro or domestic bond market l Int. and principal secured by contract revenues l May have 100% guarantee from monoline insurance company
Copyright 1996 Ian H. Giddy

l Sponsor

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West Java Power Project

Supplier, Contracor, Operator Agreements Guarantee PD Dayalistrik Pratama Purchase agreement US$ payments on term loan Banks

SPV
US$ Interest and principal on bonds

Investors

US$ Interest and principal on loan Rupiah payments for electricity

Guarantee of interest and principal ASIA Ltd

PLN Indonesia Govt of indonesia

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Summary Collateralized debt l Securitized loans l Non-recourse project debt l Basic question: Why should a company segregate the cash flows from a particular business, and make it selffinancing?
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Other Future Flow Securitizations Credit card voucher receivables l Remittance receivables l Export receivables l Airline ticket receivables l Net international telephone settlement receivables
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Ian H. Giddy
Stern School of Business New York University 44 West 4th Street, New York, NY 10012, USA Tel 212-998-0332 ian.giddy@nyu.edu http://giddy.org

Copyright 1996 Ian H. Giddy

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