Financing PPPs: Project Finance June 2006

Index

Section I. Project Finance

Section II. Spanish Market Advantages

Section III. Risk Matrix

P. 2
Section I
Project Finance
Project Finance
 Project Finance Definition

Definition: A form of financing projects, primarily

based on claims against the financed asset or
project rather than on the sponsor of the project.
However, there are varying degrees of recourse
possible. Repayment is based on the future cash
flows of the project.

P. 4 Seccin I
 Project Finance Principal Participants in a Project Finance

Sponsors Government
National Banks
national Banks

Capital Markets

Sponsors International
Monolines
international Banks

P. 5 Seccin I
 Project Finance Financing Structure

Shareholders

Dividends + Capital
interest

Payment Principal
Project Company + Interest
Concession CV + CF Financial
Administration Agreement contracts Banks
(SPV)

Payment

Operating &
Construction Maint.
Contract Contract

Insurance company
Construction
Operating Company
Joint Venture

Service
Contracts

Service supplier 1 Service supplier 3 Service supplier 3 Service supplier n

P. 6 Seccin I
 Project Finance Calendar
Process duration: 4 months

Phase I
Financial Structure Phase II
Risk analysis Phase III
Financial closing

Feasibility Study
Contracts & Risk management Term Sheet & IM
Economic analysis and Financing Arrangers: Term Sheet &
structure Contracts negotiation
Financial closing
Participants: Syndication

Financial Advisor: Banks

P. 7 Seccin I
 Project Finance Financial institution rules

Advisory Arrangement/Financing
Tender preparation Financial Underwriting

Advisory to the Sponsors Funding in the Capital Markets

Feasibility study of the project Other financial facilities: bridge, RCF,

Risk analysis Possibility of equity investments

Optimum economic, legal and tax structure

Other sponsor research

Legal structure

Coordination between different participants

Project presentation in the Capital Markets

Negotiation with the financial institutions

P. 8 Seccin I
 Project Finance Volume of operations

18.000
16.000
14.000
12.000
USD Mll 10.000
8.000
6.000
4.000
2.000
0

UK USA Australia Spain Italy China Indonesia Brazil Japan Mxico

Volume operations (2004)

Dealogic

P. 9 Seccin I
 Project Finance Financing tools

Bank financing

No bank financing
Securitization
Bonds

P. 10 Seccin I
 Project Finance Bank Financing (I)

Main financial source

Debt with SPV. Operative relationship with the sponsors, no financial relationship.

High leverage ratios.

Long repayment terms. Taking into account Cash Flows

It is out of the balance financing for the sponsors, no effect in rating

Pricing: Interest rate + margin

Reference rate: DSCR

P. 11 Seccin I
 Project Finance Bank Financing (II)

The Financial model is the main tool to obtain the economic analysis and the financing structure.

Main ratios to measure project capacity to face debt obligations:

Cash Flow available for debt service

Debt Service Coverage
Ratio (DSCR) Debt service (principal, interest & commissions)

Cash Flow available for debt service

Interest Coverage Ratio
(ICR) Interest

NPV of Cash Flows available for debt service (during debt) discounted at debt rate
Loan Live Coverage
Ratio (LLCR)
Outstanding debt

P. 12 Seccin I
 Project Finance Leverage and Term

UK PPPs
90 x
IPP Spain (1) Wind Spain Roads Ireland
x x x
80
Ports Spain
Debt/Equity
x Roads USA Underground
70
x Spain
x
60
Wind USA
x
50

40
0 10 15 20 25 30
Total term
Debt / Equity vs term

P. 13 Seccin I
 Project Finance Non Bank Financing
Securitization

The process of aggregating credit rights of the concessionaire, mainly right to collect tolls, revenues of the
commercial areas and payments of the Administration into a negotiable security.

Risk transfer to the investor.

Different terms.

Widely used in the international markets. No in Spain

Advantages: cheaper financing cost and flexibility.

P. 14 Seccin I
 Project Finance Non Bank Financing
Bonds

As the borrower is a SPV, the risk profile is complicated and not attractive for the bond market.

This type of financing is used with a Monoline guaranty

In Spain it has been used just in the Autova de los vierdos and M-45

P. 15 Seccin I
Section II
Spanish market advantages
Project Finance
 Spanish Market The main differences with the UK model

UK SPAIN

Initial competition Initial competition

Concession Grant
Concession terms negotiation

Initial terms stated and

Binding terms Fixed from the beginning
then negotiation

Financial Close prior to Financial Close once the

Financing
concession grant Concession is granted

P. 17 Section II
 Spanish Market Advantages of the Spanish Legal Framework

Economic + Financial
Asset Responsibility
Equilibrium

Legal framework helps to structure

different financial schemes

P. 18 Section II
Section III
Risk Matrix
Project Finance
 Risk Matrix Main risks

Building & Operational Risk:

Building
Demand
Operating

Financial Risk

P. 20 Section III
 Risk Matrix Risk mitigation

Contracts will provide mechanisms to mitigate the risk:

Contractual structure & risk mitigation

Risk: Contract Mitigation mechanism

Cost Construction Contract Fixed price

Delay Construction Contract Penalty clause

Technical performance Construction Contract Penalty clause

Operating Operation Contract Technical advisor will control the operation

Traffic Concession contract Fix tariff

Tariff / Law Concession contract Tariff will compensate traffic and law changes

Force Majeure Concession contract Concession agreement will cover these risk

Political risk Concession contract Concession agreement will cover these risk

P. 21 Section III
 Risk Matrix Other risk mitigations

Sponsors Technical & Financial solvency.

Due diligence.

EPC Contract.

Long warranty periods.

Penalty clauses.

Operating & Maint. Contract.

Extension definition.

Length.

Cost limits.

P. 22 Section III
 Risk Matrix Advisors & Insurance Program

Traffic Advisor

Insurance Advisor

External Advisors Legal Advisor

Technical Advisor

Audit Advisor

Damages

Construction ALOP

Civil liability
Insurance program

ALOP

Operating Civil liability

Force Majeure

P. 23 Section III