Financing PPPs: Project Finance

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Financing PPPs: Project Finance 

October 2007

 

P. 2  

Index 

Section I.  Brief Project Finance Introduction

Section II.  Risk Matrix

Section III.  Case study: Cuenca Road Network Program 
 
 

 

Project Finance 

Section I 
Brief Project Finance Introduction

 

P. 4  

Definition of Project Finance 

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. 
 
 
 

Secci贸n  I 

Project Finance Introduction

 

P. 5  

Financing Structure 

Shareholders 

Construction

Joint Venture 

Operating Company 

Capital 

Dividends + interest 

Principal  
+ Interest 

Payment 

Payment  
CV + CF 

Insurance company 

Service supplier 1 

Service supplier 3 

Service supplier 3 

Service supplier n 

Service

Contracts 

Project Company (SPV) 

Administration 

Banks 

Concession

Agreement 

Financial

contracts 

Construction

Contract 

Operating &

Maint.

Contract 

Secci贸n  I 

Project Finance Introduction

 

P. 6  

Calendar: Process duration: 4 months 

Feasibility Study Contracts & Risk management Economic analysis and Financing structure  

Financial Advisor: Banks 

Financial Structure 

Phase I 

Risk analysis 

Phase II 

Financial closing 

Phase III 

Term Sheet & IM Arrangers: Term Sheet & Contracts negotiation Financial closing Participants: Syndication  

Secci贸n  I 

Project Finance Introduction

 

P. 7  

BBVA Project Finance Experience 

Secci贸n  I 

Project Finance Introduction 

Leading Project Finance Bank in Spain

BBVA enjoys a leading position in project financing in Spain: #1 Arranger in 2006 #1 Arranger in 2005 #1 Arranger in 2004 #1 Provider in 2003 #1 Financial Advisor in 2003 

Leading Project Finance Bank in the World

BBVA has played a top level role in the project financing in the world: #2 Transport Mandated Lead Arranger in 2006 #3 Wind Mandated Lead Arranger in 2006 #4 Water & Sewage Mandated Lead Arranger in 2006 #10 Power Mandated Lead Arranger in 2006  
#1 Financed Advisor in 2006 #2 Western Europe Mandated Lead Arranger in 2006 #6 Eastern Europe Mandated Lead Arranger in 2006 #10 North America Mandated Lead Arranger in 2006  

P. 8  

BBVA Project Finance Experience 

Secci贸n  I 

Project Finance Introduction 

Roads

BBVA has extensive experience financing the construction of new build motorways and the acquisition of existing roads. For example: BBVA has acted as Mandated Lead Arranger on the acquisition of most of the major recent motorway privatisations including the EUR 370 million Ionia Odos Road Project (2007), the EUR 1.06 billion Variante Sur Metropolitana (2006), Euro 8.3 billion APRR privatisation in France (2006), the USD 3.8 billion Indiana Toll Road (2006), the USD 1.8 billion Chicago Skyway (2004), the Euro 1.6 billion ENA privatisation in Spain (2003) and the CAD 2.3 billion ETR-407 acquisition financing in Canada (1999) BBVA has acted on some of the most innovative new build financings in North America and Europe including the Euro 232 million Eurolink N4/N6 - the first PPP toll road in Ireland (2003), the NOK 3.2 billion E18 motorway in Norway (2006) and the USD 400 million SR-125 (2003) in San Diego, the first private toll road in the US involving TIFIA funding BBVA’s experience includes real toll roads, shadow toll roads and availability based roads BBVA has extensive experience in Latin America. Portfolio includes projects in Argentina, Chile, Colombia and Mexico. BBVA is one of the world’s leading arrangers of infrastructure financings.

Other Transportation

BBVA has acted as Mandated Lead Arranger on the financing of transportation infrastructure projects including high speed rail (TP Ferro high speed rail link between Span and France), light rail (Metro de Tenerife and Woolwich Arsenal Docklands Light Railway), container ports (Puerto de M谩laga), airports (BAA), parkings (Icon Parkings) and passenger interchange stations (Intercambiador de Castilla).  

Project Finance 

Section II 
Risk Matrix

 

P. 10  

Main risks 

Risk Matrix 

Building & Operational Risk:  

Building risk Demand risk Operating risk  
 

Financial & Economic Risk: 

Section II 

Interest rates risk Inflation risk Syndication risk

 

P. 11  

Risk mitigation 

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 
 

Contracts will provide mechanisms to mitigate the risk: 

Mitigation mechanism 

Contract 

Contractual structure & risk mitigation 

Risk: 

Section II 

Risk Matrix

 

P. 12  

Other risk mitigations  

Sponsors Technical & Financial solvency.   EPC Contract.

    Long warranty periods.

    Penalty clauses.

Operating & Maint. Contract.

    Extension definition.

    Length.

    Cost limits.

Due diligence. External advisors Insurance program  
 

Section II 

Risk Matrix

 

P. 13  

Advisors & Insurance Program 

Insurance program 

External Advisors 

Traffic Advisor 

Insurance Advisor 

Legal Advisor 

Technical Advisor 

Model Auditor 

Construction 

Operating 

Damages 

ALOP 

Civil liability 

ALOP 

Civil liability 

Force Majeure  

Section II 

Risk Matrix

 

Project Finance 

Section III 
Case study: Cuenca Province Road Network

 

P. 15  

Project Description 

Secci贸n III 

  Construction and maintenance of 458 km of roads in Cuenca province.  
  Concession term: 17 years.  
  Investments:

     Construction period: Eur 45 million investment

     Operational period: Eur 30 million CAPEX 

  Shadow toll scheme.  
  Concession company: “Conquense de Infraestructuras S.A.”  
  Five shareholders who are the main construction companies in the province.  
  Concession contract with the local authority.  
 
 

Case Study

 

P. 16  

Principal participants & contracts 

Excelent铆sima Diputaci贸n Provincial de Cuenca

BBVA Arranger

Eptisa Technical advisor

Cuatrecasas / DLA Legal advisor

Heath Lambert        Insurance advisor

Tool Ulle  Demand advisor

PWC Model auditor 

Other/Advisors 

Sponsors/Shareholders 

5 Construction companies 

Construction contract  with a Joint Venture of all concession company shareholders.

Maintenance contract with a company formed by the five shareholders of the concession company.

Administrative contracts: concession contract, etc.

Insurance contracts

Financial contracts: Senior Loan, VAT Loan, Swaps, etc.  

Contract structure 

Secci贸n III 

Case Study

 

P. 17  

Structure 

Secci贸n III 

Concession Contract 

Cuenca Local Authority 

Conquense de Infraestructuras S.A. 

Construction Joint Venture 

Conquense de Conservaci贸n S.L. 

Construction Contract 

Maintenance Contract 

Banks 

Financing Contracts 

Case Study

 

P. 18  

Risks and Guarantees 

Construction period

Any construction risk Civil liability

Maintenance period

Material Damage Civil liability Environment liability Terrorism  

Construction Risk 

Contingency   

Delays in project opening Overcost due to delays  

Guaranties

Sponsors guaranties and penalties Construction Insurance  

Maintenance Risk 

Contingency   

Unable to face debt service Maintenance overcost

Guaranties

Sponsors guarantees and penalties CAPEX reserve accounts New bank maintenance budgets  
Contractor guarantees Sponsors experience Proven technology  

Technological Risk 

Insurance Risk 

Secci贸n III 

Case Study

 

P. 19  

Financial Risk 

Credit risk of the project 100% IRS of outstanding debt during the concession period. Conservative forecast  

Legal risk 

Contingencies

Cancellation Management Contract Change in tariffs

Guaranties

Grantor compensation  
 

Secci贸n III 

Case Study 

Risks and Guarantees

 

P. 20  

Other Project guarantees 

Real Guarantees

Asset mortgage commitment

Pledges of:

Management Contract Project Contracts IRS Contracts Insurance Contracts

Pledge of Concession company 

Fulfill of financial ratios 
 

Secci贸n III 

Case Study

 

P. 21  

Project Strengths & Weaknesses 

Project Strengths

Sponsors experience Technical solvency Support of the sponsors  

Project Weaknesses

Legal changes Tariff changes Administrative problems (licenses & permits)  

Main issues to obtain internal credit committees approvals

Suitable financial structure Favorable legal and administrative framework Technological risk guarantees Public interest asset Correct risk distribution  

Secci贸n III 

Case Study

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