Project Finance

PHILIPPINE INSTITUTE OF CIVIL ENGINEERS

SOUTH LUZON MULTI-REGIONAL TECHNICAL CONFERENCE
AMELIA S. DELA ROSA
17-18 NOVEMBER 2018
Member of the MTD Group of Malaysia

New Clark City

National Government Administrative Center
A Joint Venture of BCDA and MTD Clark, Inc.
 Project Description
60 has for phase 1
A one-stop-shop delivering faster, reliable,
efficient public service. Strategically located at
the Civic Center for synergy with private
developments
Mode
PPP
Financing NCC NGAC – PHASE 1

 Financing the project is the responsibility of the Proponent

 Some Key Questions:
 International or Local?
 What currency? USD, MYR, PHP
 Range of acceptable rates - Benchmark and margin
 Security

 Debt-equity ratio
Factors in Decision Making
Philippines Malaysia United States
Sep-17 Sep-18 Sep-17 Sep-18 Sep-17 Sep-18
5 Year Bond Yields 4.64% 7.12% 3.59% 3.77% 1.94% 2.98%

Change in Bond Yields 2.49% 0.18% 1.04%

Exchange Rate (in PHP) 12.04 13.11 50.57 54.21

% Change FOREX 8.90% 7.20%

We can only make the best decision at the time with the best available data

Forecasting is both an art and a science

Project Finance
Financing of long-term infrastructure, industrial
projects and public services based upon a non-
recourse or limited recourse financial
structure, in which project debt and equity used
to finance the project are paid back from the
cash flow generated by the project.

Thus, Special Purpose Companies are created for

the project
Corporate Finance

Sponsors use
assets and cash flows from the
existing business to guarantee the credit
extended by the lenders. If the project is not
successful, lenders have direct recourse to the
sponsor’s assets in order to achieve repayment.

Loans are carried on the sponsors’ balance sheet

Project Finance - Loan Collateral

1) Assignment of Revenues
 Contract must allow this assignment of revenues and receivables to
the lender or a common security trustee if the loan is syndicated

2) Lenders’ Step-In Rights

 Lenders have the right to take over the project when the project
company (borrower) is unable to meet its obligation
 Generally, lenders wouldn’t want to assume the actual rights and
obligations because they are not in the business of construction or
operation for instance, but would appoint an entity that has the
necessary capabilities to step in for them
Project Finance - Loan Collateral

3) Assignment of Project Documents

 To ensure that step-in rights can be exercised in full
 Enables lenders to have direct access to the counterparties of the
transaction in the enforcement of rights and remedies

4) Pledge of Shares
 Liens on project assets may not be allowed
 Lenders may require require that shares of the SPC be pledged
Project Finance - Loan Collateral

5) Sponsor’s Support
 Possibly through a corporate guarantee or a standby letter of
credit issued by a bank acceptable to the lenders
Project Finance - Covenants

 Debt/Equity Ratio = Total Liabilities/Total Shareholders Equity

 Depends on the agreement with lenders and equity providers
 Usual ranges – 60%-80% Debt and 20%-40% Equity

 Debt Service Cover Ratio

 Debt service refers to the amount of payment due to the lenders
(whether interest or principal) at any given time
 The financial model and cashflows should be able to show that each
payment obligation (e.g. interest payments or partial principal
payments on term loans) can be met through the project revenue
Project Finance - Covenants

 DSRA – Debt Service Reserve Account

 For the protection of the lenders – funded at the outset, the
amount is equivalent to scheduled interest and/or principal
payment
 Most often, it is a deposit equivalent to a certain number of
months of interest payment
 The number of months vary, depending on negotiations with the
lender
Financial Model: Assumption Based
Ensure validity of assumptions!

 Revenue Streams
 Projected demand, prospects for growth, consumption figures

 Projected Costs
 Estimates based on most current costs
 Overhead and other administrative costs
 Inflation adjustment

 Contingency
Investment Decision: NPV

 The Net Present Value (NPV) is the sum of the present

values of the individual cash flows (both incoming and
outgoing) of a series of cash flows.
 Present Value is defined as the current worth of a future
sum of money or stream of cash flows at a certain
discount rate.
 If the calculated NPV is positive, generally you can
proceed with the project
Investment Decision: IRR

 When evaluating a project, the internal rate of return

measures the estimated percentage return from the
project.
 It uses the initial cost of the project and estimates of the
future cash flows to figure out the interest rate.
 In general, companies should accept projects with IRR
that exceed the cost of capital and reject projects that
don’t meet that guideline.
Global Project Finance 2017

 Globally, loan volumes were fairly static

between 2016-2017
 2016 – US$ 236.4 Billion
 2017 – US$ 229.6 Billion

 But, if you look at it from a regional perspective

 Americas –↑
 Asia–↑
 Europe, Middle East and Africa (EMEA) – 38.5% ↓
Global Project Finance 2017

 Asia Pacific jumped in loan volume –40%↑

 2016 – US$ 57.2 Billion
 2017 – US$ 80.3 Billion

 This recovery in loan volumes is attributable to:

India, Indonesia, Philippines, Thailand, Pakistan

 Australia and Japan remained static (US$ 24.5Bn

and US$8.5Bn)
GLOBAL PROJECT FINANCE LOANS 2017
Southeast Asia Project Finance Loans
By Country
South East Asia Project Finance Loans
(US$ Mil) FY 2016 FY 2017
# of Issue # of
Country Issue Amount % Issues Amount % Issues

Indonesia 7,005.5 59.5 11 13,813.6 64.0 12

Philippines 2,361.0 20.0 4 3,775.9 17.5 6
Singapore 1,786.6 15.2 2 - - -
Thailand 513.2 4.4 4 2,454.4 11.4 3
Vietnam 115.0 1.0 1 - - -
Malaysia - - - 1,296.0 6.0 2
Myanmar(Burma) - - - 250.0 1.2 1
Cambodia - - - 9.2 .0 1
Laos - - - - - -

Industry Total 11,781.2 100.0 22 21,599.0 100.0 25

• Biggest chunk of PF Loans goes to the power sector, whether globally or regionally or even
locally in the Philippines

• PH Deals include Meralco’s Power Plant in Atimonan, Quezon; SMC’s Power Plant in Limay
Bataan; and the Rehabilitation of the Angat Hydroelectric Power Plant
 South East Asia Project Finance Loans 2017 • China Development Bank’s
# of
Bank (US$ Mil) Rank % Issues single deal was worth US$ 4.5
China Development Bank 4,500.0 1 20.8 1 Bn
Bank of Philippine Islands 2,651.4 2 12.3 5
Philippine National Bank 1,056.3 3 4.9 1
China Construction Bank 528.6 4 2.5 1 • BPI and PNB shared credit for
Natixis
ANZ Banking Group
170.9
120.0
5
6*
.8
.6
1
1
the US$ 2.2 Bn Atimonan
ING 120.0 6* .6 1 One Energy deal
Societe Generale 120.0 6* .6 1
Bank Rakyat Indonesia 70.5 9* .3 1
Bank Negara Indonesia PT 70.5 9* .3 1 • Cross border deals e.g.
Bank Mandiri 70.5 9* .3 1 Philippine banks not
Industrial & Comm Bank China
Cathay Financial Hldg Co Ltd
70.2 12*
70.2 12*
.3
.3
1
1
necessarily limited to
DBS Group Holdings 70.2 12* .3 1 Philippine projects
Malayan Banking Bhd 70.2 12* .3 1
Credit Suisse 70.2 12* .3 1
Banco De Oro Unibank Inc 68.2 17 .3 1 • Syndicate of banks can
Gazprombank 46.0 18 .2 1 finance one deal
Industry Total 21,599.0 100.0 25
Other Philippine projects that have
used PF Loans
 Php 5.3. Billion Sewage Treatment Facility - Maynilad
Funding assistance from the Development Bank of the
Philippines through JICA’s Financial Intermediary or Two-Step
Loan

 Php 20 Billion GMR-Megawide Mactan Cebu International

Airport (25-Year BOT Project)
Php 20 Billion syndicated loans from six local banks – BDO, BPI,
DBP, LandBank, Metrobank, PNB
An additional loan of Php 3.3 Bn was provided by ADB through
an amended OLSA
Project Finance Bonds

 Alternative debt funding for infrastructure projects

 Offers an opportunity for various institutions to invest in projects
 Still isn’t used as widely as loans
 Best example: Tiwi-Makban Geothermal Plants
Tiwi-Makban: First Climate Bond in Asia Pacific

TERMS AND CONDITIONS

Borrower AP Renewables, Inc
Sponsor Aboitiz Power Corporation
Facility Php 12.5 Billion
- Guaranteed Tranche: Php 10.7 Bn
- ADB Direct Loan: Php 1.8 Bn
Tenor Guaranteed Tranche: 10 Years
ADB Direct Loan: 5 Years
Guarantee Up to 75% of the Guaranteed Tranche
Guarantors ADB
CGIF (Credit Guarantee and Investment Facility)
Lead Arranger and BPI Capital Corporation
Bookrunner
Project Privatization of the Tiwi (Albay) and Makban (Makiling-Banahaw in
Laguna) Geothermal Power Plants – Acquisition and Rehabilitation

http://www.sec.gov.ph/wp-content/uploads/2017/02/BPI-GREEN-FINANCING-PRODUCTS.pdf
Project Finance Data
Most project finance facilities are private and public information is
limited. Numerous non-disclosure agreements are signed
between parties thus limiting the sharing of information.

The Thomson Reuters Project Finance International (PFI) Annual

League Tables are the most accurate and comprehensive
measure of global project finance activity

League Table – refers to a ranking of companies based on certain known

criteria. In the case of Thomson Reuters, ranking is based on the issue size
Evaluating the Borrower
 There is still a need to analyze fully the credit worthiness
of the borrower. In project finance, where the borrower
is usually a special purpose company, this may entail
credit risk analysis of the parent company(ies). If the SPC
is owned by a consortium then this will entail evaluating
the members of the consortium.
 Banks will have their own comprehensive credit approval
process
 It is necessary to understand the risks involved and how
to mitigate/address these risks
Borrower Credit Risk

 Evaluating the Financial Statements

 Capital adequacy
 Ability to raise capital
 Analysis of Operating Efficiency
 Market position
 Use of resources and output
 Better operating efficiency => sustainability
 Quality of Management
 Track record – performance, payment
The Challenge: Effectively Linking Risk
Exposures To Capital
“Adequately addressing the inherent complexities of project and
infrastructure finance transactions is a major challenge –
Understanding the roles of various parties to the transaction as
well as contractual, legal, and regulatory requirements,
and other characteristics of these investments
can be a hurdle for lenders and investors.
To be effective, risk assessment approaches must reflect a true
understanding of these issues and address a number of unique
challenges to protect substantial investments.”
--- Moody’s Analytics
Know and understand what you’re getting into!
 Partnership - Crucial “P” in PPP

 “The best strategic partnerships are win-win-win: they are good for
you, good for your partner, and have an outsized impact on your
shared customer base.”1

 “If you want to have a good partner, be a good partner” 2

1 – thinkgrowth.org
2 – Pinterest
END