CAIIB Super Notes: Corporate Banking: Module C: Project and Infrastructure Finance: Disbursement, Monitoring, Supervision and Follow up of Project Finance Loans

CAIIB – Super-Notes © M S Ahluwalia Sirf Business

Disbursement, Monitoring, Supervision and Follow up of Project Finance Loans

Module C: Project and Infrastructure Finance

http://sirfbusiness.blogspot.com/search/label/CAIIB

http://msahluwalia.blogspot.com/

http://sirfbusiness.blogspot.com/




CAIIB – SUPER NOTES

Corporate Banking: Disbursement, Monitoring, Supervision and Follow

up of Project Finance Loans





Contents

Coverage:

1. Introduction

2. Capturing Cash Flows

3. Project Documentation

4. Disbursement of Project Loans and

Monitoring in Construction Phase

5. Network Techniques Used in Project

Implementation

6. Monitoring, Supervision and Follow up

of Project Finance Loans





INTRODUCTION

1.





Ensuring Safety of Bank’s Funds

• System for capture of cash flows of the project

• Documents to be executed

• Disbursement of the loan

• Monitoring the execution of the project

• Network Techniques for Project Implementation

• Follow up and Monitoring of the project in the operational

phase





CAPTURING CASH FLOWS

2.





TRA

• Strict control is required over utilization of revenues as they

are the only source of repayment

• Trust and Retention Account:

– Every rupee earned is routed through TRA account

– Appropriation is decided beforehand in pre-determined sequence

– Utilization is allowed in a preferential manner as per a ‘waterfall

arrangement’





Waterfall Arrangement

Fuel, raw material, wages and salaries etc.

Fuel, raw material, wages and salaries etc.

Operations and Maintenance

Costs


Costs

Govt. Taxes, Excise and other

duties

Govt. Taxes, Excise and other

duties

Debt Service Debt Service •Interest and

Repayment Installment

Remaining is available for use without lender’s

control

Remaining is available for use without lender’s

control





DSRA

• Equal to interest and repayment obligations of one or two

quarters.

• The reserve is utilized when due to unforeseen circumstances

there is a shortfall of revenues to take care of current

repayment obligations

• Filled up by subsequent flows of revenue

• May be in the form of Standby LC or Bank Guarantee





Cash Sweep

• Excess cash flows are not allowed to accrue to the SPV.

• Instead they are swept back towards accelerated repayment,

by applying it to the installments from the rear end





PROJECT DOCUMENTATION

3.





Documents

Concession/License Agreement


Shareholder’s Agreement (SHA)

Shareholder’s Agreement (SHA)

Engineering, Procurement and

Construction (EPC) Contract

Engineering, Procurement and

Construction (EPC) Contract


Contract


Contract

Financing Documents Financing

Documents Common Loan

Agreement Common Loan

Agreement

Inter-Creditor Agreement


Security Documents Security Documents Transaction Documents Transaction Documents






• Agreement with the govt. granting the right to the project

vehicle to develop the project

• It delivers the project site to the private developer

• Govt./Public body agrees to meet the Rehabilitation and

Resettlement (R&R) Expenses

• It specifies various terms like – Period, Termination Clause,

Technical specifications, State support agreement etc






Type of Project Name of Agreement

Road Concession Agreement

Telecom Licensing Agreement

Airport Operations, Maintenance and Development Agreement (OMDA)





Shareholder’s Agreement

• Between all shareholders of SPV including Project sponsors

• Establishes

– Shareholding Pattern

– Decision Making Process

• Defines

– Cash calls and remedies available against funding defaults

– Shareholder Exit Process

– Right of First Refusal (ROFR)

• Ensures equity funding is fully tied up and available

• Lays down a simple process for a shareholder to monetize his shareholding





EPC Contract

• Between SPV and EPC Contractor

• Establishes EPC contractor’s sole responsibility in designing,

procuring, constructing, testing and finally commissioning the plant

facility

• Lays down

– Guaranteed and minimum performance parameters

– Liquidated Damages

– Defects Liability

• Protects the project against time and cost escalations





Operations and Maintenance Contract

• Between SPV and O&M Contractor

• Establishes responsibility of the O&M contractor to operate

the plant/facility to ensure the availability of project/facility.

• Defines Maintenance Obligations

• Specifies Bonus Payments

• Ensures a certain level of mitigation of operating and

performance risks





Operations and Maintenance Contract

Other Sector Specific Project Documents:

- Power Purchase Agreement

- Fuel Supply Agreement

- Fuel Transport Agreement

- Default Escrow Account





Financing Documents

• Between SPV and Project Lenders

• Govern the financing of the project





Common Loan Agreement

• Also known as Loan Agreement, Facility Agreement, Rupee Facility

Agreement, Senior Loan Agreement etc

• Defines

– Amount and purpose of loan

– Term of the Loan

– Repayment Schedule including Moratorium Period

– Interest Rates, reset clause

– Pre-Commitment and Pre-disbursement conditions

– Drawdown/Disbursement Schedule

– Debt Fees/Service, representation and warranties

– EODs (Events of Default) and Dispute Resolution Procedure






• Amongst the creditors in the syndication

• Ensures Coordinated Action/Prevents unilateral action

• Provides for the right of each individual lender against the

borrowers





Security Documents

• Protect lenders in event of default by the borrower

• Allows lenders to presume control over the assets

• Assets maybe movable, immovable, fixed or current





Types of Security Documents

•Over land, building, plant and equipment, book debts and receivables

Mortgage Document/Deed of Hypothecation Mortgage Document/Deed of Hypothecation

•Pledging of equity of sponsors

•Sometimes satisfied with negative lien/non disposal undertakings

Share Pledge Agreement Share Pledge Agreement

•Concession Agreement, Licensing Agreement, insurance contracts, Off Take Agreements, Construction Contracts etc. are assigned to the banker.

•To capture all the benefits accruing to the borrower

• Included as a part of English mortgage

Assignment of Key Contracts Assignment of Key Contracts

•Construction Guarantee, Performance Guarantee, Cost Inflation and FE Risk Protection.

Guarantees Guarantees





Transaction Documents

• Project Documents and Financing Documents along with the key contracts

• Critical Transaction documents are as follows:

Sector Critical Transaction Documents

Power Fuel Supply/Transport Agreement, Power Purchase Agreement (Escrowability of off taker), Technology, Equipment suppliers, Evacuation Arrangements and Distribution losses

Roads Concession Agreement, Traffic Study, Land Availability, EPC Contract

Ports Concession Agreement, Traffic Study, Hinterland Connectivity, Rationale and Inland Linkages, Container Freight Stations and Container depots, Level of Containerisation, Dredging Requirements

Telecom Licensing and Technology obsolescence, ARPU, MOU and VAS charges





DISBURSEMENT OF PROJECT LOANS AND MONITORING IN CONSTRUCTION PHASE

4.





Disbursements

• Vital to ensure ‘End use of Funds’

• Debt disbursements in the form of progress payments to minimize

possibilities of diversion of funds

• Services of LIE are outsourced

• Borrower submits detailed drawdown schedule which is vetted by

the LIE

• Developers generally spend significant chunk of funds through their

equity before first disbursement. This also takes care of “upfront’

equity infusion





Disbursements

• Compliance report in r/o pre-disbursement conditions is

prepared

– In case of consortium it is sent by lead bank to other banks/Fis





Monitoring

• End use certificate obtained from statutory auditors

• Confirmation sought from LIE also

• LIE also submits monthly/quarterly report





NETWORK TECHNIQUES USED IN PROJECT IMPLEMENTATION

5.





Network Techniques

• Completion of a project in shortest time depends on right

selection of sequence of these activities.

• Techniques:

– Critical Path Method (CPM)

– Program Evaluation Review Technique (PERT)





MONITORING, SUPERVISION AND FOLLOW UP OF PROJECT FINANCE LOANS

6.





Monitoring Measures

• LIE Services

• O&M Activity

• Monitoring of revenue inflows through TRA arrangement

• Causes for revenue shortfall should be assessed and corrected

• Interest reset should be done timely

• Regular Consortium Meetings

• Control should be exercised to ensure time submission of

statements

• Insurance Policies to be kept current and monitored





Do you have any questions or queries or some feedback to give?

Just mark an email to [email protected]




mailto:[email protected]

CAIIB – Super-Notes © M S Ahluwalia Sirf Business For more Super-Notes: Click Here

M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New

Delhi, India.

To know more about him you may visit his blog-site: Estudiante De La Vida

















http://twitter.com/msahluwalia

http://www.facebook.com/pages/M-S-Ahluwalia/258015240783