Upload
kaiya
View
44
Download
3
Tags:
Embed Size (px)
DESCRIPTION
New Mexico Housing Summit. Creating Affordable Housing Through Public- Private Partnerships. Disclaimer. - PowerPoint PPT Presentation
Citation preview
New Mexico Housing Summit
Creating Affordable Housing Through Public- Private Partnerships
2
Disclaimer
RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate.
This presentation was prepared exclusively for the benefit of and internal use by the recipient. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent.
By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy.
The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change.
To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it.
IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.
Various definitions
Public Private Partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies
PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project
Private involvement in projects already
Private construction
Private investors buy municipal bonds
Covers a broad spectrum of Private involvement in US
Design Build (DB)
Design Build Operate/Maintain (DBO)
Design Build Finance (DBF)
Design Build Finance Maintain (DBFM)
Design Build Finance Operate/Maintain (DBFOM)
3
3
What is a PPP?
4
4
Brownfield v. Greenfield
Brownfield
Gives governments ability to raise needed funds, for example to fill budget deficits or to undertake new infrastructure projects
Government leases existing asset to private entity in exchange for large upfront payment
Private entity gets right to collect tolls or other revenues generated by asset for life of the lease, called a concession
Private entity operates and maintains asset during concession
Government retains legal ownership of asset
Greenfield
Same concept as above regarding existing assets, except that private entity also constructs asset (usually no upfront payment)
Revenues may take the form of availability or similar payments from government
Government gets control of asset at end of concession term
5
5
Revenue Risk v. Availability Payments
Revenue Risk
Private entity and lenders take risk that project revenues and user fees will be able to service debt and provide sufficient equity return
Toll roads, managed lanes, airports
May have revenue sharing over certain levels between government and private entity
Availability Payments
Private entity receives periodic payments from government during operating period as long as project is properly operated and maintained
Used for roads, bridges and tunnels that cannot generate sufficient cash flow to service debt and provide equity return
Used for assets that do not generate cash flow (courthouses, schools, hospitals, etc.) or other reasons
6
6
Sectors Suitable for P3s
The sectors that are suitable for P3s differ across countries
Roads and Bridges
Tunnels
Airports and Ports
Parking Facilities
Mass Transit Systems (high-speed rail, light rail, bus)
Water Treatment and Waste-Management Facilities
Housing (affordable housing, military housing)
Hospitals
Prisons
Courthouses
Sports Facilities
Schools
7
Update on U.S. P3 Market – Status and Trends
The market is beginning to witness a shift away from:
Brownfield transactions
Politically challenging
Movement towards greenfield transactions…
Trend is moving toward:
Construction based greenfield projects
Delivery of new public infrastructure
Transaction Profile
Growing acceptance of Private Public Partnerships (“P3”) – albeit each state is a different market
Knowledge migration from Canada, Australia and UK into the U.S. P3 market
Growing acceptance for availability payments transactions (however appropriations / authority credit risk is a key issue)
Remains a transportation centric market
Greenfield and real toll/volume based transportation projects will provide a steady source of new transactions
Observations
8
P3 Project Structure
Procurement Process
Step 1 – Request for Qualification (RFQ)
Step 2 – Shortlist (if applicable)
Step 3 – Request for Proposal (RFP)
Lenders get involved; design-build contract price and pricing of loan have largest impact on bid price
Shortlisted bidders comment on Concession Agreement and Instructions to Proposers (ITP)
All bidders submit bid on same Project Agreement and ITP
Step 4 – Naming of Preferred Bidder
Step 5 – Execution of Concession Agreement
Step 6 – Financial Close
9
P3 Project Structure
Fundamental Principles
Party best able to manage specific risks should assume such risks
Risk allocation based on interwoven documentation that must fit together
Risk allocation starts with Project Agreement between Authority and Private Entity (special purpose company or SPC) and is further allocated to other project participants, including design-builder
SPC accountable to Authority and Lenders (in addition to other project participants such as design-builder)
SPC will need to get consent from Authority and Lenders for specified amendments, waivers and change orders
Limitations on what SPC can do (i.e. negative covenants in financing documents, restrictions in Project Agreement)
Lenders’ recourse is to Project, the SPC, SPC assets and Lenders’ collateral
Lenders’ debt is not guaranteed
Equity needs to wait for operating period to get their return
Design-Builder to get paid monthly from draws under financing documents
Equity to be funded upfront or during construction period but in any event would be funded upon an Event of Default under Financing documents
10
Why use Project Finance?
P3’s typically use non-recourse Project Finance
Project Finance is complex, slow and has a high upfront cost! But…
Benefits for P3 projects
Low funding cost due to high leverage
Increases investors’ financial capacity, so creating more competition for projects
Enables public sector to assess and monitor project-specific data
Third-party due diligence helps to ensure project deliverability
Benefits for investors
Non-recourse
Greater leverage, which may be off-balance sheet
Hence higher return on investment
Enables partnerships with different financial strengths to work together
11
Risk Transfer – The Fundamental Basis For P3
P3s All About Risk Transfer or Risk Sharing Maxim is Risk is Passed to the Party Best Able to Mitigate or Manage It
Public sector always has inherent strengths
Legislative power
Ability to obtain site
Tax exemptions
Liability exemptions or caps
Ability to “self insure”
Private Sector Can Optimize & Mitigate Risk is Managed, Assessed, and Priced by Private Sector
Design risk
Completion risk
Counterparty credit risk
Maintenance risk
Interface risk (interactions between above risks)
Skilled specialists with necessary expertise and experience
Whole life cost
Patient Equity and active management
Fixed price turnkey
Insurance
Contingencies/ Concessionaire Equity
Role of Equity
Equity provides a buffer over third party debt funding (typically 10-15% in Availability Payment deals) and takes the first loss
Equity upside is limited Availability Payment deals - some upside unused contingencies but little organic growth as there is no volume or demand based payments
Long term investment horizon - no distributions pre-completion
Compensation for development / construction risk is received over entire project term
Ultimate investors/holders of PPP equity (usually via infrastructure-funds) are pension funds etc – relatively risk averse
Tends to be priced tightly compared to corporate finance target returns (20%+)
Equity’s most material exposure is contractor non-performance
In a well structured and diligenced deal, the probability of this risk should not be high, however, if it occurs impact can be catastrophic (total loss of investment)
13
Investment Criteria for Equity Providers
Potential for upside from unused contingencies …
… but also for severe downside since take the first loss on a limited basket of risks including
Cost increases, e.g. insurance, lifecycle or taxation
Replacement of subcontractors
Refinancing, etc.
Similar due diligence requirements and expectations as senior funders vis a vis risks
However, will also be looking for least restrictive funding agreements possible
Allow them to manage the business
Allow them to distribute cash
14
P3 Project Structure
The Role of the Special Purpose Company
The Special Purpose Company (“SPC”) is the vehicle through which P3 projects are delivered
Main responsibilities include:
Act as a single point of contact with the Authority (through the Project Agreement) and lenders;
Enter into project documents and financing documents;
Raise project financing;
Governance, controls and monitoring; and
In the case of this project, to manage maintenance obligations
Few assets and efficiently resourced
Key decisions typically made by a board (representatives of the key stakeholders)
SPC to be properly staffed to handle responsibilities
May manage maintenance and operating obligations – may do so by competitively procured subcontracts
15
Typical Project Structure
P3 Project Structure
D&B contractor (CJV)
O&M contractor
Authority
SPC
Lenders
Shareholders
Project Funding
Operations & Maintenance
Contract*
Design-Build contract
Project Agreement
*Not uncommon for SPC to self perform O&M i.e. no O&M subcontractor, as is the case in this transaction
16
Milestone Payments
DebtInterest & Principal
Equity Distributions
Milestone / Availability Payments (User fees, if
applicable)
Simplistic Payment Structure
SPC
Lenders
Public Sector
Equity Investors
“Sponsors”
CJV
Debt to equity ranges from 50:50 to 90:10 depending on risk profile
i.e. brownfield / greenfield, availability / toll risk, etc.
Debt is provided on a non-recourse basis
Contractor(s) typically contract as part of a Design & Build Joint Venture
Contracts supported by guarantees / bonding for construction risk
Availability payments commence at the start of service delivery and are subject to performance regime through the Project Agreement
CJV Guarantors
17
Principal Documentation
Concession Agreement
Design-Build Contract
Back to back with Project Agreement
Design-Build Contract Guarantees
Operation and Maintenance (“O&M”) Agreement (if necessary)
Operation and Maintenance Guarantee (if necessary)
Interface Agreement (if necessary)
Limited Liability Company Agreement
Financing
Loan/bond documents; Security documents
Direct Agreements/Consents to Assignment
Lenders’ Direct Agreement for Project Agreement
Lenders’ Direct Agreement for Design-Build Contract
Lenders’ Direct Agreement for Design-Build Contract Guarantees
Authority Direct Agreement for Design-Build Contract
Lenders’ Direct Agreements for O&M Agreements (if applicable)
18
Project Agreement
Project Agreements in Traditional Markets Follow Common Form
UK: Tend to follow Standardization of PFI Contracts (“SOPC”)
EU Countries: Often have their own national standards
Canada: Varies by province but British Columbia and Ontario broadly modeled on SOPC
Australia: National guidelines which provide a range of options at State level. Again, broadly modeled on SOPC
United States: Wide range, no standard contractual framework
19
Investment Criteria for Senior Lenders
Contractor Security / Lender’s Requirements
Senior lenders’ return is limited with no upside
Very high gearing with no recourse to shareholders
Hence senior lenders’ focus is on minimizing their risk
Due Diligence
Technical: Design, timetable, cost budget reasonable, construction methodology and appropriateness
Legal: Contracts give the risk allocation, protections and control required
Insurance: Requisite insurances are in place
Contractor: Experience and capability to execute the contract
Financial strength: Net asset value, credit rating
Surety / Guarantees
Levels of third party support given
Other
Size of investment vs. time required
Market conditions
20
What can go wrong?
Lender’s Risk & Mitigations
Construction Cost Over-Run or Delay
Contract under-priced Too aggressive timetable Unexpected complications, e.g. site conditions worse than expected Senior lenders and equity protections:
Technical Advisor (“TA”) sign-off of contingencies in cost and timetable
Contractor held to fixed price turnkey contract Contractor liable for Liquidated Damages during delay In worst case scenario Contractor has Termination liabilities
Senior lenders in addition have buffer of equity return
Operating Performance
Contract under-priced Unexpected cost increases above indexation Inability to meet required performance standards Senior lenders and equity protections:
TA sign-off of performance standards and contingencies in costs Contractor held to fixed price contract Benchmarking/market testing for soft services Performance deductions passed through to operator (whole fee at
stake) In worst case scenario Operator has Termination liabilities
Senior lenders in addition have buffer of equity return
Insolvency of Major Project Party
Example: Jarvis situation in the UK Senior lenders and equity protections:
Financial strength of subcontractors assessed upfront Parent Company Guarantees required Third party support required for weaker contractors
Senior lenders in addition have buffer of equity return
Cost Over-Runs at SPV Level
Management costs Lifecycle costs if risk held at SPV level Insurance costs Senior lenders and equity protections:
TA sign-off of adequacy of lifecycle budget Insurance premia sharing with Authority General SPV contingencies
21
Security required by Funders and Equity
Security Package
CJV Security Package
Cap on General Damages Percentage of Contract Sum
Cap on LDs Percentage of Contract Sum sufficient to cover 100% of the Availability Payment
abatement or unmitigated costs out to the Long Stop Date
Liquid Security Percentage of Contract Sum in the form of a letter of credit from suitably rated bank /
institution with refresh provisions
Parent Company Guarantee Required from creditworthy entities
Example Security Package Required by Funders for Similar Transactions
Where project finance is used, the security normally required by the financiers (funders and equity) includes:
Security over all the project cashflows and assets (including contractual rights) and equity in the project company;
A direct agreement with the Authority, providing rights for lenders to step into Project Agreement in the event of insolvency or other default;
A direct agreement with the subcontractors, providing rights for the lenders to step into subcontracts in the event of insolvency or other default; and
Guarantees or bonding of the subcontractors’ obligations under the subcontracts (which may be provided to the project company and secured in favor of the lenders);
22
Control & Monitoring
Lenders exercise varying degrees of control over project finance borrowers
Covenants – general undertakings requiring compliance with terms of project documents, consents etc
Representations and Warranties – requiring borrowers to periodically certify that they have been in compliance (considered a more active mechanism of control as borrower has to take positive action to certify)
Agent (on behalf of syndicate) in a bank deal or Trustee in a bond deal will require the following to monitor project performance:
Monthly report from the technical adviser (TA) during construction, certifying construction costs to be drawn down and compliance with program
Periodic TA report during operations monitoring operating performance
Periodic update to financial model to calculate key financial ratios (to permit equity distributions)
Monitoring of insurances by insurance adviser to ensure insurance remains in place
Annual audited and monthly/semi annual management accounts
Typically a ‘sweep up’ provision requiring Borrower to provide any other information that the Agent/Trustee reasonably requests
Regulation of flow of funds through Depositary Agreement
Controls & Monitoring Requirements
Control & Monitoring
Operations and Maintenance Expenses
Principal on Debt
Interest on Debt
Other Reserve Accounts
Project Revenues Project Revenue Account
Debt Service Reserve Account
Maintenance Reserve Account
Equity Distributions
Project Revenues
Priority of Payments Cash Waterfall (Representative Simplified Illustration)
24
RBC Capital Markets – Albuquerque Staff
Paul J. Cassidy Erik Harrigan Loretta BrushManaging Director Director Associate Vice President(505) 872-5991 (505) 872-5992 (505) [email protected] [email protected] [email protected]
Andrew Stricklin Marlo HoukAssociate Administrative Assistant(505) 872-5996 (505) [email protected] [email protected]
RBC Capital Markets, LLC6301 Uptown Blvd. N.E., Suite 110
Albuquerque, NM 87110(505) 872-5999
Fax: (505) 872-5979