PROJECT FINANCE · ADVANTAGES & DISADVANTAGES Aspect Impact Benefit For Sponsors Distribution to Shareholders • Allows shareholders to get steady cash in the years when there is

Private and Confidential: For Limited Circulation Only

PROJECT FINANCESTRUCTURING A DEAL

2

DISCLAIMER

• This presentation (“Presentation”) has been prepared by Synergy Consulting Infrastructure and

Financial Advisory Services Inc. (“Synergy”) to provide helpful information on the subjects

discussed for educational purpose only.

• Synergy will not regard any person (whether a recipient of this Presentation or not) as a Client and

will not be responsible for providing any advice or protections to any such person.

• No representation or warranty, express or implied, is or will be given by Synergy or their respective

directors, affiliates, partners, employees or advisors or any other person as to the accuracy,

completeness or fairness of this Presentation and no responsibility or liability whatsoever is

accepted for the accuracy or sufficiency thereof or for any errors, omissions or misstatements,

negligent or otherwise, relating thereto.

• Synergy does not undertake, and is under no obligation, to provide any additional information, to

update this file, to correct any inaccuracies or to remedy any errors or omissions in this

Presentation.

• The Presentation should not be regarded as constituting an opinion on the situations discussed in

the Presentation, nor relied upon as a basis to proceed, or not to proceed, with any specific action

or remedy.

Private and Confidential: For Limited Circulation Only

CONTENTS

1 DEAL STRUCTURE OVERVIEW

2FINANCING OF PROJECT:

OVERVIEW

4 DEBT FINANCING

3 EQUITY FINANCING

DEAL

STRUCTURING

OVERVIEW

1 1.2 FINANCING STRUCTURE OVERVIEW

1.1 DEAL STRUCTURE OVERVIEW

5

•Senior debt financing

•Equity, EBL, SHL

•Payment guarantees, LCs

•Commercial framework

(BOO/BOOT, Concession term

etc.)

•Tariff structure including

deductions / deemed payments

•Government guarantees

•Minimum functional

requirements

•Design limits

•Plant efficiency guarantees / KPI regime

• Contractual structure

•Risk Allocation

•Risk mitigation (Back to back risk transfer and insurance)

Legal

Structure

Technical

Structure

Financing Structure

Commercial

Structure

5

KEY ASPECTS

DEAL STRUCTURING OVERVIEW1.1

6

TYPICAL REQUIREMENTS

FINANCING STRUCTURE OVERVIEW1.2

• Senior Debt Financing

• Several bids require lender

commitments ranging from a

minority up to 100% of debt

requirement

• LoI from ECAs/DFIs may also be

submitted (though this is typically

not considered as part of

committed funding)

• Lender sign-off on project

documents is required pre-bid (i.e

significant lender legal DD is

performed pre-bid)

• Equity Financing

• EBL – typically LoIs are

considered to be sufficient

• Equity commitment letters


• Some bids in the region do not

require lender commitment at bid

stage. However, sponsors may be

required to submit bank LoIs to

demonstrate lender interest and

also to correctly incorporate likely

financing terms in their bid

• While some initial lender

comments may be provided at

pre-bid stage (especially by DFIs)

Detailed DD is commenced only

after the appointment of

preferred bidder


• Sponsor may submit EBL LoIs /

equity commitment letters to

demonstrate their level of

commitment to the procurer


• No senior debt commitments are

typically sought at proposal stage

• Sponsors typically finalize the

commitment from senior lenders

before the commercial close

• Depending upon overall deal

structure and negotiations, lender

requirements may need to be

anticipated and included within

project documents at

negotiations stage


• Procurer may seek an equity

commitment letter as a part of

aforementioned short form

proposal

Bid

(with Lender Commitment)

Bid

(without Lender Commitment)Negotiated Deal

Deal Type

FINANCING OF

PROJECT:

OVERVIEW

2 2.2 KEY FINANCING CONSIDERATIONS

2.1 SOURCES OF FINANCING

8Private and Confidential: For Limited Circulation Only

2.1 SOURCES OF FINANCINGINTRODUCTION

PROJECT COST DEBTEQUITY

• Equity Bridge Loan

• Cash Equity Infusion

• Shareholders Loan

• Loans from lenders including :

• Commercial Banks/Fis

• Multilateral Agencies/ DFIs

• ECAs

• Bonds

• Conventional Lending

• Islamic Financing

• Long Term Facility (Covered / Uncovered)

• Mini Perm Facility

3. LOAN CLASSIFICATION: ON THE BASIS OF

DOCUMENTATION

4. LOAN CLASSIFICATION: ON THE BASIS OF

STRUCTURE

2. OPTIONS FOR DEBT FINANCING1. OPTIONS FOR EQUITY FINANCING

In order to meet the project’s funds requirement, cash is infused either in form of Equity or Debt


2.2 KEY FINANCING CONSIDERATIONS

• The risk allocation structure under project documents needs to be acceptable to the developer, lenders

and other stakeholders, for the project to be successfully financed by local / international lender

community

Acceptable Risk Allocation

• Lenders would also take into account the requirement of the project to the Offtaker on a long-term

basis

• Strategic nature of the project to the Offtaker would instill confidence and generate ample interest in

the lender community

• Analyze the economic feasibility and viability of the project, vis-à-vis the region / country

• Lenders are expected to review the need for the project based on the increase in demand of the

produce in the market

Strategic Nature of Project & Project Need

• Environmental concerns and technology utilized will be key considerations for most development

financial institutions and some international commercial lenders for providing funding to certain

projects like coal fired power project

Environmental Concerns

• Credit strength of the Offtaker and sufficient credit support mechanism would be key to generate

sufficient interest from the lender community

Credit Strength Of The Offtaker

• Mature technology in utility space which has proven its bankability through several successful

transactions in the region is generally preferred by the lenders

• Lenders are expected to be comfortable with such well established technologies in the utility space

Established Utility Technology

SOURCES OF

EQUITY

FINANCING

3

3.2 BASE EQUITY

3.3 EQUITY BRIDGE LOAN

3.4 SHAREHOLDER’S LOAN

3.5 PREFERRED EQUITY

3.6 LETTER OF CREDIT

3.1 EQUITY CONTRIBUTION


3.1 EQUITY CONTRIBUTION

Equity CommitmentBase Equity

Equity Bridge Loan Shareholder’s Loan

Letter of Credit

OVERVIEW


3.2 EQUITY BRIDGE LOAN

• Short term facility raised to bridge Sponsors’ equity investment in a project

• Stop-gap measure until medium or long-term funding can be arranged. Also called swing loan or

gap loan (also delays the infusion of more expensive cash equity, into the Project)

• Sponsors typically fund a portion / entire equity investment in a Project by way of an Equity Bridge

Loan (increasingly being accepted as a bid optimization measure to boost IRRs)

Definition

• Provided for a short period of time (though the tenors have been increasing with the increased

acceptance among the lenders, in the region with EBL tenors now ranging to up to 9 years)

• Typically attracts higher interest rate as compared to other forms of debt

• Bridge loans can be approved and disbursed quickly

Features

• Funds can be arranged through bridge loans within a short span of time with comparatively less

documentation (as opposed to, say, raising bonds)Advantages

• Expensive source of funding since the interest rates are higher as compared to other type of loansDisadvantages

KEY FEATURES


3.2 EQUITY BRIDGE LOANCONTRACTUAL FRAMEWORK

EBL STRUCTURE

Contracts Participants Purpose

Facility Agreement • Project Company and EBL Lenders • Terms and conditions of EBL

Subordination

Agreement• Senior Lenders and EBL Lenders

• Subordinating rights of EBL Lenders to those of Senior Lenders in

respect of Project asset and cash flows

Security Agreements• Project Company, Sponsors and EBL

Lenders

• Security provided to EBL Lenders along with terms and conditions

for exercise of the same

CONTRACTUAL FRAMEWORK

EBL Agreements /

Security Documents

Senior Lenders Sponsors

Project Company EBL Lenders

Senior DebtSecurity Documents

Equity Investment

Subordination Agreement

Equity Bridge Loan

Legend

Cash

Contract


3.3 BASE EQUITY

• Contribution by shareholders to fund the cost of development and construction phase of the projectDefinition

• Can be upfront, pro-rata, partial pro-rata or back-ended as agreed in the financing documentsDrawdown

• No fixed repayments

• Cash available after operating and financing activities are distributed to the shareholders, subject

to restrictions on distribution in financing agreements

Repayment

• Equity can be raised through a market equity sale process, a private placement to shortlisted

parties or through corporate debt

• No covenants or obligations for Project Company associated with this funding

Features & Advantages

• Most expensive source of fundingDisadvantages

KEY FEATURES


3.4 SHAREHOLDER’S LOAN

• Shareholder’s Loan is a subordinated and unsecured loan

• Generally provided for a fixed duration but some flexibility in terms of tenor if SHL is provided by

providers of base equity

Definition

• Post base equity drawdown or pro- rata with base equity, as agreed in financing documentsDrawdown

• Fixed repayments decided by shareholders but with an option of deferral in case if needed

• Senior to base equity and junior to commercial bank debt and government tax authoritiesRepayment

• Interest rate (zero to high), tenor etc. are decided by shareholders; typically used to repatriate cash

from Project SPV to shareholders

• Not backed by collateral; Considered as equity while calculating leverage under financing

documents; treatment may vary under project documents

• In the event of debtor default the claim of lenders of shareholder’s loan is senior only to the claims

of common shareholders

Features

KEY FEATURES


3.4 SHAREHOLDER’S LOANADVANTAGES & DISADVANTAGES

Aspect Impact Benefit For Sponsors

Distribution to

Shareholders

• Allows shareholders to get steady cash in the years when there is dividend

lock up (in terms of shareholder’s loan repayment and interest)

• Improves Sponsors’ IRRInvestment Tenor • Provides flexibility to shareholders to withdraw infused capital

Tax Shield• Reduces tax payable due to creation of tax shield on interest for

shareholder’s loan (subject to tax laws of a particular country)

Aspect Impact For Sponsors

Voting Rights • Equity financing as shareholder’s loan does not provide voting rights

Security • Unlike senior debt, shareholder’s loan is not secured by collateral

Leverage

• Repayments of shareholders loan are considered as repayment of equity. Hence, check on gearing ratio is required

while paying shareholder’s loan, to ensure gearing ratio covenant in any year is not breached due to reduction in

shareholder’s loan due to repayment

DISADVANTAGES

ADVANTAGES


3.5 LETTER OF CREDIT

• Short term instrument used by Sponsors to assure the senior lenders of their equity investment in

the project

• Instrument used is a guarantee issued by a bank on behalf of Sponsor

Definition

• LC balance is reduced as per the equity infusion schedule agreed under the financing agreementsDrawdown

• Typically used as credit support for projects having Early Generation Revenues or for back-

ended/pro-rata equity contribution

• Guarantee is included as a contingent liability on the books of the Sponsors

• No covenants or obligations for Project Company associated with this funding

Features & Advantages

• In case Sponsors are unable to infuse the committed amount to replace the LC, the default is on the

books of the Sponsors

• Consumes the guaranteeing ability of the Sponsors

Disadvantages

KEY FEATURES

DEBT

FINANCING4

4.2 VARIOUS FINANCING STRUCTURES

4.3 SELECT FINANCING TERMS

4.4 KEY FINANCIAL RATIOS

4.1 DEBT FINANCING OPTIONS

4.5 OTHER FINANCING CONSIDERATIONS


4.1 DEBT FINANCING OPTIONSCOMMERCIAL LENDERS

Parameter Description

Description• Commercial banks represent a primary source of funds for project financings and include major International,

regional and local banks

Funding Options

• In arranging large amount of debt for financing infrastructure projects, the banks often form syndicates to distribute

the debt exposure, as mostly a single bank may not have the appetite to underwrite the entire debt

• In some jurisdictions with lower credit rating, commercial lenders may require to lend under a covered tranche. In a

covered tranche, debt payment obligations would be guaranteed by insurance cover from ECAs or MIGA or as PRGs

Pricing

• Competitive pricing in developed countries where banks are comfortable with project financing

• Pricing may be expensive / not available without cover in developing countries or countries with limited project

finance precedents

Commitment• Varies significantly between different commercial lenders depending on the size of the project, country risk, project

risk, liquidity and other commercial elements

Tenor • Mini perm as well as Long term financing going up to the tenor of offtake agreement

Advantages

• Competitive pricing

• Amenability to competitive and complex financing structures with longer tenors, balloons repayment, mini perm

structures and lower hedging requirements

Other

Considerations• Lenders may prefer supporting developers that have an existing relationship with them


4.1 DEBT FINANCING OPTIONSMFIs / DFIs


Description

• DFIs / MFIs provide a crucial role in providing credit in the form of higher risk loans, equity positions and risk

guarantee instruments to private sector investments in developing countries

• They are usually owned or backed by national governments to promote sustainable growth

Funding Options

• The finance is generally offered in the form of long-term loans (between 10 and 25 years), equity investment and

credit risk guarantees

• Along with providing financing, DFIs often act in cooperation with governments and other organizations in providing,

(or financially contributing to/supporting), management consultancy and technical assistance

• They aim to promote best practices in business, governance and environmental standards in the funds or companies

they invest in

Pricing

• DFIs will usually be funded by their shareholders, including government funds and will be backed by government

guarantees. Their pricing is generally competitive in developing countries

• In some cases commercial banks may offer better pricing than DFIs

Commitment • Commitment Levels would vary based on geography, project and their engagement with the respective country

Tenor • Usually long term financing with tenors that can go beyond 20 years depending upon tenor of concession

Advantages

• Provide financing in regions where getting long term financing from other sources is difficult

• Finance provided by DFIs act as a catalyst, which helps to attract and mobilize the involvement of other private

investors

Other

Considerations• May have longer Due-Diligence Process as compared to other lending sources


4.1 DEBT FINANCING OPTIONSECAs


Definition

• Export Credit Agencies, commonly known as ECAs, are public agencies and entities that provide government-backed

loans, guarantees and insurance to corporations from their home country that seek to do business overseas in

developing countries and emerging markets

• One of the key source for debt financing in large scale projects

Funding Options

• Provides financing for infrastructure projects on a non-recourse basis through following facilities:

• Equipment linked facility

• Equity linked facility

• Each of the above financing facilities may be availed as cash facility, or as insurance and guarantee facility (as

offered by respective ECAs)

Pricing • Pricing expected to be more competitive than commercial lenders

Commitment• Funding linked to the extent of equity shareholding by respective country’s corporations or to the extent of value of

country sourced equipment

Tenor

• Equity Linked Financing: Tenor is governed by individual ECAs

• Equipment Linked Financing: Governed by OECD guidelines (for Renewable Projects: 18 years; for Conventional

Projects: 14 years)

Advantages• Equity linked funding with competitive pricing and longer tenor

• Ample liquidity for projects, in conjunction with commercial lenders

Other

Considerations

• May not accept competitive financing structures which may be acceptable to commercial lenders, thereby

constraining structuring options for the entire loan tenor

• May have longer Due-Diligence Process as compared to other lending sources


4.2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Senior Debt Closing Balance (with refinance) Senior Debt Closing Balance (without refinance)

Debt

Drawdown

Initial Maturity

DateCompletion of Debt

Repayment using

Cash Sweep

• Medium term financing instrument with typical tenors of 4-7

years (Initial Maturity Date)

• Outstanding debt is expected to be repaid at Initial Maturity

Date

• As per the structure, the borrower is incentivized to refinance

the outstanding debt at Initial Maturity Date (otherwise cash

sweep kicks in under Soft Mini Perm structure/considered as

a default in hard Mini Perm Structure)

STRUCTURE

KEY FEATURES SAMPLE TERMS

VARIOUS FINANCING STRUCTURESFINANCING STRUCTURES - MINI PERM (1/2)

• FC to Initial Maturity Date : 120 bps

• Post Initial Maturity Date + 5 years: 250 bps

• Thereafter: 350 bps


4.2

TYPES OF MINI PERM

• Failure to refinance is not an event of default

• Post Initial Maturity Date, margins increases significantly

making debt more expensive

• Most, if not all, project’s cash flow is used to repay the loans

thereby reducing returns to shareholders

SOFT MINI PERM

• Failure to refinance at Initial Maturity Date is an event of

default

• Relatively less popular as refinancing risk is pushed on to the

procuring authorities

HARD MINI PERM

ADVANTAGES & DISADVANTAGES OF MINI PERM

• Higher Liquidity due to wider participation of lenders having

short to medium term lending appetite

• Lower margins due to inherent nature of being short term

instrument

• Penalties applicable after Initial Maturity Date of loan

incentivizes the borrower to refinance the debt prior to Initial

Maturity Date

ADVANTAGES

• Refinancing Risk: Sponsors are exposed to refinancing risk

• Decreased Returns: In case debt is not refinanced at

competitive rates (assumed initially), returns to shareholders

reduces significantly till facility is repaid due to cash-sweep

post Initial Maturity Period

DISADVANTAGES

VARIOUS FINANCING STRUCTURESFINANCING STRUCTURES - MINI PERM (2/2)


4.3

INTEREST RATE HEDGINGSELECT FINANCING TERMS

• Since the base rate of the debt interest generally fluctuates with time, the Project Company has to protect itself against the fluctuating interest rates which will impact debt repayment and financial ratios

Requirement

• Interest rate swaps are used to hedge against fluctuating interest rates

• Project company pays fixed interest rate on hedged principal amount to the hedging bank and the margin to the lending bank

• Hedging bank pays the floating rate to the lending bank

• Thus the Project Company is protected against fluctuating interest rates and the risk is borne by the hedging bank

Determination

• The hedging agreement should be compliant with the International Swaps and Derivatives Association (ISDA) agreement

• ISDA has created standardized contracts to enter into derivatives transactions, to help companies across the world

Hedging Terms

PROJECT COMPANY

LENDING BANK

MarginFixed Rate

HEDGING BANK

Floating Rate Floating Rate

The Project Company pays hedging bank a fixed rate in return for floating rate & pays the hedging bank a floating rate margin

PAYMENTS STRUCTURE


4.3

ADDITIONAL FEESSELECT FINANCING TERMS

Upfront Fee:

• Fee charged to cover administration and primarily the reserving of funds.

• Usually payable at financial close or at first debt drawdown date

Syndication Fee:

• Fee charged by the bank for arranging a syndicated loan, i.e. raising the required amount in the market

Underwriting Fee:

• Upfront fee payable to insurers, reinsurers or underwriters of insurances taken out by the Project

Company to protect itself against various risks

One Time Fees

Commitment Fee:

• Fee charged by lenders to their borrowers for unused credit or credit that has been promised at a

specified future date

• Payable during the construction period until the end of debt availability period

Agency Fee:

• Fee payable to lenders for various roles like inter-creditor agent, security agent, debt facility agent etc.

• It’s an annual fee to be paid over the entire debt tenor

Fees During Construction

Agency Fee:

• Fee payable to lenders for various roles like inter-creditor agent, security agent, debt facility agent etc.

• Its an annual fee to be paid over the entire debt tenor

Fees During Operation


4.3 SELECT FINANCING TERMSMETHODS OF DEBT DRAWDOWN: BACK ENDED

• In this kind of drawdown structure equity is

drawn first. Debt is drawn once all the equity

amount has been exhausted and utilized to

fund project costs (most amenable to the

lenders)

• Most common structure followed in

infrastructure projects due to upfront equity

infusion by the Sponsor and thus providing

comfort to the lenders about appropriate funds

utilization

• Completion risk is mitigated by a few months

(till the equity amount is fully drawn)

• Interest during construction is lower (debt

obligations come aboard later in the

construction process and thus interest

incidence is also deferred) and hence leading to

lower project cost

UTILIZATION SEQUENCE

Base Equity

Standby Equity

Standby Debt Facility

Base

Equity

Debt

Facility

Standby

Equity

Standby

Debt

Debt Facility

KEY FEATURES


4.3 SELECT FINANCING TERMSMETHODS OF DEBT DRAWDOWN: PRO RATA

• Both equity and debt are drawn on a pro rata

basis to meet the project funding requirements

(may be agreed after negotiations with the

lenders while utilizing cash equity infusion in the

Project)

• Debt and Equity (in their respective ratio as per

the leverage decided at the Project FC from the

financial model) are drawn from day 1 with the

beginning of the construction period

• Leads to higher project costs since the financing

costs are higher (due to higher IDC, with interest

incidence starting from the very beginning of

construction period)

• Lenders generally require an LC in this case

equivalent to the amount committed but not

invested by the equity shareholders (which may

still be better as opposed to infusing cash

equity upfront and thus beneficial towards IRR)

UTILIZATION SEQUENCE

Base Equity

Pro-rata

Base

Equity

&

Debt

Facility

Pro-rata

Standby

Equity &

Standby

Debt

Debt Facility

Standby EquityStandby Debt

Facility

KEY FEATURES


DEFINITION

• A quantitative measure used by lenders to determine whether

a project's prospective net cash flow from operations in a

period can support (make timely service payment) the debt

service for that period as per the indicated terms

• It is the amount of cash flow available to meet interest and

principal payments to service debt in a period

METHOD OF CALCULATION

DSCR = Net Operating Cash flows

Total Debt Service

Where,

Numerator: EBITDA plus interest income less taxes less increase

in working capital

Denominator: Principal repayments plus debt interest including

interest on working capital

SIGINIFICANCE

• Important covenant required by lenders under project

financing.

• A DSCR of less than 1 would mean operating cash flows are

not sufficient to service debt. E.g. DSCR of 0.95 would mean

there is only enough operating cash to cover 95% of debt

service payments

• Generally higher the DSCR the better, however each lender

has a different comfort level

KEY ASPECTS

• Generally a minimum DSCR level of 1.20 or 1.25 is acceptable

by lenders under project finance

• There may be provisions under the debt term sheet which may

lead to event of default if the DSCR falls below a predefined

level (like 1.00 or 1.05)

• The term sheet may also contain provisions for minimum

DSCR requirements to allow distribution of dividends. Project

company can release dividends only when DSCR is above

minimum required “Distribution DSCR” level

4.4 KEY FINANCIAL RATIOSDEBT SERVICE COVERAGE RATIO (DSCR)

DSCR


DEFINITION

• A quantitative measure used by lenders to determine whether

a project's prospective net cash flow from operations over the

life of the loan can support (make timely service payment) the

debt service as per the indicated terms

• It is a measure of ability to repay debt over the remaining life

of the loan whereas DSCR provides snapshot of period wise

debt service capability of the operating cash flows


LLCR = NPV of Net Operating Cash flows

Total Debt Outstanding

Where,

Numerator: Net present value of future net operating cash flows

(available for debt service over the remaining debt tenor) as at

calculation date

Denominator: Closing balance of debt facility as on calculation

date

SIGINIFICANCE

• Important covenant required by lenders under project

financing

• An LLCR of 1.00x means that the CFADS, on a discounted

basis exactly matches the amount of outstanding debt

balance

• Generally higher the LLCR the better, however each lender has

a different comfort level

KEY ASPECTS

• Generally a minimum LLCR level of 1.25 or 1.30 is acceptable

by lenders under project financing

• There may be provisions under the debt term sheet which may

lead to event of default if the LLCR falls below a predefined

level (like 1.05 or 1.10)

• The term sheet may also contain provisions for minimum LLCR

requirements to allow distribution of dividend

4.4

LLCR

KEY FINANCIAL RATIOSLOAN LIFE COVERAGE RATIO (LLCR)


DEFINITION

• A financial ratio used to estimate the ability of the borrowing

company to repay an outstanding loan

• It is a measure of ability to pay over “Project Life” whereas

LLCR measures the ability to pay over the life of the loan


PLCR = NPV of Net Operating Cash flows

Total Debt Outstanding

Where,

Numerator: Net present value of future net operating cash flows

(available for debt service over the life of the project) as at

calculation date

Denominator: Closing balance of debt facility as on calculation

date

SIGINIFICANCE

• A commonly used debt metric along with LLCR in project

finance

• An PLCR of 1.00x means that the CFADS, on a discounted

basis, is exactly equal to the amount of the outstanding debt

balance

• Generally higher the PLCR the better, however each lender

has a different comfort level

KEY ASPECTS

• To provide cushion, lenders sometimes ignore the cash flows

beyond a certain cut-off date to protect against uncertain

future cash flows

• The discount rate up to the loan life would be the cost of debt

and a higher rate after that to account for the increased risk

• The debt term sheet may also contain provisions for minimum

PLCR requirements to allow distribution of dividend

4.4

PLCR

KEY FINANCIAL RATIOSPROJECT LIFE COVERAGE RATIO (PLCR)


DEFINITION

• A financial ratio used to indicate the amount of debt Project

Company (PC) has compared to its equity

• It is a measure of company’s financial leverage, the proportion

of debt and equity used by the PC to finance its assets


D/E = Total Debt Liabilities

Shareholder’s Equity

Where,

Numerator: Includes only interest bearing long term debt. Short

term or non-interest bearing debt is ignored

Denominator: Total shareholder’s equity in the PC including

retained earnings before PCOD

SIGINIFICANCE

• A high debt to equity ratio signifies higher debt service

requirements over the debt tenor

• Project Company should generate enough cash flows to

service its debt else it would be declared bankrupt

KEY ASPECTS

• In project finance, the debt to equity ratio is greater than 1 in

almost all the cases, signifying a greater amount of debt than

equity

• In project finance, high leverage implies that lenders bear

greater risk and hence are protected through various

covenants and agreements

4.4

D / E

KEY FINANCIAL RATIOSDEBT TO EQUITY RATIO (D/E)


4.5

RESERVE ACCOUNTS

• Also known as Debt Service Reserve Account

• Generally mandated by the Senior Debt lender to maintained by the Project Company SPV

• Used as reserve by lenders in event of disruption of cashflows for Project Company, to the extent that debt cannot be service

• Cash amount equivalent to principal and Interest payment for next specified no of period to be maintained in the account

• The amount of cash held in the account changes every period with change in repayment profile and interest payable

• Cash in Reserve account released at the end of Senior Debt tenor

TYPICALLY USED STRUCTIRES FOR DSRA FUNDING

• The DSRA funding requirement for the first period is capitalized as part of Project Cost

• Cash transferred to DSRA account upon start of operations period

• The increase of DSRA balance or release happens as per the repayment profile

Prefund

• An LC is used throughout the senior debt tenor as a security against not maintaining cash in the DSRA

account

• LC amount revised every period in line with the DSRA balance required

LC

• The DSRA funding requirement for the first period is capitalized as part of Project Cost

• The DSRA amount is released into project accounts upon start of operations period

• An LC is used throughout the senior debt tenor as a security against not maintaining cash in the DSRA

account

Prefund Release

OTHER FINANCING CONSIDERATIONS


4.5 OTHER FINANCING CONSIDERATIONSCASH SWEEP

• Applicable usually in case of mini perm financing structure

• Certain percentage (agreed in the financing agreement) of cashflows available for distribution are used to repay the senior debt

• This repayment is over and above the scheduled repayment as agreed in financing agreements

• Cash is credited to the Distribution account only after deduction of cash sweep amount

• This reduces the effective senior debt tenor and also the distributions to shareholders during the senior debt tenor

• Soft Mini perm : Cash is sweep is applicable when refinancing of senior debt is not successful after the initial maturity date

• Hard Mini perm : Failure to refinance leads to an event of Default under the financing agreement

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Senior Debt Closing Balance (with refinance) Senior Debt Closing Balance (without refinance)

Debt

DrawdownInitial Maturity

DateCompletion of Debt

Repayment using

Cash Sweep

ILLUSTRATION

After the initial maturity date of 8 (years) , accelerated repayment of senior debt occurs leading to reduction in effective senior debt

tenor from 29 years to 20 years

APPENDIX


DEBT FINANCING OPTIONSECA EXAMPLE - OVERSEAS INVESTMENT ASSURANCE

• Protects investors and financial institutions from economic losses resulting from political risks such as expropriation, exchange

restrictions, war, political riot and breach of contract in the country where investment is made

• The maximum tenor may be ~20 years

• Covered percentage may be up from 50% to 100% depending upon the insurance coverage provider and cover utilized

= + ++

OVERSEAS INVESTMENT (DEBT) INSURANCE

Covered Risks ExpropriationExchange

Restrictions

War & Political

Riot

Breach of

Contract

Equity

Investment

Loan

Agreement

Investor

Project

Company

Financing

Bank /

Commercial

Lender

Insurance

Cover Provider

36

CONTACT INFORMATION

1

Arpan NalwayaSynergy Consulting Inc.

PHONE

Mob: +91 9999038805

EMAIL

[email protected]

2

Rohit PandeySynergy Consulting Inc.

PHONE

Mob: +91 8527997568

EMAIL

[email protected]