Infrastructure Project Finance and Project Bonds in Europe

E. Rossi, Rok Stepic, Kenneth A. Loparo, Mahvash Alerassool

• Publisher: Palgrave Pivot
• Year: 2015
• Print ISBN:
  9781137524034
• eBook ISBN:
  9781137524041
• Topic: Business
• Subtopic: Business General
• Index: Business

Project sponsors in Europe are facing more and more difficulty when acquiring conventional long-term bank loans for infrastructure projects. The regulatory landscape for debt markets will evolve further with implementation of Basel III requirements. Recently, the Asset Quality Review under the European Central Bank's Comprehensive Assessment process, and related pressures on banks' balance sheets, have constrained bank long-term lending. This has led to much discussion on non-conventional bank funding options for infrastructure deals in the future. This book analyses the project bond financing solution in detail, identifying all the specific features that make it highly suitable for large capital intensive infrastructure projects. The first part of the book assesses the main characteristics and prerequisites of project finance, including public-private partnership, infrastructure project assets and greenfield versus brownfield projects. It then discusses the European infrastructure project finance market in detail, before comparing bank conventional lending versus the project bond solution. In the final part of the book, the author presents the Europe 2020 project bond initiative, and reveals a range of key case studies and their findings.

1

Project Finance

Abstracts: The project finance topic, even if it is a well-known subject for many practitioners, is still a very complex financing process with many peculiarities not always entirely understood by non-specialists.

According to Basel II Capital Accord project finance is defined as one of the five subclasses of specialized lending activity. In this sense, it is a very specific lending business with its own rules and procedures. For this reason, banks tend to create within their organization dedicated business units with specialized resources and competences. Hence, there is a need to provide a general overview that can cover not only the main features of project finance but also more detailed aspects such as the public-private partnership (PPP) scheme or the critical differences between Greenfield and Brownfield projects.

Rossi, Emanuele and Rok Stepic. Infrastructure Project Finance and Project Bonds in Europe. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137524041.0006.

1.1General overview

There are many definitions which can be used to describe project finance (PF). Considering the type of project that will be examined in our work, the definition according to us should highlight PF as a method of raising of funds on a limited recourse basis, with a purpose of developing a capital intensive infrastructure project, where the sponsor is a special purpose vehicle (SPV) entity, and repayment by the borrower will be entirely dependable on internally generated cash flows produced by the project and not necessarily depending on the soundness and credit worthiness of the sponsors.¹ However, the borrower’s projects track record plays an important role in the decision-making process.

Clearly, it is arguable to which extent where the borrower is guaranteeing collateral (or other type of contractual remedy) to the lender can be truly called “project finance”. However, this is the main reason for shareholders to adopt this kind of financing for infrastructure facility.

Project financing differentiates from corporate financing in a way that PF is a means of financing projects through SPV (legally and economically self-contained legal entity whose only business is the project) as being the borrower for the senior debt. In traditional corporate lending structure, the capacity of raising additional debt depends entirely on the balance sheet strength, looking at the specific company’s balance sheets key performance indicators (KPIs). On the other side, project financing enable the shareholders to book debt off-balance sheet, whereby the debt capacity entirely depends on the projected future cash flows. In Table 1.1, we can see other important differences between traditional corporate finance and project finance.

TABLE 1.1 Corporate financing versus project financing characteristics

In other words, we might say that project financing is a complex procedure in which we have an unbiased allocation of risk on a large scale between the various stakeholders of the project. The project itself has a finite life depending on the factors such as length of the concession, contract or licenses. Hence, the PF loan must be fully repaid by the project’s life end. In respect to the lenders, they entirely rely on the expected future cash flows projection, which is a mainstream of revenue for the repayment of loan, interest and their fees. Therefore, the project must be “ring-fenced” (legally and economically self-contained) (Yescombe, 2013). The typical stakeholder’s structure in a PF deal consists of:

Sponsors: The equity investor of the project company can be a single party or a consortium of sponsors. Their subsidiaries may also act as subcontractors, feedstock providers or off-taker to the project company. In case of public-private partnership (PPP) structure, government may also retain an ownership stake in the project.

Government: The public entity contractually provides a number of undertakings to the project company or lenders, which may include credit support in respect of the procurer’s payment obligations under a concession agreement.

Contractors: The performance obligations of the project company to construct and operate the project will usually be done through engineering procurement and construction (EPC) contract and operations and maintenance (O&M) contracts.

Lenders: Normally the lending side includes one or more commercial banks and/or international agencies (EBRD, IFC and EIB) and/or export credit agencies and/or bond investors.

Advisors: Due diligence advisors to the lenders which at a minimum will include technical and legal advisors but potentially also financial, insurance, auditing, tax, accounting, ma...

Table of contents

• Cover
• Title
• Introduction
• 1  Project Finance
• 2  European Infrastructure Project Finance Market
• 3  Bank Conventional Lending versus Project Bond Solution
• 4  The Europe 2020 Project Bond Initiative
• 5  Case Studies in CEE
• Conclusion
• Appendices
• Bibliography
• Index