PROJECT FINANCE TRANSACTIONS AND OPIC: A … FINANCE TRANSACTIONS AND OPIC: A HIGH LEVEL OVERVIEW...

© 2016 Haynes and Boone, LLP

PROJECT FINANCE TRANSACTIONS AND

OPIC: A HIGH LEVEL OVERVIEW AND

EXPLANATION

June 21, 2017

1

Presentation to

The Center for American and International Law



What is Project Finance?

• Definition: Secured financing of large, new,

single-purpose, capital intensive facility or

facilities on a limited- or non-recourse

basis, based on anticipated cash flows

• Who does it and why?

• What does non-recourse mean?

• Exceptions

2



Agenda• What is Project Finance?

• Mandate and Fee Letters

• Term sheets

• Project documents

• Financing documents

• Security

• OPIC: Its Mission, Objectives and Commitment to Project Finance

• Case study: the Dabhol Project

• Conclusions

3



Project Finance is Everywhere

4



Traditional PPP Project Finance Structure

5



Waterfall of Cash Flow

6



Mandate Letter

• Description of transaction

• Scope of work

• Conditions precedent

• Protection against circumvention

• Terms

• Proper signatories

• Largely falls away upon execution of Credit

Agreement

7



Fee Letter

• Confidential

• Fees not refundable; no offset

• Credit Agreement typically lists payment of

all fees due under Fee Letter as a condition

precedent to initial disbursement

8



Term Sheet

• Terminology: MOU, Summary of Terms and

Conditions, Deal Sheet, etc.

• Non-Binding

– Subject to Documentation

– Subject to Credit Approval

– Good Faith

• Essential Terms

• “Usual and Customary”

9



Project Documents

• Offtake agreements

• Fuel/input agreements

• Construction contracts

• O&M agreements

• Derivatives

10



Project Documents Generally

• Understanding the law of contracts

• The role of contracts in Project Finance

• Understanding market risk

• Evaluating your project parties

• Aligned performance criteria

11



Project Documents: Offtake Agreements

• Essential terms

– Tenor

– Quantity

– Quality

– Price

– Conditions / Termination / Excuse

– Breach / Damages

• Matching inputs and outputs

• “Take-or-Pay” vs. “Requirements”

12



Project Documents: Fuel/input Agreements

• Reliable and competitively priced fuel supply

arrangements

• Commodity supply contract

• Transportation service agreement

• Priced to track power market and natural gas

market fundamentals

• Hedged physically

• Hedged financially

13



Project Documents: Construction Contracts

• Types (Turn-Key EPC is most common)

• Exclusions to scope

• Change orders

• Milestones and Retention

• LDs

• Minimum performance threshold

• Lien waivers

• Completion and testing

14



Project Documents: O&M Agreements

• Agreement between Project Company and Operator

– Delegation to Operator

– Project Company may carry out work itself, but arrange for

technical assistance

• Basic contents include:

– Definition of service and standards

– Responsibilities of the Operator

– Remedies (including liquidated damages) for failings and delays

– Fees

– Key Personnel

15



Financing documents

• Credit agreement

• Depositary agreement

16



Credit Agreement

• Type and amount (Term? Revolving? Multi-currency?)

• Fees

• Availability

• Amortization and maturity

• Reps and warranties

• CPs

• Covenants

• Financial covenants

• Events of default and remedies

• Guarantees

17



Depositary Agreement

• Accounts

• Waterfall

18



Security

• What you get… and why

• Assets (all tangible and intangible property)

• Real property (mortgage and title insurance)

• Equity pledge in borrower and relevant subsidiaries

• Insurance

• Regulatory rights

• Contract assignments

• Direct agreements

• Transfer protection

19

The U.S. Government’s Development Finance Institution

OPIC: What’s That?

Presented to the Center for American and International Law

June 21, 2017


Helping American Businesses Compete

As the primary U.S. Government agency supporting private sector investments in the developing world, OPIC provides businesses with the tools to manage the risks associated with foreign direct investment.

OPIC currently manages a $21.5 billion portfolio of projects across 100 countries and operates on a self-sustaining basis at no net cost to the American taxpayer.


USG Support for Investors

Overseas Private Investment Corporation (OPIC)Provides financing, guarantees and political risk insurance to help American businesses gain footholds in emerging and post-conflict markets and address critical development challenges

Export-Import Bank of the United States (Ex-Im)Works to promote the export of goods and services made by American businesses, large and small, by providing working capital and term financing and insurance to fulfill export orders and help mitigate risk

U.S. Trade and Development Agency (USTDA)Links U.S. businesses to export opportunities by funding project planning activities, pilot projects, and reverse trade missions while creating sustainable infrastructure and economic growth in partner countries

USAID Development Credit Authority (DCA)Mobilizes local financing for underserved borrowers and sectors through risk-sharing agreements with private lenders

Department of Commerce’s International Trade Administration (ITA)Works to open new markets for American products and services by providing export counseling, market analysis and other export assistance services, and hosting trade promotion events

Small Business Administration (SBA)Provides financial and technical assistance, counseling and advocacy to American small businesses at home and overseas. Its services include export assistance centers around the country and export loan capital


USG Support for Investors

U.S. Businesses OPIC Ex-Im USTDA USAID/DCA ITA SBA

Financing for investments abroad X

Export credit insurance X

Political risk insurance X X

Partial loan guarantees X X X X

Feasibility studies and training X

Export assistance and counseling X X

Support at major U.S. and Overseas trade shows

X

Foreign Investors OPIC Ex-Im USTDA USAID/DCA ITA SBA

Partial loan guarantees X X

Reverse trade missions and business workshops

X

Enhanced financing for purchases of U.S. goods and services

X


Our Impact Overseas

Projects that OPIC currently supports are producing significant sustainable economic development results across a number of sectors.

• Housing projects have constructed more than 60,000 affordable homes and have provided more than 200,000 home mortgages, the majority of which are for first-time homeowners.

• Water infrastructure projects are producing over 150 billion liters of water each year, the equivalent of more than 260 billion bottles.

• SME and microfinance clients are providing access to finance to over 10 million SME and microfinance borrowers.

• Energy projects are expected to generate more than 3.5 gigawatts of electricity in the developing world – enough to power roughly three million U.S. homes.

• Agriculture projects are sustaining livelihoods for nearly one million small holder farmers.

• Healthcare projects are treating patients at a rate of more than seven million patient visits per year – in both small clinics and large hospitals.

• Education projects are educating more than 120,000 students in primary and secondary schools, and more than 25,000 students in higher education.


OPIC and Foreign Policy

• OPIC is a key resource that can effectively mobilize private sector support to advance USG priorities globally

• Example: Arab Spring initiatives

• OPIC will partner with the Department of State, USAID, the Department of Commerce and other sister agencies in USG-wide initiatives

• Example: Power Africa

• OPIC works with the US Embassy in project countries to help conduct CRDD, evaluate local project priorities and assist with advocacy

• Foreign Policy priority projects must still satisfy all OPIC programmatic and policy requirements


OPIC and Low Income Countries

OPIC statutorily-defined low-income countriesAFRICA AFRICA (continued)Benin SomaliaBurkina Faso South SudanBurundi TanzaniaCameroon TogoCentral African Republic UgandaChad ZambiaComoros ZimbabweCongo, Dem. Rep.Cote d'Ivoire ASIADjibouti AfghanistanEritrea CambodiaEthiopia IndiaGambia, The LaosGhana MyanmarGuinea NepalGuinea-Bissau PakistanKenyaLesothoLiberia LATIN AMERICAMadagascar HaitiMalawiMaliMauritania MENAMozambique YemenNigerRwanda NISSao Tome and Principe KyrgyzstanSenegal TajikistanSierra Leone


OPIC Products


Our Products

OPIC offers innovative financial solutions to support private investors including debt financing, insurance, and support for private equity investment funds.

Products Current* PortfolioBased on a $29B Statutory CapacityDebt Finance

― Limited recourse, long-term finance for private sector, commercial projects

― Loan amounts up to $250M per project, up to 20 year term

― Specific programs for providing finance to small-and-medium-sized enterprises and others

Political Risk Insurance― Protection against currency inconvertibility,

expropriation and political violence, including terrorism, as well as other specialized coverage

― Policy coverage up to $250M per project― Fixed premium, cancellable only by insured

Investment Funds― Senior debt for private equity funds selected by

competitive process― Investment decisions made independently by selected

fund managers

$16.26 billion

$2.48 billion

$2.76 billion

$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

Total Exposure

Political Risk Insurance

Investment Funds

Debt Finance

$21.5 BILLION

*December 21, 2016


OPIC Products

Investment Guarantees

Funded and unfunded investment guarantees to projects with sufficient U.S. connection

Direct Loans

Issued in USD to projects sponsored by or significantly involving U.S. small businesses

Political Risk Insurance & Reinsurance

Protects investors and contractors against political risks that their assets may face when deployed overseas

Investment Funds

Support for privately-owned, privately-managed funds that make equity or debt investments in overseas companies

Local Currency Guarantees

Local currency investment guarantees to local financial institutions for projects with sufficient U.S. connection

Frameworks

Un-funded investment guarantees of loans made to overseas companies by a U.S. financial institution

Syndications

B loan participations sold in OPIC-originated transactions


Investment Guarantees and Direct Loans


Long-Term Financing

• OPIC Financing provides medium- to long-term funding through direct loans and loan guaranties

• By complementing the private sector, OPIC can provide financing in countries where conventional financial institutions often are reluctant or unable to lend

• The majority of OPIC’s financing is used to cover the capital costs (such as design/engineering services, facility construction or leasehold improvements, equipment) associated with the establishment or expansion of a project in a non-financial industry or to fund the expansion of lending capacity (such as microfinance, SME lending or mortgage lending) by a financial services provider

• OPIC does not consider financing requests that are solely for working capital needs or for the purpose of making an acquisition, though limited working capital or acquisition costs may be financeable if they are a portion of overall project costs

• OPIC does not finance export sales that are unrelated to long-term investments in overseas projects

• OPIC does not purchase loan participations and cannot be a B-lender


Covenants/Reporting

Financial Ratios and Reporting

Maintenance of 1) Maximum Debt/Worth Ratio, 2) Minimum Current Ratio, 3) Minimum Debt Service Coverage Ratio (levels depend on project projections)

Provision of quarterly unaudited and annual audited financial statements

Provision of an annual project plan/budget for the upcoming fiscal year

Typical Policy Covenants

Compliance with US Foreign Corrupt Practices laws and other applicable laws

Environmental, Health and Safety requirements

Worker Rights requirements

Economic Policy requirements

Other Covenants/Reporting typical and customary for similar transactions


Security/Collateral

• Completion/equity guaranty – full or partial guaranty of the payment of designated obligations until the project has achieved a state of physical completion, is able to demonstrate that it is operating successfully and is able to confirm that all licenses/permits, etc. are in place

• Life-of-Loan guaranty – in certain cases OPIC may require a guaranty that lasts through the life of the loan rather than through completion only

• Pledge of shares – a perfected pledge in all equity interests of the project company (and any other relevant entities, such as intermediate holding companies)

• Debt service reserve account – typically for at least 6 months debt service coverage

• Liens/mortgages – for limited recourse deals OPIC usually requires a mortgage or a lien on or assignment of project assets

• Pledge of insurance proceeds

• Assignment of Project contracts

• Direct Agreements with material Project parties – to provide for additional cure periods and step-in rights





47%37%

16%

FY2015 Policy Portfolio

Expropriation

Inconvertibility

Political Violence

Covered Risks

Specialty Products

Terms

Rates and Benefits

Currency inconvertibility and transfer

Expropriation (including “creeping” expropriation)

Political violence, including terrorism

Breach of contract by a sovereign or sub-sovereign Non-honoring of sovereign guarantee Contractual frustration or denial of justice Performance and advance payment (bid bond) guarantees

Up to 20 years coverage Liabilities to $250M Re-insurance with other providers possible 90% coverage limit for equity investments and 100% coverage for debt investments

Fixed Premium Cancellable only by the insured Claims avoidance through advocacy by various U.S. government agencies Transparent and fair claims determination


Covered Exposure

• Debt

• Equity

• Leases

• Performance/advance payment guarantees

• Contracts with governments

U.S. Involvement Requirement

• If OPIC insures directly, investor = U.S.

• If OPIC reinsures, reinsured party = U.S.

or

underlying project = “significant” U.S. involvement

Coverage Amount

• Amount of equity (less 10%) or debt (insurance)

• Proportionate participation by U.S. investors in the project if foreign governments or multilaterals share liabilities

• Risk share for reinsurance varies

Definition of “U.S.” for Direct Insurance

• U.S. citizen

• U.S. non-profit

• U.S.-organized entity more than 50% U.S.-owned

• Non-U.S. organized entity more than 95% U.S.-owned

• U.S. statutory business trust (and 25% capital from

U.S. sources)

• “Significant” private U.S. participation in a project and foreign governments or multilaterals share liabilities

Definition for “U.S.” for Re-insurance (OPIC as Reinsurer)

• U.S. citizen

• U.S. permanent resident

• U.S. non-profit

• U.S.-organized entity more than 25% U.S.-owned

• Non-U.S. organized entity 50% U.S.-owned

Definition of “Significant” U.S. Involvement

• U.S. involvement at least 25% of OPIC coverage



Investment Funds


Investment Funds

• OPIC lacks statutory authority to make equity investments; however, it can provide debt capital to support the creation of privately-owned and managed investment funds that make equity or debt investments in companies overseas

• Fund investments are initiated through calls for proposals solicited by OPIC

• Calls may be general or require a particular geographic or industry focus

• A selection committee, comprised of an internal OPIC team and an independent private equity consultant, conducts extensive manager evaluations

• Generally, the evaluation of prospective fund managers is based on the following criteria:

• The viability and thoughtfulness of the proposal

• The relevant track record of the prospective management team

• The cohesiveness of the management team, and its experience managing third-party capital

• The ability of the manager to raise sufficient equity capital to support the investment thesis

• OPIC has supported infrastructure funds


OPIC Policies


General Eligibility Criteria

OPIC-SUPPORTED INVESTORS AND PROJECT PROPOSALS MUST SATISFY CERTAIN POLICY CRITERIA

Have a commercially viable business plan

Involve the U.S. private sector in a meaningful way

Maintain private sector control (<50% government ownership)

Contribute to sustainable development goals

Be located in one of ~160 eligible countries

Comply with international environmental standards

Support international human rights and worker rights regulations

Cause no loss of U.S. jobs or adverse impact on the U.S. economy


OPIC Sectors

Energy/Power

Healthcare/Hospitals

Agriculture/Food Security

Transportation (roads, rail, ports, airports)

Clean Water/Waste Management

Educational Institutions

Tourism

Telecom and Media

Other Infrastructure

Financial Services

Micro, Small, and Medium Enterprises

Impact Investment


OPIC Policy Reviews

Eligibility

OPIC projects must have significant US ownership or involvement

Character Risk Due Diligence

Material project participants are screened for OFAC compliance and other reputational risks

OIP Clearances

OPIC’s Office of Investment Policy issues three mandated policy clearances: Environmental Assessment, Social Assessment, and Developmental Effects


U.S. Connections in OPIC-Supported Projects

OPIC policy requires that finance and direct insurance projects have a meaningful connection to the U.S. private sector.

How Does OPIC Define U.S.?

• A U.S.-organized entity generally must be at least 25% U.S.-owned

• A foreign organized entity generally must be at least majority U.S.-owned

How Does OPIC Measure U.S. Involvement?

• OPIC requires U.S. involvement in the project company in an amount that is equivalent to 25% of the project company’s equity, which may be met with equity, long-term debt or other U.S. contracts or, by combining these types of involvement

• OPIC will support investment funds if the fund has raised U.S. equity equal to 25% of OPIC’s loan support or if the fund is managed by a U.S. manager

How Does OPIC Measure the Duration of U.S. Involvement?

• For an ongoing project, U.S. entities need to retain a 25% interest in the project through final disbursement of the OPIC loan. In the case of a start-up or ‘greenfield’ project, the U.S. entities need to retain a 25% interest through physical completion of the project

• OPIC must approve any proposed transferee of the interest

How Does OPIC Define U.S. Small Business?

• This is defined as a business with annual revenues during the last fiscal year of less than $400M; entities/individuals without revenues, net worth of less than $100M

• Consistent with the U.S. Small Business Administration, OPIC also considers a business with 500 or fewer employees as “small”


CRDD

Character risk due diligence (“CRDD”) is intended to uncover derogatory information about a project or material project parties

Areas for investigation can include:

• possible involvement in terrorism;

• corrupt practices;

• money laundering;

• criminal history;

• conduct resulting in debarment by the U.S. Government or an international financial institution (including regional development banks);

• the public image of the project company and the other parties involved;

• the environmental accountability of all parties related to the project;

• effective anti-money laundering and know your customer procedures and adequate internal controls of the project company; and

• procedures that reduce the risk of improper involvement of politically exposed persons in projects seeking OPIC support.

CRDD investigations commence at the time of an application in an effort to identify issues as soon as possible

CRDD is confirmed at each step of OPIC’s approval process and must be refreshed periodically prior to the issuance of a commitment


ESG Statutory Policies

“OPIC's mission is to mobilize and facilitate the participation of United States private capital and skills in the economic and social development of less developed countries and areas, and countries in transition from non-market to market economies. In accomplishing its mission, OPIC will promote positive U.S. effects and host country developmental effects. OPIC will assure that the projects it supports are consistent with sound environmental and worker rights standards. In conducting its programs, OPIC will also take into account guidance from the Administration and Congress on a country’s observance of, and respect for, human rights. In accomplishing its mission, OPIC will operate on a self-sustaining basis.”— U.S.C. Title 22 §2191


Policy Clearances

OPIC’s Office of Investment Policy (OIP) ensures that OPIC implements its statute and policies across all OPIC-supported projects. This includes Congressionally-mandated statutory requirements and general OPIC policy requirements. Specifically, OIP is tasked with guaranteeing that all OPIC-supported projects:

Apply consistent and sound environmental standards

Apply consistent and sound worker rights standards

Observe and respect human rights

Have no negative impact on the U.S. economy

Encourage positive host country development effects


Active Policy Monitoring

OIP ensures that every OPIC-supported project will adhere to and implement OPIC’s Congressionally-mandated statutory requirements and policies by conducting analysis and issuing clearances in the following three areas:

Economic Analysis

Environmental Assessment

Social Assessment

The clearance process is initiated upon receipt of the Borrower’s application; all three clearances must be issued for each OPIC project before a commitment can be executed.

In addition, OIP monitors all OPIC-supported projects to ensure that they are in compliance with OPIC statutory and policy requirements.


OPIC Procedures


Pre-Screening and Sample Questions

• Statutory Eligibility – Compliance with OPIC’s statutes and Federal Law

– “Are you a U.S. business with a project located in an OPIC-eligible country?”

• Financial Viability – Project is a sound investment for OPIC

– “Is your project financially sound and commercially viable?”

– “Have you raised the equity?”

• Policy Eligibility – Compliance with OPIC’s environmental, social, labor, and U.S. effects policies

– “Would your project have adverse effects on project workers, the host country’s environment, local communities affected by the project, the U.S. economy, or U.S. jobs?

• Development Impact – Contributes to the development goals of host country

– “Will your project have a positive developmental effect on the local community?”

• Additionality – Project is additional to private sector banks and insurers

– “Have you contacted a private sector lender or insurer for involvement in your project?”


Application

Online/electronic application process that may include:

• Business plan (including sponsor and management relevant experience)

• Documentation supporting the commercial viability and development impact of project

• Relevant contracts or agreements

• Financial statements

• Financial projections

• Sponsor Disclosure Report

• References

• Investment strategy, fund manager track record, and plan for fundraising (Investment Funds)


Unique OPIC Issues

OPIC as a US agency is governed by Federal laws regarding transparency, appropriation of funds, submission to jurisdiction and handling of Governmental records

• OPIC cannot agree to NDAs or other restrictions on handling information that are inconsistent with the requirements of the Freedom of Information Act

• The Tucker Act prohibits OPIC from submitting to jurisdiction in any courts

• Federal law dictates the courts where certain claims can be made against OPIC

• The Anti-Deficiency Act prohibits OPIC from providing open-ended indemnities or entering into agreements to reimburse third party costs to any person - OPIC must always therefore be excluded as an indemnifying party

OPIC has negotiated specific OPIC forms of comfort letters for our Borrowers and under the Master Cooperation Agreement to address these issues.


Questions


Overseas Private Investment Corporation

OPIC Programs



Case Study

Dabhol Power Project

54


Dabhol Deal Structure


Risks and Mitigants in DabholProject Finance Transaction

Political Risks Market Risks

Political Risk Mitigation Tools Market Risk Mitigation Tools

• Currency risks – convertibility, transfer limitations

• Environmental, regulatory, or permit issues• Expropriation and Nationalization• Domestic politics• Civil strife/unrest• Business and legal climate – enforceability of

contracts, institutional transparency

• Political risk insurance• Arbitration/alternative dispute

resolution provisions• Host government guaranty• Escrow accounts• Comfort letters from host government• Assignment of risk via contracts

• Price and demand for offtake• Counterparty risks – can customers

pay?• Cost and availability of inputs• Offtake risk• Currency risks – Devaluation• Construction risks – cost overruns,

credit/performance risks

• Local market due diligence• Escrow accounts• Host government guaranty• Currency hedges and swaps• Offshore reserve accounts• Assignment of risk via contracts


Lessons Learned from Dabhol Project

• Big risk selling power to a financially weak off-taker. Make sure that price of power is affordable. Do the off-taker and the government have ability and willingness to pay?

• You cannot necessarily rely upon government guaranties, particularly in a politically charged environment.

• Misalignment of interests between power producer and off-taker raises the prospects of a project failure. Is it really a fair PPA? Is the project sponsor perceived as acting equitably or arrogantly?

• Are the lenders interests well-aligned or do their interests diverge, particularly in a crisis?

• While robust dispute resolution mechanisms will not prevent issues from arising, having enforceable remedies will contribute to an acceptable settlement.



Conclusions

• Understand the facts

• Find the issues

• Make sure material issues are adequately

mitigated

• “No two projects are the same”

• "No project is perfect“

• Know the players and what they do!

58

Date post:	22-Apr-2018
Category:	Documents
Upload:	trandieu
View:	219 times
Download:	3 times