Global Banking and Capital Markets
Loan Syndication and Project Finance
Prof. Ingo Walter
Financing alternatives available to major Euro-zone corporations
Inte
rest
rat
e sw
ap
Fixed
DEBT
Floating
Curr
ency
sw
ap
Non-Euro
Bank debt
Privateplacement
Public offering
StrippedUnstripped
Straight
With warrants
CallableIndex-linkedConvertible
Real estate
Unsecured
LeasingAsset backed
Project financeTerm LoanRevolving facilites
VRN
MTNFRN
EurobondE-zone
Bank debt
US CP
ARPEuro CP
Subsidized fundsEuro
Short term
Full rights
Restricted
Private
Public offeringDomestic
International
Private
Long term
Hybrid
EQUITY
Firm Continuum and sources of capital
Private Placement
Insider Seed Money
Sources of Capital
Commercial Paper
MediumTermNotesMezzanine
FundFinancing
Public Debt
Intermediate-Term Commercial Loans
Very small firm, possibly with no collateral
and no track record.
Small firm, possibly with high growth
potential but often with limit track record.
Medium-sized firms.Some track record.Collateral available,
if necessary
Large firms ofknown risk and
track record.
Firm SizeInformation Availability
Venture Capital Public Equity
Short-Term Commercial Loans
What form of financing?Match needs and motivations to available sources
Permanent or Flexible
Frequent Borrower?
Commercial paper or Short term bank debt
Permanent
No
Yes
NoIs availability insurance needed?Flexible
YesBank credit facility
Medium term notes
Size?
Credit Problems?
Tax Problems?
Capital availabilityProblems?
No
Disclosure Problems?
No
Private placementSmall
LargeYes
Term loan
NoYes
Leasing
Asset backed financingYes
Project finance
YesEurobond
Domestic or foreignbondNo
Bank Loan Origination
Borrower-Bank
Search
Credit
Analysis
Borrower-Bank
Negotiation
Bank
Funding
Typically throughreferrals
Bank conductsloan evaluation
Terms negotiated
Bank funds loan
Revolving Credit Facilities: Illustrations
Top 20 Arrangers of Syndicated Loans1
1997-99 (US$ million)Pos. Bank Amount No. % Share
1 Chase Manhattan Corp. 755,416.4 2,535 212 Bank America Corp. 683,733.4 3,462 193 Citigroup Inc. 447,172.4 1,567 134 JP Morgan & Co. 312,773.3 708 105 Deustche Bank AG 229,355.5 1,128 66 Barclays 127,105.6 559 47 ABN AMRO Bank NV 115,780.7 846 38 Fleet Boston Financial 114,127.7 1,173 39 Credit Suisse First Boston 99,843.6 373 3
10 UBS Warburg 90,089.3 297 311 Bank of New York 88,362.9 399 212 First Union Corp. 85,520.2 800 213 Scotia Capital 61,343.1 360 214 HSBC 60,598.3 341 215 Goldman Sachs & Co. 53,883.3 165 216 Greenwich Natwest 47,712.8 196 117 Banque National de Paris 47,465.4 283 118 Societe Generale 47,384.4 443 119 Toronto Dominion Bank 47,063.1 213 120 Dresdner Bank 41,722.3 216 1
Total 3,556,454 16,064 100
1 Euromarket, Asiamarket and U.S. Market combinedSourc: Euromoney Publications PLC.
Syndicated Loans
Project Finance
The arrangement of debt, equity and credit enhancement for the construction or refinancing of a specific facility/ plant in a capital intensive industry;Financiers must based their credit appraisals on the merits of the project and projected revenues from the operations of the facility;a ndFinanciers must rely on the assets of the facility (including its revenue producing contracts and cash flow) as collateral.
Industrial Distribution of Project Finance and All Syndicated Loans
Project Finance Loans Project Finance LoansIndustrial Category # of Loans Total Value of Percent of # of Loans Total Value of Percent of of Borrower Amount Loans US$ Million Total Value Amount Loans US$ Million Total Value
Commerical & Industrial 3,136 386,862 61.0 59,612 8,391,648 63.1Chemicals, Plastic & Rubber 105 8,891 1.4 2,340 321,100 2.4Communications 241 51,126 8.1 2,237 510,242 3.8Construction/ Heavy Engineer 222 15,477 2.4 1,434 75,751 0.6Forest Productions/ Packaging 135 15,219 2.4 1,988 299,979 2.3Hotels & Leisure 298 20,628 3.3 1,992 255,184 1.9Mining & Natural Resources 300 28,030 4.4 1,452 191,219 1.4Motorway Operator 117 14,642 2.3 342 28,636 0.2Oil & Gas 631 119,513 18.8 6,061 1,165,320 8.8Petrochemicals 147 24,975 3.9 470 89,359 3.9Steel & Aluminium 215 23,488 3.7 2,098 199,275 3.7
Utilit ies 1,063 140,609 22.2 4,644 808,306 22.2Electrical/ Energy Utility 1,009 136,520 21.5 3,942 714,073 21.5
Financial Institutions 167 21,828 3.4 14,051 2,461,411 3.4Transportation 143 48,677 7.7 5,781 711,028 7.7
Transport (ex. Airlines, Ship) 112 46,788 7.4 1,870 319,180 7.4Government/ Agencies 399 30,602 4.8 3,979 674,869 4.8
Government/ Authority 302 23,333 3.7 2,463 488,359 3.7
Other 48 5,844 0.9 2,716 251,211 0.9
Total, All Items 4,956 634,422 100.0 90,783 13,298,473 102.1
Financial Details of the Fifteen Largest Project Finance Deals Since 1980
Project Finance Relationshipsc) a) c) e)
Lender:Bank & Inst.
Investors
Govt.Insurance Co.
Derivatives & L/cs
(Supra-)National
Institutes
Equity
Profit
Fee
Guarantees
Guarantees
Co-Financing
BOT AgreementState
Guarantee
LoansDebt-Service
O&MAgreement
Turn-KeyContract
Buy-Back
Equity/ Quasi Equity
Supply-or-PayContract
Take-and-PayContract
c) e)
Contractor
Project Operator
Customer
c) e)
Agent (Bank) Suppliers
Structuring Contract
Sponsor c) e)a) c)
c) e)
d) f) d) e)Dual-Tranche-Financing a) Sponsor b) Project
c) Contractor d) Lendere) Guarantor f) Operator
Maui Gas Field, New Zealand
A) Contract covering design, constructionand operation of offshore production and onshore treatment facilities
B) Contract covering onshore and offshore engineering services/ consulting
C) Contract covering construction of offshore gas transmission system
D) Contract covering construction of onshoregas transmission system
BOT Concept
From Government perspectiveTo provide competitively priced infrastructure (power, tunnels, telecoms).To develop infrastructure off balance sheet.
From Lender/ Investors perspectiveInvest in long-term stable cashflow.Receive and adequate return.
Possible Sources of Debt
Export Credit AgenciesMutilaterals/ BilateralsCommerce BanksCapital Markets
Export Credit Agencies
Traditional providers of concessional financing for equipment sales
US: US EXIMGermany: HERMESUK: ECGDJapan: J-EXIM
OECD Guidelines: 85% of Country Specific Costs15% of Local Content and 15% of Local Costs
Growing flexibility towards project finance
Multilaterals/ Bilaterals
IFC, World Bank, ADB, EBRDOPIC, CDC, OECFCatalyst for mobilizing financeCan provide debt, equity and cofinancingGenerally flexible on tenor and will do project financing
Commercial Banks
Traditional providers of limited recourse financingRecently more aggressive on accepting political riskPolitical risk can be isolated through:
offshore guaranteesescrow accountspolitical risk insurance
Capital Markets
Appetite of US capital markets for infrastructure projects144A marketPrivate placements
Offer longer tenors which improve project economicsMore flexible on political risk
Comparison of Cash Flows
Debt Service
Best Case Cash Flow
Expected Case Cash Flow
Worst Case Cash Flow
ExpectedLife of Project
Years0 5 10 15 20
0
5
10
15
20
$25
Sample Project Risks
Risk Allocation Mitigation1 Compleiton Delay Turnkey Contractor - Contingency for owner-caused
- Financially strong contractor- Insurance
2 Cost Overrun Turnkey Contractor - Good Design/ Well-defined Sco- Contingency for owner-caused- Sound EPC Contract
3 Output Shortfall Owner - Solid Base Case Economics- Reserve Accounts- Insurance
4 Offtake Shortfall Utility - Capacity Payments- Minimum Take
5 Currency Fluctuations Utility - Denomination of power sales incurrency of Contractual Obligat
6 Increased Interest Rate Owner - Interest Rate Swaps- Continency funds- Bond Issues
7 Erosion of Project Economics Owner - Experienced developer duringdevelopment phase & allowancefor margin of error
8 Political Risk All - Insurance- Self Insurance- Off-shore Arbitration
Principles of Risk Allocation
First PrincipleRisk can be transferred, not eliminated
Second PrincipleAssumption of risk is to be balanced by rewards
Third PrincipleAllocate risk to the party best positioned to manage and mitigate the risk