caiib super notes: corporate banking: module c: project and infrastructure finance: disbursement,...
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CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Disbursement, Monitoring, Supervision and Follow up of Project Finance Loans
Module C: Project and Infrastructure Finance
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Corporate Banking: Disbursement, Monitoring, Supervision and Follow
up of Project Finance Loans
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Contents
Coverage:
1. Introduction
2. Capturing Cash Flows
3. Project Documentation
4. Disbursement of Project Loans and
Monitoring in Construction Phase
5. Network Techniques Used in Project
Implementation
6. Monitoring, Supervision and Follow up
of Project Finance Loans
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
INTRODUCTION
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Ensuring Safety of Bank’s Funds
• System for capture of cash flows of the project
• Documents to be executed
• Disbursement of the loan
• Monitoring the execution of the project
• Network Techniques for Project Implementation
• Follow up and Monitoring of the project in the operational
phase
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAPTURING CASH FLOWS
2.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
TRA
• Strict control is required over utilization of revenues as they
are the only source of repayment
• Trust and Retention Account:
– Every rupee earned is routed through TRA account
– Appropriation is decided beforehand in pre-determined sequence
– Utilization is allowed in a preferential manner as per a ‘waterfall
arrangement’
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Waterfall Arrangement
Fuel, raw material, wages and salaries etc.
Fuel, raw material, wages and salaries etc.
Operations and Maintenance
Costs
Operations and Maintenance
Costs
Govt. Taxes, Excise and other
duties
Govt. Taxes, Excise and other
duties
Debt Service Debt Service •Interest and
Repayment Installment
Remaining is available for use without lender’s
control
Remaining is available for use without lender’s
control
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
DSRA
• Equal to interest and repayment obligations of one or two
quarters.
• The reserve is utilized when due to unforeseen circumstances
there is a shortfall of revenues to take care of current
repayment obligations
• Filled up by subsequent flows of revenue
• May be in the form of Standby LC or Bank Guarantee
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Cash Sweep
• Excess cash flows are not allowed to accrue to the SPV.
• Instead they are swept back towards accelerated repayment,
by applying it to the installments from the rear end
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
PROJECT DOCUMENTATION
3.
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Documents
Concession/License Agreement
Concession/License Agreement
Shareholder’s Agreement (SHA)
Shareholder’s Agreement (SHA)
Engineering, Procurement and
Construction (EPC) Contract
Engineering, Procurement and
Construction (EPC) Contract
Operations and Maintenance
Contract
Operations and Maintenance
Contract
Financing Documents Financing
Documents Common Loan
Agreement Common Loan
Agreement
Inter-Creditor Agreement
Inter-Creditor Agreement
Security Documents Security Documents Transaction Documents Transaction Documents
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Concession/License Agreement
• Agreement with the govt. granting the right to the project
vehicle to develop the project
• It delivers the project site to the private developer
• Govt./Public body agrees to meet the Rehabilitation and
Resettlement (R&R) Expenses
• It specifies various terms like – Period, Termination Clause,
Technical specifications, State support agreement etc
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Concession/License Agreement
Type of Project Name of Agreement
Road Concession Agreement
Telecom Licensing Agreement
Airport Operations, Maintenance and Development Agreement (OMDA)
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Shareholder’s Agreement
• Between all shareholders of SPV including Project sponsors
• Establishes
– Shareholding Pattern
– Decision Making Process
• Defines
– Cash calls and remedies available against funding defaults
– Shareholder Exit Process
– Right of First Refusal (ROFR)
• Ensures equity funding is fully tied up and available
• Lays down a simple process for a shareholder to monetize his shareholding
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EPC Contract
• Between SPV and EPC Contractor
• Establishes EPC contractor’s sole responsibility in designing,
procuring, constructing, testing and finally commissioning the plant
facility
• Lays down
– Guaranteed and minimum performance parameters
– Liquidated Damages
– Defects Liability
• Protects the project against time and cost escalations
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Operations and Maintenance Contract
• Between SPV and O&M Contractor
• Establishes responsibility of the O&M contractor to operate
the plant/facility to ensure the availability of project/facility.
• Defines Maintenance Obligations
• Specifies Bonus Payments
• Ensures a certain level of mitigation of operating and
performance risks
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Operations and Maintenance Contract
Other Sector Specific Project Documents:
- Power Purchase Agreement
- Fuel Supply Agreement
- Fuel Transport Agreement
- Default Escrow Account
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Financing Documents
• Between SPV and Project Lenders
• Govern the financing of the project
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Common Loan Agreement
• Also known as Loan Agreement, Facility Agreement, Rupee Facility
Agreement, Senior Loan Agreement etc
• Defines
– Amount and purpose of loan
– Term of the Loan
– Repayment Schedule including Moratorium Period
– Interest Rates, reset clause
– Pre-Commitment and Pre-disbursement conditions
– Drawdown/Disbursement Schedule
– Debt Fees/Service, representation and warranties
– EODs (Events of Default) and Dispute Resolution Procedure
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Inter-Creditor Agreement
• Amongst the creditors in the syndication
• Ensures Coordinated Action/Prevents unilateral action
• Provides for the right of each individual lender against the
borrowers
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Security Documents
• Protect lenders in event of default by the borrower
• Allows lenders to presume control over the assets
• Assets maybe movable, immovable, fixed or current
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Types of Security Documents
•Over land, building, plant and equipment, book debts and receivables
Mortgage Document/Deed of Hypothecation Mortgage Document/Deed of Hypothecation
•Pledging of equity of sponsors
•Sometimes satisfied with negative lien/non disposal undertakings
Share Pledge Agreement Share Pledge Agreement
•Concession Agreement, Licensing Agreement, insurance contracts, Off Take Agreements, Construction Contracts etc. are assigned to the banker.
•To capture all the benefits accruing to the borrower
• Included as a part of English mortgage
Assignment of Key Contracts Assignment of Key Contracts
•Construction Guarantee, Performance Guarantee, Cost Inflation and FE Risk Protection.
Guarantees Guarantees
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Transaction Documents
• Project Documents and Financing Documents along with the key contracts
• Critical Transaction documents are as follows:
Sector Critical Transaction Documents
Power Fuel Supply/Transport Agreement, Power Purchase Agreement (Escrowability of off taker), Technology, Equipment suppliers, Evacuation Arrangements and Distribution losses
Roads Concession Agreement, Traffic Study, Land Availability, EPC Contract
Ports Concession Agreement, Traffic Study, Hinterland Connectivity, Rationale and Inland Linkages, Container Freight Stations and Container depots, Level of Containerisation, Dredging Requirements
Telecom Licensing and Technology obsolescence, ARPU, MOU and VAS charges
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
DISBURSEMENT OF PROJECT LOANS AND MONITORING IN CONSTRUCTION PHASE
4.
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Disbursements
• Vital to ensure ‘End use of Funds’
• Debt disbursements in the form of progress payments to minimize
possibilities of diversion of funds
• Services of LIE are outsourced
• Borrower submits detailed drawdown schedule which is vetted by
the LIE
• Developers generally spend significant chunk of funds through their
equity before first disbursement. This also takes care of “upfront’
equity infusion
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Disbursements
• Compliance report in r/o pre-disbursement conditions is
prepared
– In case of consortium it is sent by lead bank to other banks/Fis
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Monitoring
• End use certificate obtained from statutory auditors
• Confirmation sought from LIE also
• LIE also submits monthly/quarterly report
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NETWORK TECHNIQUES USED IN PROJECT IMPLEMENTATION
5.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Network Techniques
• Completion of a project in shortest time depends on right
selection of sequence of these activities.
• Techniques:
– Critical Path Method (CPM)
– Program Evaluation Review Technique (PERT)
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MONITORING, SUPERVISION AND FOLLOW UP OF PROJECT FINANCE LOANS
6.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Monitoring Measures
• LIE Services
• O&M Activity
• Monitoring of revenue inflows through TRA arrangement
• Causes for revenue shortfall should be assessed and corrected
• Interest reset should be done timely
• Regular Consortium Meetings
• Control should be exercised to ensure time submission of
statements
• Insurance Policies to be kept current and monitored
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida