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What will be covered today?
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Project finance is the financing of long-term
infrastructure based upon a non-recourse structure.
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Project finance is about identifying each risk associated with
the design, construction and operation of the project; and
determining which participant is best able to bear that risk,
and the mechanic to do so.
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What exactly is financial close?
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What is the key difference between project finance
and a corporate loan?
Key difference
• Under corporate loan, lenders have recourse to all the assets of
the company itself (regardless of whether the proceeds of the
loan are used to finance a specific asset or not);
• In project finance, the borrower is a Special Purpose Vehicle
(SPV) and the principle Lender security is the future cashflows of
the project itself – it is ‘cashflow lending’.
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Trends in Project Finance for Coal-fired Power
Sector
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Independent Power Producer (IPP) Business Process Flow
Pre-Qualification
Request for Proposal
Letter of Intent
PPA Negotiations and Signing
Financial Close/Financing
Date
Commercial Operation Date
End of Contract
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A Typical Project Finance Structure Chart
Financial Institutions
SponsorsSPV
(Borrower)
Project Counterparties
Engineering, Procurement, Construction
(EPC)
Fuel Supplier
Operation and Maintenance
(O&M)
Senior Loan
Offtaker
Repayment
Dividend
Equity
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The USD595 million financing package for IPP Cirebon 1
(660MW) achieved financial close in March 2010.
JBIC, KEXIM, BTMU, ING, MFG, SMBC
Marubeni, Korea Midland Power,
PT Tripatra Engineers &
Constructors, Samtan
SPV (Borrower)
Project Counterparties
EPCFuel
SupplierO&M
Senior Loan
Offtaker -PLN
Repayment
Dividend
Equity
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The USD1.5 billion financing package for IPP Mong Duong 2
(1200MW) achieved financial close in September 2011.
Kexim, HSBC, CA, SC, Natixis, SG, SMBC, ING,
Mizuho, BNP Paribas
AES (US); Posco(Korea); China
Investment Corporation
SPV (Borrower)
Project Counterparties
EPC Doosan HIC
Fuel Supplier
VinacominO&M
Senior Loan
OfftakerEVN
Repayment
Dividend
Equity
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Lenders
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Financial ratios and covenants
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Power Purchase Agreement (PPA) tariff is made up
of five components – as long as sponsors receive
capacity payment, this portion is enough to repay
debt and provide equity return.
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Export Credit Agencies
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ECA support can take the form of loans, guarantee
or insurance, depending on the mandate it has
been given by its government.
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Risk insurance is critical to projects obtaining international
financing. It is usually expressed as a percentage of the
risk, and size of the loan covered for that risk.
• Political risk cover – covers restriction/ prohibition of imports, war or revolution, change in law or policy;
• Commercial risk cover – covers inability to collect export proceeds or loan because the counterpart doesn’t repay the loan;
• Extended political risk guarantee (EPRG) - covers the usual political risks plus risks associated with breach of contract by government parties (e.g. if offtaker defaults), nationalisation, and currency non-convertibility.
For e.g., a USD1 billion loan, may have 800 million “covered” for 100% of political risk, 90% of commercial risk. The rest, the USD200 million, may require another ECA support.
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Export Credit Agencies - New OECD guidelines on coal-
fired power generation
PLANT UNIT SIZE (gross installed capacity)
Unit > 500 MW Unit ≥300 to 500 MW
Unit < 300 MW
Ultra-supercritical or < 750 g CO2/kWh
12 years 12 years 12 years
Supercritical or between 750 and 850 g CO2/kWh
Ineligible 10 years, and only in IDA-eligible countries
10 years, and only in IDA-eligible countries
Subcritical > 850 g CO2/kWh
Ineligible Ineligible 10 years, and only in IDA-eligible countries
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Project Sponsors
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Sponsors provide equity into the SPV to fund
the project
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Chinese participants in IPP market
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Top Japanese Trading Houses
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Mitsui has said it will cut its investment exposure to coal by a third within three years, due to environmental concerns; Sojitz, also said it would limit investments in coal.
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Summary of learning
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The USD1.5 billion financing package for IPP Mong Duong 2
(1200MW) achieved financial close in September 2011.
Kexim, HSBC, CA, SC, Natixis, SG, SMBC, ING,
Mizuho, BNP Paribas
AES (US); Posco(Korea); China
Investment Corporation
SPV (Borrower)
Project Counterparties
EPC Doosan HIC
Fuel Supplier
VinacominO&M
Senior Loan
OfftakerEVN
Repayment
Dividend
Equity
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Do we understand everything in this table?
Mong Duong 2 Financing Plan USD million
Kexim – Direct Loan 342
Kexim – Covered loan (100% political and commercial cover)
280
K-sure – Covered loan (80% political and commercial cover)
839
Total debt 1,461
Key Financing Details
Tenor 18 years
Gearing (debt/equity ratio) 75% debt, 25% equity