Structuring Ddebt-financing-for-infrastructure-projectsebt Financing for Infrastructure Projects

Structuring Debt Financing for Infrastructure Projects

La Compagnie Benjamin de Rothschild Structured Finance Advisory

2012

Table of content

I. Market environment – Overview

II. Infrastructure debt and project finance outlook

III. Key debt structuring considerations and type of projects

IV. Institutions and infrastructure projects debt

V. CBR’s as a financial advisor for infrastructure projects

2LA COMPAGNIE BENJAMIN DE ROTHSCHILD

I. Market environment - Overview

� The UK is still the largest market, followed by

France which tendered very large transactions

which closed in 2011.

LA COMPAGNIE BENJAMIN DE ROTHSCHILD 4

I. Market environment - OverviewGeographic and Sector Breakdown

United kingdom - 36%

France - 14%Italy - 7%

Germany - 7%

Russia - 7%

Spain - 5%

Turkey - 4%

Norway - 3%

Belgium - 2%

Netherland - 2%

Other countries - 13.0%

Source: Infrastructure journal

Transactions by region 2011

Oil & Gas - 36%

Transport - 14%

Mining - 7%

Renewables - 7%

Water - 7%

Power - 5%

Social & Defence - 4%Telecoms - 3%

Source: Infrastructure journal

Transactions by sectors 2011

� Europe is still largely investing in energy and

transport infrastructure where the requirements

are significant.

� Tours-Bordeaux high-speed

railway in France (€ 5.4 bn)

� Nord Stream Gas Pipeline

Phase II (€ 3.9 bn)

� Acciona Portfolio

Refinancing (€ 1.6 bn)

� Ministry of Defence

headquarters in France (€

1.5 bn)

� Bretagne-Pays de la Loire

high-speed railway in

France (€ 1.2 bn)

� Nottingham Express Transit

(phase II) in the UK (€ 620

m)


I. Market environment - OverviewPipeline trend

218

393

530

382

445

358

-

20'000

40'000

60'000

80'000

100'000

120'000

140'000

160'000

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011

In e

uro

s m

illi

on

Tra

ns

acti

on

co

un

t

Transaction volume in Europe by year

Value of transactions (EUR million) Number of transactions Source: Infrastructure journal

� In 2011, more than 350 projects reached financial close in Europe worth approximately €110 billion.

� Some landmark transactions were extremely capital intensive, with significant debt requirements:

II. Infrastructure debt and project finance outlook


II. Infrastructure debt and project finance outlook Significant deal flow and funding requirements

The infrastructure deal flow in Europe is still huge in the long term and capital intensive:

�Europe faces massive infrastructure investment needs, in particular for transport, energy and broadband

networks.

�The European Commission estimates such needs to amount to € 1.5 trillion to € 2 trillion with a view to meet

the policy goals of the Europe 2020 Strategy for smart, sustainable and comprehensive growth.

� The completion of the trans-European transport network (TEN-T)

programme.

� The trans-European energy networks (TEN-E) programme.

�Despite the current economic situation, Governments across Europe

are still willing to stimulate their economy by launching infrastructures

projects to boost productivity, competitiveness and economic activity.

�Debt and project finance remains an important source of funding.

�Steps are being undertaken to tap again the debt capital markets :

� The Europe 2020 Project Bond Initiative launched by the EIB.

� Important steps are also being taken by many governments

to accelerate major infrastructure investment and house building

with the implementation of guarantee schemes.


II. Infrastructure debt and project finance outlook The bank debt market liquidity is decreasing…

The Bank market is not as deep and more constrained and risk averse for project financing:

� The liquidity available on the Bank debt market decreases because of the adverse economic conditions.

� The project financiers are also experiencing significant collateral damage from the forthcomingregulatory reforms primarily aimed at what is perceived as riskier banking activities and which limit

liquidity available:

� The Basel III regulatory framework requires banks to hold greater levels of capital against long and

less liquid project finance loans.

� The prudential rules lead to a capital reallocation decreasing the commitment capacity.

� The number of lenders active in infrastructure project finance is decreasing due to the more stringent

credit risk criteria and exposure constraints, especially for volume risk transactions.

� Banks are also looking to deleverage their balance sheet, thus many portfolio of project finance loans are

available presumably at a discount price.


Refinancing and exits shall also drive debt funding requirement within the infrastructure sector:

� Projet finance deal flow

� Important refinancings for the period 2013-2018 are expected:

� More than € 100 billion of debt has been raised over the 2009-2011 period in Europe for

infrastructure projects split asbetweentransport (ca. €33 billion), renewable (ca. €35 billion), Social

infrastructure (ca. €17 billion), power (ca. €14 billion), and telecoms (ca. €4 billion).

� The Eiffarie / APRR refinancing is one example of how the capital markets have been tapped.

� Equity providers are also looking to sell some of their participations in infrastructure assets and re-leverage

the funding structure:

� Once a project is closed, industrial sponsors are more willing to recover some of their equity to

finance new projects.

� Financial investors’ equity IRR targets do not allow them to increase their equity exposure to

projects indefinitely and many of them are looking for an exit due to the duration of their fund.

II. Infrastructure debt and project finance outlook … whilst the funding requirement remains significant

III. Key debt structuring considerations and type of projects


III. Key debt structuring considerations and type of projectsGreenfield vs. brownfield

Usually, infrastructure assets are classified in two categories:

�Greenfield assets:

� New projects being or to be tendered which are to be designed, built, financed and operated by a

dedicated majority privately-owned special purpose vehicle (SPV).

� Lenders finance the investment phase, hence support the construction risks but also the

operating/maintenance risks as they are repaid over a long period of time (15-25 years) once the

project comes into operation.

� Such risks are mitigated by a comprehensive security package (including guarantees from the

contractor and operator the SPV is using), a tailor made repayment profile and a string set of

covenants including financial covenants (debt coverage ratios), creating strong constraints on the

borrower.

� The debt component is structured in such way that lenders are repaid under very conservative/

adverse situations but there is a limited recourse to the shareholders of the SPV

�Brownfield assets:

� Secondary projects, already in operation, which can be refinanced on the basis of the assets

performance post operation (usually after 3 to 5 years).

� They are safe assets with high visibility on revenue and very low risks.

� They usually allow for a higher debt leverage and a looser debt structure


III. Key debt structuring considerations and type of projectsRisk profile evolution of an infrastructure project

The following chart illustrates the typical risk profile development of an infrastructure asset


The PPP framework is a well established model, implemented through the two main legal frameworksavailable:

�Availability based projects:

� The SPV is in charge of designing, building, financing and maintaining the infrastructure

� The SPV receives availability rent from the granting authority which will cover, among others, the

financing and maintenance costs involved.

� This payment can vary depending on performance criteria agreed in the Contract (ex: social

buildings).

�Volume/revenue based projects:

� The private SPV selected by the granting authority takes a volume risk on the infrastructure; the

payment of operating expenses, the funding of the maintenance and renewal costs, the repayment of

the debt financing component and the payment of dividends are dependent on the revenue

generated by the private operator.

� Revenues of the SPV are generated by users of the infrastructure (ex: motorways concessions).

�Some projects can combine a rent paid by the public authority with some revenue risk. In such case, the rent

varies depending on the attendance measured on the infrastructure.

III. Key debt structuring considerations and type of projectsAvailability based vs. revenue risk projects


III. Debt financing characteristics and type of projectsKey features of infrastructure debt

Tenor [20 – 25] years

Interest rate Fixed rate ca.[3-4]%+Margin

Margin [200–400] bps, the lower margin being for a) the construction period

for a well established/ credit rated contractor, b) an availability based

project where the counterparty paying the rent is a solid investment

grade public sector entity; the higher margin being paid during the

operation period for a volume risk-based asset

Upfront fees [150-250] bps

Security Complete security package

Guarantees Set of guarantees from contractors, operators, equity providers,

public entities,...

Repayment profile Tailor-made, but back-ended

Other covenants and undertakings Exhaustive and providing lenders credit friendly features including

financial covenants (debt service cover ratios), restrictions on

distributions and baskets (limits on additional indebtedness, limits on

acquisitions/disposals, etc,…)

IV. Institutions and infrastructure projects debt


IV. Institutions and infrastructure projects debtInstitutions could bridge the gap created by the decrease in bank debt’s liquidity

Participation exits

Important deal flow Refinancings Institutional investors, such as pension funds,

insurers, mutual funds, and sovereign wealth funds, could potentially take up some of the

slack in the market.

Decreasing bank project finance debt available when the deal flow is still on the rise, hence an opportunity for alternative players to enter the

market


IV. Institutions and infrastructure projects debtWhy would infrastructure assets be attractive to institutions?

� Investing via debt instruments in infrastructure assets offers attractive investment features/ considerations

for investors:

� A low volatility and a low correlation to other asset classes.

� Long term perspective through tangible assets with high visibility on future returns and a low risk of

capital loss.

� A natural inflation hedge as the underlying assets revenue are, to a various degree, usually linked to

inflation.

� Attractive all-in rate (margin + base rate + commitment fees – during the drawdown period)

� Infrastructure assets provide a risk-return profile that sits between bonds and equity and enhance the

efficiency of a portfolio through diversification.

� The recent liquidity constraints enabled to strongly improve the infrastructure contract risks allocation in

favour of private financing providers.


IV. Institutions and infrastructure projects debtInstitutions are already active in Europe

Recent examples of transactions:

� Acquisition of assets: acquisition by Dutch Pension Fund PGGM of majority stake in the UK University

Partnerships Program (UPP) from Barclays Infrastructure Fund:

� UPP recently won a £ 230 million PPP project under a 125 year concession scheme.

� The transaction is a good example of direct investment in stable social infrastructure sectors with a

long term focus.

� Refinancings: Eiffarie/APRR € 5.6 bn of debt to be refinanced by 2013:

� APRR raised ca. €2.5 billion in bonds over 12 month at an average coupon of 4.83% to rebalance

bank debt and to fund APRR’s needs and CAPEX.

� The remaining € 3.5 bn of debt was refinanced through the bank debt market.

� Debt portfolios: Bank of Ireland disposal of debt portfolio:

� € 270 million in UK asset backed project finance debt to a Danish Pension fund at a 16.5%

discount to par value.

� € 200 million of UK infrastructure project finance loans portfolio sold to Aviva at a 19% discount to

par value.

V. CBR’s as a financial advisor for infrastructure projects


CBR, through its dedicated, experienced Structured Finance Advisory team, can offer a full range ofservices in a capacity of financial advisor as per the following situations:

� Project finance deal structuring or an asset acquisition

� Refinancing

� Acquisition of debt portfolios

CBR’s Project Finance franchise has established itself as a leading player over the last 10 years,leading the league tables as Global Transport and Global PPP Financial Advisor in 2011 (InfrastructureJournal league tables). CBR advises:

�Private consortia bidding and implementing greenfield projects or acquiring brownfield projects

�Granting Authorities tendering projects or renegotiating existing projects underlying concession agreements

�Institutional investors willing to finance or acquire single assets / assets portfolio, extend debt instruments,

acquire project finance debt portfolios

V. CBR’s as a financial advisor for infrastructure projectsAn established franchise in project finance offering a full range of services


V. CBR’s as a financial advisor for infrastructure projectsTrack record

� Project finance advisory

� Private equity advisory

LEAGUE TABLES - INFRASTRUCTURE JOURNAL - FY 2011

Global Financial Advisors - PPP transactions (top 10 - worlwide)

Rank CompanyTotal

US$ m

Deal

flow

Market

share (%)

1 Compagnie Benjamin de Rothschild 12'986 6 12.6

2 Ernst & Young 11'733 24 11.4

3 Deloitte 7'282 8 7.1

4 Natixis 7'051 2 6.9

5 HSBC 6'461 4 6.3

6 Société Générale 6'266 3 6.1

7 KPMG 6'052 18 5.9

8 Crédit Agricole Group 5'900 1 5.7

9 PwC 5'469 15 5.3

10 Macquarie 4'681 3 4.6

European Infrastructure Financial Advisors (top 10 - all sectors)

Rank CompanyTotal

US$ m

Deal

flow

Market

share (%)

1 Société Générale 14'854 6 11.9

2 Compagnie Benjamin de Rothschild 12'986 6 10.4

3 Royal Bank of Scotland 11'389 5 9.1

4 HSBC 7'949 5 6.4

5 Ernst & Young 7'287 20 5.8

6 Natixis 7'051 2 5.6

7 UniCredit 6'602 3 5.3

8 Crédit Agricole Group 5'900 1 4.7

9 Deloitte 5'344 8 4.3

10 Commerzbank 4'884 1 3.9


CBR can assist in:

�Identifying /sourcing an opportunity/a project.

�Assessing the merits and economics of such project.

�Designing and structuring an optimum tailor made financing solution.

�Developing a financial model to test the economical and financial feasibility of the project.

�Coordinating the due diligence (legal, technical, insurance, tax, etc..).

�Preparing an evaluation/ financial projections and an appropriate set of sensitivities.

�Analyzing of the project risks and their financial impact.

�Preparing the relevant info package (information memorandum, due diligence reports, financials).

�Organizing a road show as appropriate.

�The credit analysis with the relevant parties.

�The negotiation, drafting and closing of the finance documentation.

V. CBR’s as a financial advisor for infrastructure projectsIndicative scope of work


Contacts

Structured finance advisory departmentLa Compagnie Benjamin de Rothschild29, route de Pré-BoisP.O. Box 490 1215 Geneva 15 Switzerland(CH) +41 58 201 75 00 / (UK) +44 207 845 5983Website: http://cbr.groupedr.ch

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