PROJECT FINANCE & LOAN SYNDICATIONS - Prime Bank …

1 PROJECT FINANCE & LOAN SYNDICATIONST heories, Procedures & Techniques2 What is PROJECT FINANCE ? A ProjectFinancetransactioninvolvesthemobi lizationofdebt,equity,contingentequity,h edgesanda varietyoflimitedguaranteesthroughanewlyo rganizedcompany,partnershiporcontractual jointventureforthepurposeofbuildinga capitalintensivefacilityandoperatinga discretebusinessactivity. Twomainformsofcorporatelending: Fullfaithandcreditofcorporatebalanceshee t Projectfinanceloan3 Some Jargons FullRecourseLoan:Aloaninwhichthelenderca nclaimmorethanthecollateralasrepaymentin theeventthattheloanisenforced. Thusa fullrecourseloanplacestheSponsor sassetsatrisk. NonRecourseLoan:A loaninwhichthelendercannotclaimmorethant hecollateralasrepaymentintheeventthatthe loanis enforced. LimitedRecourseLoan:A loaninwhichthelendercanclaimmorethanthec ollateral,subjecttosomerestrictions, asrepaymentin Financing Mechanisms Projectfinancingcanbedoneby: a singlebank,or throughloansyndication(arrangingloanfrom a numberofbanks/financialinstitutions) Inbothcases,creditappraisalremainsidenti calwithfocusbeingthesame: determiningcashflowgeneratingcapacityoft heproject However,syndicationisgenerallypreferredw henloansizeis large( say, crore),andtheborrowerhasstrongoperationa landfinancialtrackrecordsothatitispossib letoraisefundfromthemarket5 What is PROJECT Appraisal?

2 Projectfinancerequiresprojectappraisal. Projectappraisalistheduediligenceconduct edonsponsors, technical, market, environmental, financial,legal, andriskaspects, amongothers,oftheproposedproject. Itis theassessmentoftheviabilityofproposedlon g-terminvestmentsin termsofshareholderwealth. Froma commercialbank sperspective, is PROJECT Appraisal Needed? Tostopbadprojects Topreventgoodprojectsfrombeingdestroyed Todetermineif componentsofprojectsareconsistent ToassessthesourcesandmagnitudesofrisksTo determinehowtoreducerisksandefficientlys harerisks7 Components of PROJECT Appraisal SponsorsAnalysis TechnicalAnalysis MarketAnalysis EnvironmentalAnalysis: FinancialAnalysis LegalAnalysis RiskAnalysisSponsors & Management Review Sponsorsreviewshouldanswerthefollowing: Sponsorstrackrecordinimplementingsimilar kindofprojects Sponsorsfinancialstrengthtofulfillbaseeq uityandcontingentequitycommitment Managementreviewshouldanswerthefollowing : Whataremanagerialandlaborneedsoftheproje ct?

3 Doesorganizationhavetheabilitytogetthema nagerialskillsneeded? Istimingofprojectconsistentwithquantitya ndqualityofmanagement? Whatarewageratesforlaborskillsrequired?T echnical Analysis ReviewofTechnicalExpert/IndependentEngin eer sReport Trackrecordofproposedtechnology Adequacyandcompletenessoftheprojectdesig n Quantitiesofinputsbytypeneededforinvestm entandoperation Laborrequiredbytypeandtime Inputpricesandsourcesofsupply EnvironmentalimpactsMarket Analysis ReviewofMarketExpert sReport Whetherthereexistsa strongmarketfortheproject Demand supplygap Priceelasticity Availabilityofsubstitutes Sector/IndustryAnalysisshouldalsobedoneh ere Industry competitiveness/structure/tariff/duty/ta x/vat, etc. Availability of inputs/raw materials Major industry players State of regulationsEnvironmental Analysis Whatarethelikelyenvironmentalimpactsfrom undertakingproject? Whatis thecostofreducingthenegativeimpact? Evaluationoftheenvironmentalimpactsandri skswithandwithouttechnicalmeasuresaretak entoreducetheseimpacts Aretherealternativewaysofsupplyingthegoo dorserviceofprojectwithoutincurringthese environmentalcosts?

4 Whatarethecostsofthesealternatives? Isit a RED/ORANGE/GREEN PROJECT ? HaveDoEandGoBpermissionsbeenobtained?Fin ancial Analysis Determinationoftotalprojectcostandsource soffinance Howtoforecastprojectearningsandcosts? Howtomodelprojectprofitabilityunderuncer tainty? WhataretheDCFtoolsusedin projectanalysis? Keyquestionsaskedin financialanalysis: What is relative certainty of financial variables? What are sources and costs of financing? What are minimum cash flow requirements for each of the stakeholders? What can be adjusted to satisfy each of the stakeholders?Typical Structure of Financial Analysis Capitalcostandfinancingplan Capitalcost Workingcapitalrequirement Engineering,procurement,andconstruction Allocationofloanandequityanddisbursement Operatingcostsandearningsprojections Revenues Operatingcosts Proformafinancialstatements(IS,BS,SCF) Financialprojection Netpresentvalue(NPV)&internalrateofretur n(IRR) SensitivityAnalysisLegal Analysis Isprojectoperationlawful?

5 ReviewAoA/MoA,checkcertificateofincorpor ation,etc. Doestheprojecthasrelevantpermissionin place? ,it requiresatleast30differentconsents/permi tsfromgovt. lineagencies. CNGrefuelingstationsrequires3basicpermis sionsfromRPGCL,Dept. ofExplosivesand9otherpermissionfromvario usgovt. lineagencies. Schools,universities,hospitals,etc. allhavetheirspecificpermissionrequiremen ts. Ifanythingrelatedtoexport/foreigninvestm ent,checkforBoardofInvestment,Bangladesh Bankapproval. Ifanythingrelatedtotax,duty,VAT,etc. consultNationalBoardofRevenue. Ifanythingrelatedtocapitalraising, Analysis FundamentalPrincipleof Riskallocation: Riskshouldbeallocatedbycontractor otherwise,to thepartybestableto mitigateor controlrisk. MajorRisksInvolvedin ProjectFinance: ConstructionRisk CreditRisk MarketingandOperatingRisk FinancialRisk PoliticalRisk LegalRisk EnvironmentalandSocialRisk ForceMajeureRisk16 PROJECT Financing Parameters LoanLimit:Determiningmaximumborrowingcap acityoftheproject Currency:Maybedenominatedin eitherlocalorforeigncurrency.

6 CapitalStructure:Maximumdebt-to-equityra tioupto80:20 ,whichcommemorateswithlengthofconstructi onperiodandtimingofrevenuegenerationbyth eproject FacilityNature:Bothfundedandnon-funded(L /C,BG,etc.).Fundedfacilitiesmayincludere volvingcreditforworkingcapitalfacility Rateof Interest:Rateofinterestis 13% paorlower. Fees& charges:Asapplicable Securities:Primary(firstchargeonprojecta ssets),andcollateral(PG,corporateguarant ee,R/Monotherimmovableproperties,lienonf inancialassets,FDR,shares,etc.)17 What is Loan Syndication? AsperEncyclopaediaofBankingandFinance(EB F), Syndication meansa temporaryassociationofpartiesforfinancin gandexecutionofsomespecificbusinesspurpo se EBFalsodefines SyndicatedLoan asloansextendedbymultiplebankswheretheov erallcreditinvolvedexceedsanindividualle nder slegallendingorotherlimits Syndicatedloanismadeavailablebya groupofFIsinpre-definedproportionsundert hesamecreditfacilityfollowingcommonloand ocumentationformalities Loansyndicationisdifferentfromclubfinanc ing(wheremanybanksfinancea singleborrower)intermsofdealorigination, mechanism,documentation,disbursement,mon itoring,management,etc.

7 EssentialCharacteristics: (i ) singleborrower,(ii)morethanonelender,(ii i)commonloan& securitydocumentation18 Why is Loan Syndication Required? Banksarerestrictedtotakefundedexposureon a singleborrowerupto15%oftheircapital,andn on-fundedexposureupto20%oftheircapital Banksalsosetprudentialloanlimitinternall ytorestrictloanexposureona singlecustomer BangladeshBankfurtherlimitspercentageoft otalcreditportfoliothatcanbeinformoflarg eloan( loansizeexceeding10%ofBank scapital)basedonpercentageofclassifiedlo an. Forexample,largeloancanbemaximum56%ofpor tfolioforNPLbelow5%, maximum52%forNPLexceeding5% butlessthan10%,etc. Infrastructureprojectsandcapitalintensiv eindustrialundertakingsrequirelumpyinves tmentthatisn tpossiblefora singlebanktoaddress19 Advantages of Loan Syndication Diversification/sharingofrisks,costshari ngandpoolingofresourcesandreputation Participatingbanksplayusefulrolesbyprovi dinginformativeopinionsand/oradditionale xpertiseevenafterthefundinghasbeenextend ed Popularschemeforfinancinglargeandmediums caleprojects TheabilityofthecustomertodealwithsingleB ank/FI( LeadBank and AgentBank )asa one-stopservicepoint Syndicationprovidesborrowerwithacomplete menuoffinancingoptions,whichusuallyresul tsinmorecompetitiveloanpricing,productin novationsandwidercooperation Theopportunityfortheborrowertoestablisha trackrecordwithmanybanksfromjusta singletransaction20 Parties to a Loan :Aninstitutionorindividualthatraisesfund sin returnforcontractingintoanobligationtore paythosefunds,togetherwithpaymentofinter estovertheloan.

8 :Responsibleforraising/arrangingthefund. LeadArrangerorBankco-ordinatesallactivit iesrelatedtoa particularsyndicationdealfromproposalori ginationtofinaldisbursementoftheloan. Italsoperformsfollowingfunctions: Assists the borrower to structure the PROJECT and set important loan parameters, prepare the information memorandum, formulate a plan to raise the fund within an agreed time schedule Has the responsibility for much of the loan selling Acts as the first port of call for questions and answer them authoritatively in order to head off problems and sensitivities before they arise21 Parties to a Loan :Performsfollowingfunctions: Preserve all security documents and provide administrative & monitoring activities during tenure of the loan Act as the agent for the banks (not for the borrower) and to co-ordinate and administer all aspects of the credit facility once relevant documentation has been executed The activities include disbursement of money, collection of money, commitment fees, front-end fees, interest and repayments of principal Responsible for transmitting any post-closing waivers or amendments requested by the borrower and negotiating them with the syndicate banks Inform the participating banks regarding progress of the PROJECT Circulate audited financial statements regularly Call for a review meeting time to time where the borrowers and the representatives of the participating banks will be present22 Parties to a Loan ParticipatingBanks/FinancialInstitutions (Fls).

9 A groupofBanks/FIscommittingtosomeextentfo rparticipationin thesyndicationdeal5. JointArranger/Co-Arranger:Oneormoremanda tedbankswhowillactjointlytoraisethefundf romthesyndicatedmarket6. Numerousotherparticipantsmayremainpresen tsuchas SecurityTrustee,BookRunner,ModelBank,etc .23 Loan Syndication Fees & Charges LoanProcessingFee(Flat):A lump-sumnon-refundableamounttobepaidtoth eLeadArrangerforprocessingtheloan. Arranger sFee :Feetobepaidforarrangingthefundbasedonsy ndicatedamountbeforesigningoftheagreemen ttothemandatedbank/LeadArrangerorgroupof banksforarranginga transaction(Thisfeewillnotbesharedtothep articipatingbanks). AgencyFee(Flat):FeepayabletotheAgentBank forpreservingallsecuritydocumentsandforr enderingadministrative& monitoringactivitiesasAgentovertenureoft heloan. ParticipationFee :Feetobepaidonsyndicatedloanamounttothep articipatingbanksbasedonparticipationamo unt. ManagementFee(Annual):Feeonoutstandinglo anamountateachyearendduringloanperiodtob esharedbyallparticipatingbanks.

10 CommitmentFee(Quarterly):Feepayableonund rawnportionofloanlimit. L/CCommission:L/CopenedbytheFrontBank(Le adArrangerorL/CopeningBank)anda commissiontoberealized,ofwhichL/Copening Bankmayretaina percentageasskimandtherestis Syndication Process1. Pre -SigningStage:Includestimeperiodcovering followingtwophases: Pre -mandate stage. During this phase, the details of the proposed transaction are discussed and finalized through an indicative Term Sheet. After finalization of Term Sheet, a Letter of Mandateis obtained from the borrower. This time period is rarely shorter than one month and can be as long as one year. Post-mandate stage. During this phase, loan syndication takes place and facility agreements are negotiated and finalized. It is concluded by a closing or signing ceremony. This phase may take six to eight weeks. 2. Post-Signing Stage: Period covering after execution/ signing of syndication loan and security documents till full and final adjustment of syndicated loan A termsheetis a document,whichis notgenerallyintendedtobelegallybindingun tilit formspartofa formaloffer, LetterofMandatefromtheborrower.