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Risk Mitigation Strategies in Infrastructure Finance: A Comprehensive Guide, Schemes and Mind Maps of Finance

An in-depth analysis of key issues in infrastructure finance, focusing on risk mitigation strategies for construction, operations, technical & environmental, financial, and political risks. It covers various mitigation techniques, including fixed price turnkey contracts, warranties, experienced contractors, long-term technical warranties, proven technologies, public consultation, and investment insurance.

What you will learn

  • How can political risks be managed in infrastructure finance projects?
  • What strategies can be used to mitigate financial risks in infrastructure finance?
  • What role does insurance play in risk mitigation for infrastructure finance projects?
  • How can construction risks be mitigated in infrastructure finance projects?
  • What are the primary risks associated with infrastructure finance projects?

Typology: Schemes and Mind Maps

2020/2021

Uploaded on 12/31/2021

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fatima-mehdaoui 🇬🇧

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Infrastructure Finance
Key Issues
2018
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Download Risk Mitigation Strategies in Infrastructure Finance: A Comprehensive Guide and more Schemes and Mind Maps Finance in PDF only on Docsity!

Infrastructure Finance

Key Issues

TMB

Special Purpose Company Structure

[to control company activities]

At Risk:

Low or no Risk:

• Grants and subventions [free?]

Equity

Debt

Cost of Capital

TMB

Conclusion: project developers try to maximise amount of debt!

Mezzanine

Risk Mitigation Risk Type Mitigation Construction

  • Cost over-runs
  • Delays
  • Site acquisition & access
  • Physical asset risks (a) Use fixed price turnkey contracts (b) Negotiate penalties & incentives (c) Negotiate warranties (d) Keep project specification fixed (e) Use experienced/competent contractors [(f) Introduce bonding & retentions] (g) Usually Govt. responsibility (h) private projects require insurance Operations - Revenue forecasts
  • Revenue build-up
  • Operating costs
  • Management failure (a) Obtain realistic revenue forecasts (b) Obtain long-term sales contracts (c) Support with long-term supply contracts (d) Use experienced/competent operators (d) Negotiate operational gtees & liq. damages (e) Support with loan covenants & DSCR triggers Technical - Performance
  • Environmental
  • Social issues (a) Obtain long-term technical warranties (b) Use proven technologies (c) Undertake public consultation and approval

TMB

Risk Mitigation Risk Type Mitigation Financial - Debt/equity ratio

  • Return on capital
  • Risk / reward ratio
  • Foreign exchange
  • Interest rates
  • Debt service cover
  • Taxation (a) No excessive leverage (b) Excessive Equity IRR?: lenders will seek early repayt. (c) Impose acceptable cover ratios (1.5-2.0)? (d) Match forex exposures, if possible (e) Use fixed interest rates (if possible) (f) lenders require escrow & reserve accounts (g) Dividend constraints & cash sweeps imposed (h) Debt service triggers imposed (i) Lenders will syndicate their loan (j) Capital markets may be used to cover risks (k) Standby funding facilities required (l) Bind-in key shareholders to project success (m)Unavoidable! Legal - Licences?
  • PPP law? (a) Use experienced lawyers. (b) Insist on clear simple documents & laws (c) Use Intl. Arbitration protection Political - Regime stability
  • Political stability (a) Use investment insurance (c) Obtain IFI support

TMB

SOURCES OF FUNDS Type Source Equity:

  • New Investor capital
  • Current & future profits of developer
  • In-kind contributions [e.g. land & IP]
  • Issue of new shares in Project co. [IPO] Debt: Quasi-equity / debt

TMB

Measures Used by Investors

Internal Rate of Return [ IRR ] :

IRR = the discount rate at which the NPV of the project cash-flows

period by period equals zero.

Which IRR? Used?

(a) Project IRR : Revenues v. [capex + opcosts] [? ]

(b) Economic IRR : as for Project IRR, but incl. economic costs

& benefits [i.e. Cost-Benefit Analysis].

[ NB. incl. inflation or not? ] [ yes ]

(c) Equity IRR : Shareholder equity v. dividends yes

[ NB. treatment of retained surplus/profits. ]

TMB

Equity Finance: Issues & Measures Taken TMB^10

ISSUE MEASURES TAKEN

  • rate of return changes over time
  • dividend policy and availability
  • currency convertibility and transfer
  • balance of inherent project risks
  • availability of equity in the construction period
  • exit strategy; does secondary market exist?
  • partners and the sharing of risk
  • Political risk: use of investment insurance
  • Taxation and economic/political stability
  • use of corporate loans : mezzanine/sub-debt
    • c alculate profit over 5, 10, 20 years
    • Lenders may impose constraints
    • use insurance / have IFI support
    • mis-allocation leads to problems
    • sources identified? Need an ILOC?
    • possible Lender / Govt. constraints
    • investors prefer consortium approach
    • important in emerging markets
    • part of investor due diligence
    • Lender constraints imposed?
    • Issues of transparency & good governance?

Sources of Funds

Type Source

Equity:

  • New Capital
  • Current & future profits of developer
  • In-kind contributions
  • Issue of new shares in Project co. [IPO] Debt: -^ Aid,^ grants^ & subsidies^ : NB covenants/conditions
  • Development Banks [eg. World Bank; EBRD]
  • Export credits: [eg. US Ex-Im; ECGD; Sace]
  • National Development Funds [ e.g. OPIC, KfW]
  • Commercial lenders
  • Capital markets / bond issues
  • Islamic finance
  • Offset & Barter Quasi-equity / debt cost

TMB

Lenders’ Criteria

1 : Debt Service Cover Ratio: [for each period] : = Free Cash Flow

Fixed Charges

Free Cash Flow = Revenues: less: operating costs [ plus : depreciation] plus: any cash balances from previous period** less : increase in working capital less : incremental cap. expenditure less : tax [**Note: some conservative lenders do not include cash balances in their calculations] Fixed Charges = Loan repayment + interest payments [ plus : mandatory payments, e.g. leases]

TMB

LENDERS’ CRITERIA 2 : Interest Cover Ratio = Free Cash Flow Interest Payments 3: Coverage Ratios : [over remainder of project] : = PV of Current & Future Free Cash Flow [CFADS] Book Value of Outstanding Debt* [NB: discount rate? Av. Cost of borrowing? ] [* = or market or discounted value?]

TMB

The Project Process

Loan Security:

Cash-Flow Project Finance v. Corporate or Govt. Guarantee

Concept Development Preliminary Info. Memo Investor Identification Lender Identification Identify Contractor & Equip. Appoint Lead bank Outline Finance Proposals Formation of Project Co. Lender Due Diligence Investor commitment Confirmed Complete Financial Agreements Financial Close Phases Time

2 - 3mth 2 mth

3 - 6 mth 3 mth

3 mth 3 mth

3 - 6 mth 3 mth

3 - 6 mth 2 mth

Proj. Fin. Govt. & Corp

Total: 14 - 24mth 13 mth

TMB

Project Information Memorandum [“PIM”]

  • Project Summary;
  • Project participants / ownership;
  • Project description: technical & physical;
  • National / macroeconomic benefits;
  • Government role and support;
  • Legal framework, licensing regime, & sector regulation;
  • Description of market and revenue potential;
  • Corporate & financial structure;
  • Cash-flow analysis: data; Base Case assumptions; sensitivity analysis; risk assessment and mitigation;
  • Security structure for loans;
  • Project agreements;
  • Environmental & social issues.

TMB

Typical PPP Structure PPP Concessionaire [SPV, LLC, JV?] Investors Lenders [ECAs; IFIs; banks] (Inter-credit. Aggt.) Share Subscription Agreement Loan Agts. Govt. Agency or Co. Services Contract. Revenues or Availability Payts Dividends 3rd Party Gtees. Regulatory Regime. The Engineer GOVERNMENT Concession [e.g. PPP ] Construction Operations & Maintenance TMB

PSC v. PPP 100 50 0

“Whole Life Cycle”

Construction

Years

PPP PSC TMB [Note: need to introduce impact of inflation in costs].