Project finance appraisal: an introduction

Long-term consequences of major projects

University College, London
Tom Hackett & Gianni Carbonaro
10th December 2012

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 Todays programme

Two principal sections

Project Finance Appraisal (TH):

The European Investment Bank (EIB)
EIBs approach
Project Bonds

The long-term consequences of major

projects illustrated by the Vasco da Gama
Bridge, Lisbon (GC)

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 Project finance appraisal:
an introduction

EIBs approach
Project Bonds

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 The European Investment Bank
Long-term Finance Supporting EU Objectives Exemplified By EUROPE 2020
STRATEGY

Within the EU increase in:

Growth & employment potential
Environmental sustainability
Economic and social cohesion

Outside the EU:

Private Sector Development, Infrastructure Development, Security Of
Energy Supply, Environmental Sustainability And Support For EU Presence
In Asia And Latin America Via Foreign Direct Investment (FDI).

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 EIB Activity in Figures (2011)

Total lending EUR 60.9 bn.

Lending - European Union EUR 53.8 bn.

Lending - partner countries EUR 7.1 bn.

Borrowings EUR 76 bn.

Balance sheet about EUR 450 bn.

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EIB Signatures & Disbursements 2007 - 2011

Signatures
Disbursements

EUR bn

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 Benefits of EIB Lending

Support for EU priority objectives.

Assurance of project quality and soundness.

Technical assistance.

Project assessment.

Financial benefits of EIB funds.

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 Project finance appraisal:
an introduction

European Investment Bank (EIB)

Project Bonds

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 Project finance appraisal

Who can borrow/be a project sponsor with the EIB?

Governments

Local authorities

Banks

Corporations

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 Project finance appraisal
To qualify for EIB funding, projects must:

1. Correspond to at least one

EIB OBJECTIVE.

2. Be TECHNICALLY SOUND.

3. Be financially viable, SHOW AN

ACCEPTABLE ECONOMIC RETURN

#11,
4. Be COMPLIANT with
environmental and procurement
LEGISLATION

5. Have a BANKABLE CREDIT

RISK profile.

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 Project finance appraisal

Sponsor

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 Project finance appraisal
All projects must be environmentally beneficial or
acceptable :

Nature, size & location

of the project.

Formal compliance with

European environmental
legislation.

#
Environmental capability /
sponsors capacity

Environmental/Social risks
and impacts

Mitigation and/or
compensation measures

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 Project finance appraisal
PF/PPP Dimensions: Economics

Cash-flow

Market prospects

Financial and economic profitability

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 Project finance appraisal
PF/PPP Dimensions: Economics

Company structure

Project's sponsors
and financiers

Project's features

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 Project finance appraisal
PF/PPP Dimensions: Contractual

More complex

Multiple actors

Distribution of risk and rewards

Key contracts / agreements

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 Project finance appraisal:
an introduction

European Investment Bank (EIB)

EIBs approach

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 Project Bonds
EU 2020 Project Bond Initiative - Why Project Bonds ?

Economies are heavily dependent on

energy, transport and communication
infrastructure
Approx. EUR 1 000 billion of infrastructure
investment is required through 2020
Significant reduction in long-term funding
available for infrastructure:
- Since 2007/8, no new projects wrapped by
monoline insurers
- Basel 2 & 3 have put banks under pressure

Challenging environment demands diversified and

cost efficient financing to fill gap

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 Project Bonds
Where next ?

Bring back private sector financing.

LGTT an early attempt to bring back private
investors.
Consistent with Connecting Europe Facility (CEF)

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 Project Bonds
EIB credit enhancement

Ability to screen, assess and monitor project risk.

Based on EIBs track record.

Target ratings of A- or better.

Fair and risk-related pricing.

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 Project Bonds Pilot Phase
Test during current EU spending plan (2007-2013)

Prior to full rollout from 2014 inclusion in future EU spending plan

(Multiannual Financial Framework)
EUR 230m leveraging up to EUR 4.4 billion of investments (19x multiplier)
Transport (TEN-T), Energy (TEN-E) & Broadband projects
Greenfield or refinancing Brownfield during construction / start-up
Project financing via capital markets (i.e. bond rather than bank)
For projects able to reach financial close by end-2016
EIB to implement

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 Project Bonds
Structure #1: Subordinated / mezzanine loan

Benefits:
Public
bond issue - Reduced probability of
or private
Project default on project bonds
Project placement
Bond during operations
Bonds Investor
Project (Target rating - Reduced losses on
based on
Costs market project bonds if a default
conditions)
occurs
EIB sub-debt
- Reduces amount of bond
financing to be raised
Equity

EIB sub-debt participation can be combined with different

types of funding sources (bonds and other senior loans)
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 Project Bonds
Structure #2: Subordinated guarantee

Benefits:
Public - On top of a fully funded
bond issue
Project or private structure: additional funding
placement
Bonds Project to cover construction
(Target rating
Bond shortfalls
based on Investor
Project market - Revolving guarantee,
conditions)
Costs available until end of project

- Reduced probability of
default and losses given
default
EIB
Equity guarantee

EIB unfunded sub-debt participation can be flexibly used and

structured in order to ensure target rating
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 Conclusion Back to the Future?
The Project Bonds reviving an asset class, unlocking a
competitive new, long-term source of finance for infrastructure.
The EIB working on pilot operations and identifying further
potential projects

Partnership with sponsors, advisers, investors and rating agencies

The Pilot Phase subject to EU interim and final evaluations

Assuming positive results, a full Project Bonds roll-out expected

under the Connecting Europe Facility (CEF) between 2014-2020
although the CEF itself squeezed in MFF discussions (recent
European Summit).

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 Thank you for your attention

Some reading:

See recent EPEC paper: www.eib.org /epec/resources/Financing

See recent Freshfields paper: www.freshfields.com/projectbonds

Tom Hackett
E-mail:
thomasehackett@gmail.com
phone: +44 (0) 20 7736 3825

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