International Financing Sources: Credits, Bonds and Equities

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International Financing Sources Credits, Bonds
and Equities
ACADEMY OF ECONOMIC STUDIES FACULTY OF
INTERNATIONAL BUSINESS AND ECONOMICS
Lecture 8

• Lect. Cristian PAUN

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Commercial Banks

• Most commercial banks in the project finance
  field have specialized departments that work to
  construct PF deals
• Project Finance Department
• The most used approach
• The department could be organized into industry
  teams
• Concentrating all the efforts and expertise in a
  single department seems to have the best results
• Structured Finance Department
• The PF is a part of structured finance in case of
  large projects
• More sophisticated financings and products could
  be offered
• The PF may not fit easily with this structure
  (different time horizons for the components of
  the structured finance projects)
• Industry based Departments
• Combine all financings for a particular industry
  or a sector
• Is not suitable for the PF in different
  industries.
• The active implication of a bank in the financing
  of a project
• Advisers
• Lead Mangers.

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Advisers

• The terms of Financial Advisors engagement are
  set out in an Advisory Agreement signed by the
  Sponsors
• The main area of this Advisory efforts
• Advising the optimal financial structure for the
  project
• Advising in the preparation of the financing
  plan
• Advising on sources of debt and likely financing
  terms
• Assisting in preparing a financial model for the
  project
• Advising on the financial implications of
  Project Contract and assisting in their
  negotiations
• Preparing the information memorandum to present
  the project to financial markets
• Advising on assessing proposals for financing
• Advising in selection of commercial bank lenders
  or bond investors
• Assisting in negotiation of financing
  documentation
• The advisors are paid by a combination of fixed
  or time based fees and a success fee on
  conclusion of the financing

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Lead Manager

• They underwrite the debt and place it on the
  market
• Financial Advisor could have a key role in the
  selection of the Leader
• A leader could be used as a financial advisor
  and the costs could be reduced.
• In this case will be signed a mandate letter
  containing the due diligence, credit clearance
  etc.
• The Lead Manager role envisages
• Documentation (project contract, financial
  documentation)
• Engineering (Lender Engineer Technical Advisor
  / Expert of the Bank)
• Financial modeling
• Insurance
• Market review
• Preparation on the information memorandum
• Syndication

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Syndicated loan
1
Beneficiary
Lead Manager
2
Credit Management Group
3
4
Group of the participant banks
Credit Memorandum
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Bank A
Bank B
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Syndicated Loan Memorandum

• Contains the following information
• A summary overview of the project
• The Project company, its ownership, organization
  and management
• Financial and other information about the
  Sponsors including their experience in similar
  projects and the nature of their involvement and
  support for the current project
• Market situation (competition, suppliers,
  demand)
• Technical description of the construction and
  operation of the project
• Project costs and financing plan
• Risk Analysis
• Financial Analysis including sensitivity
  analysis
• A detailed term sheet for the financing.

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Supplementary reports and information

• A hard copy of the financial model with the
  Model Auditors report
• A technical report from the Lenders Engineer
• Advisers report on the market in which the
  project is operating
• A similar market report on fuel or raw
  materials
• A summary of legal aspects of the project
  provided by legal advisors
• A report on insurances from the insurance
  advisor
• A copy of the environmental impact assessment
  prepared by the Project Company
• Annual reports or other information on the
  various parties to the project.

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Agency operations of the Lead Manager

• Once the financing documentation has been
  signed, the Lead Manager will act as agent for
  the banks syndicate
• The main tasks of the lead manager
• Collects the funds from the syndicate
• Holds the project security on behalf of the
  lenders
• Calculates interest payments and principal
  repayments
• Receives payments from the Project Company and
  passes these on the individual syndicate banks
• Gathers information about the progress of the
  project and distributes this to the syndicate at
  regular intervals
• Monitors the Project Companys compliance with
  the requirements of the financing documentation
  and provides information on this to the syndicate
  banks on the projects progress
• Arranges meetings and site visits as necessary
  for the Project Company and the Sponsors to make
  more formal presentations to the syndicate banks
  on the projects progress
• Organizes discussions with the syndicate and
  Project Company about term of financing
• Takes enforcement action against the Project
  Company or the security after default.

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Other credit mechanisms - Eurocredit
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Other credit mechanisms Buyer Credit
1
Exporter
Project Company
4
3
Exporter Bank
Insurance Company
2
5
Guarantee Institution
Export Credit Agency
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Other credit mechanisms Seller Credit
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Other credit mechanisms Leasing
Bank
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1
Leasing company
Project Company
2
3
5
6
4
Insurance Company
Exporter
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The Roles of the Lenders Advisers

• Legal Adviser
• The legal adviser carry out due diligence on the
  project contract and they assist the banks in
  negotiating the financing documentation
• Lenders Engineer
• A. Due diligence
• Suitability of project site
• Project technology and design
• Experience and suitability of the Constructor
• Technical aspects related to the Construction
  Contract
• Construction costs and the adequacy of the
  allowance for the contingency
• Construction schedule
• Construction and operating permits
• Technical aspects on any Input Supply Contract
  or Project Agreement
• Suitability of the Project Company Management
• Any particular technical issues or risks in
  operation of the project
• Projection of operating assumptions (outputs)
• Projection of operating and maintenance costs.
• B. Monitoring

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The Roles of the Lenders Advisers

• Insurance Advisor is a department of an
  international insurance broker reviews and
  reports any insurance provisions
• Model Auditor review the financial model
  including tax and accounting assumptions and
  verify all the sensitivity scenarios
• Other advisors
• Market advisors when the product is not being
  sold on a long-term contract or when the product
  is dependent on the market conditions
• Fuel or raw material advisors
• Traffic advisors (for infrastructure projects)
• Natural resources advisor.

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Bond issuing

• Bonds provide an important source of project
  finance in certain specific markets (USA, Latin
  America, UK and Australia)
• The bonds are tradable instruments having a
  higher liquidity than loans
• Bonds are purchased by individual investors,
  life insurance companies, pension funds
  (inflation linked bonds presented in the
  exemple).
• Investment grade rating provided by rating
  agency is a key element in the bond investment
  decision
• The American Bond Market is dominated by Rule
  144A bonds (Rule 144A specify that a private
  placement will by not submitted to SEC rules but
  the private investors should keep the bonds for
  at least 2 years in their portfolio, with only
  one exception the Qualified Institutional Buyers
  Institutional Investors with at least 100 mil.
  USD portfolios) the bonds are issued by the
  Project Company and sold to an Investment Bank
  and the bank will resold the bonds to QIBs.
• The British Market is dominated by wrapped
  bonds an AAA insurance company will insure the
  bond issuing for a long period of time (20
  years).

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Indexed Bonds Example
Nominal Return(InterestPrice Appreciation)/Initi
al Price Real Return(1Nominal
Return)/(1Inflation)
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Financial Ratios by Bond Rating Classes
Source Bodie, Kane, Marcus Investment, page
437, McGraw-Hill Irwin, 2003
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Bond Issuing Mechanism (IPO)
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Bonds vs Credits
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Bonds vs Credits
Top lead managers in bond issuing for PF 2001
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International Project Finance Equity instruments

• common stocks
• preferred stocks
• convertible bonds
• bonds with warrant
• depositary receipt

International Equity Market IPOs

• Local IPO with the support of an international
  syndicate
• Local IPO and IPO on an international market
• International IPO (listing the company on
  different markets simultaneously)
• IPO on Euromarkets.

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International Equity Market depositary receipt
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Advantages of the GDRs

• A better diversification of international
  investments
• A very efficient way to access international
  capital markets
• A better image for the beneficiary
• The stockholders are better internationally
  diversified
• A clear and simple mechanism of issuing
• High liquidity operation
• Lower cost for the beneficiary.

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Problems with the GDRs

• Difficulties in the settlement mechanism between
  issuer and depositary bank / foreign investors
  (dividends payments)
• Taxation
• Deposit fees
• Difficulties to find a proper deposit bank in the
  beneficiary country.

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International Equity Market - securitization
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Securitization characteristics

• Income homogenization for a financing company
• The operation is realized by a very specialized
  financial company (the SPV company)
• The issuing of the securities are usually
  guaranteed by government or other public
  institution / agency
• The securities issued should have a well
  developed secondary market in order to ensure a
  high liquidity level for the operation
• Income statement of the beneficiary is
  simplified
• An improvement of financial resources recovery.

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Advantages of the securitization

• Income statements simplification
• Reducing the risk of the company
• Higher liquidity
• Clear and simple operation
• Gathering the funds very quickly
• Assets homogenization.