CARE ADVISORY RESEARCH AND TRAINING LTD Project Finance: Infrastructure and Manufacturing Secrs COURSE DESCRIPTION: Project finance involves limited or non-recourse of a new project in which risks must be fully identified, allocated, and mitigated through a contractual bundle, and involves high leverage as a reward the sponsor for minimized information asymmetry. Successful project calls for multifaceted expertise on the part of the lenders in evaluating the sponsor s execution and financial credentials, technical feasibility, construction, market, regulary legal aspects, and, structure the project as a financially viable entity. Financial literature chronicles the equity-holders (sponsors ) propensity leverage information asymmetry derive undue advantage and shift the risk lenders. Uniqueness and complexities of the projects accentuate this problem. The lenders, therefore, need adopt project appraisal techniques and project structuring eradicate information asymmetry and ensure equitable project risk sharing. COURSE OBJECTIVES: Indian banks high non-performing assets constituting 16% of advances relate mainly project finance assets, and reflect significant inadequacy in project appraisal. The course aims equip the participants with best practices in project finance comprising project finance concepts, appraisal ols and techniques, and impart efficient project appraisal abilities. The course will prepare the participants handle project as seasoned campaigners from the day one through conceptual and practical insights in project. After the course, the participants are expected be able formulate project finance proposals efficiently and raise project finance for their firms, clients, or appraise the projects as lenders. TRAINING METHODOLOGY: The course will be delivered as under. Partly through lectures using PowerPoint, explain the project finance characteristics, and the project formulation,, financial structures, and appraisal process. Case studies: These will be supplemented by rigorous exercises and presentation by the participants on specific aspects. The case studies will include Indian projects as well as those from Harvard Business School. Their use will be meant for inducing clarity in analytical and conceptual rigour needed for project, and adoption in the lending institutions. Infusion of practical approach through exercises on project formulation in India (from project promoters point of view), appraisal (from the lenders point of view) and loan syndication (from arrangers point of view). Financial modelling for efficient botm up approach. The case studies will be a mix of highly successful as well as failed projects so that the participants understand how inadequate risk mitigation can lead failures. These will include Indian projects, and would involve clear comprehension of risk and risk mitigation through project construction and operations The participants will be required come prepared with specific reading / working assignments which will be given in advance. 1
Organization of the course The course will comprise 18 sessions of 1¼ hours each over a three day period as under: Day - 1 Session Duration Coverage Reference / Case study 1 2 9.30 Overview of project finance - What is project finance, - Features of project finance, - Rationale for project finance - Manufacturing and Infrastructure project - Difference in SME / Mid-Corporate Large project Reference: Chapter - 2 of the book Principles of Project Finance by ER Yescombe Case study Feature Film case: To emphasize that the project finance structures emanate from risk sharing / mitigation (The participants are expected read the references / case studies in advance) 3 4 Viability Ratios: DSCR, IRR Vs. WACC, NPV, Loan Life Coverage Ratio (LLCR), Project Life Coverage Ratio (PLCR), Residual Life Ratio (RLR) 1. Project formulation and structuring by the Case study sponsor appraisal by lenders: a. Sponsor appraisal: i. Credentials / financial resources ii. Organization b. Project : Product identification and project sizing c. Technical environmental feasibility, and use of experts for effective evaluation d. Project cost estimation: i. Land ii. Site development iii. Engineering, Procurement, Construction: - Engineering / technical consultancy cost - Procurement of plant machinery, and miscellaneous assets - Construction / erection Financing the Mozal Project (Harvard Business School: Product No. 200005) for aspects relating : - Sponsor credentials / financial resources - Project sizing, EPC structure, and cost estimation - Financial structuring and use of subordinated debt - Role of an effective arranger - Team structure for project appraisal - Alignment of debt servicing with impact of market on the cash flow - Lessons for Indian lenders - Lessons for Indian project sponsors - Lessons for financial consultants The participants must read the case study and come prepared with their analyses on the above for meaningful discussion. 2
- Commissioning - Use of consultants for effective cost evaluation iv. Contingency v. Escalation due inflation vi. Preliminary expenses vii. Pre-operative expenses viii. Interest during construction ix. Margin money for working capital 5 6 3.30 To 6.00 Day - 2 1 2 9.30 3 4 To Means of finance: - Capital structuring - Debt: Rupee / FCL / ECB Bonds ECA structures MLA structures (WB / ADB / MIGA) - Convertibles Project finance structures: - Take out and credit enhancement (IIFCL structures) - Export Credit Agencies (ECA) structures - Public Private Partnership (PPP) structures: BOT, BOOT, BOOST, BOLT, etc. - Use of convertibles - Hybrid structures - Business strategy project development - Market assessment - Sponsor credentials and financial resourcefulness - Risk identification, allocation and mitigation - Capital structure - Management structure - Shareholders agreement - Financial evaluation in dynamic environment - Project finance appraisal issues How the projects fail: Appraisal issues: - Sponsor - Market Mumbai Metro Rail project Use of convertibles: KSK Energy Ventures More caselets will be added Case studies - Australia-Japan Cable: Structuring the Project Company (Harvard Business School: Product No. 203029) - New Tirupur Area Development Corporation Limited Case studies - Dabhol Power Company - Brahmani River Pellets Limited 3
To - Risk handling - Externalities - Moniring - Lenders risk mitigation 5 3.30 6 6.00 1 2 9.30 3 4 Designing effective risk matrix - Richard Tinsley s risk matrix - ER Yescombe s risk matrix - John Finnerty s risk matrix - Designing project specific risk matrix Specifying conditions for debt sanction: - Conditions precedent debt sanction - Conditions precedent drawal - Financial covenants - Other conditions - Project finance documentation - Quiz based on caselets the participants will have respond specific questions Day - 3 Risk handling in different types of infrastructure projects by lenders: - Power generation projects: Coal based / Solar / Hydel - Toll road / Annuity projects - Commodity: Steel - Product: Car (Case study) Banks point of view - Team capacity building for project - Developing secral expertise - Effective moniring and step-in - Developing reliable expert associates Financial projections and calculation of viability ratios: - Designing integrated financial models - Ensuring realistic inputs / assumptions - Viability ratio computations - Base case - Upside case - Downside case - Iridium LLC (Product No. 200039, HBS): Things avoid in project - Mundra Ultra Mega Power Project (small note will be circulated) Case study: GM s plant-x Brazil (A): HBS- TB0201 - Discussion on financial model for: Manufacturing project Infrastructure project - Exercise on: Viability ratio computations Valuation 4
5 3.30 - Valuation - Capital structuring based on anticipated cash flow Transaction advisory aspects Team and capacity building Summary and conclusions Optimum debt-equity ratio Rating Bidding strategy for Vizag SEZ project: - Structure of the RFQ / RFP document - Devising effective bidding parameters - Devising effective Concession / Concession Agreement - What facrs can cause failure 5