Project Finance - Session 1 Slides from the class that I delivered at ESADE Business School in Barcelona

1. Project Finance Session 1: Introduction to Project Finance

2. Agenda What is Project Finance? Why use Project Finance? Who uses Project Finance? Separate Incorporation & Contamination Risk The Global Project Finance Market 2009 2

3. What is Project Finance? … the structured financing of a specific economic entity – the SPV, also know as a project company – created by sponsors using equity or mezzanine debt and for which the lender(s) consider the cash flows as being the primary source of loan reimbursement. 2009 3

4. Financing New Projects Normally Two Alternatives: Financed “On” Balance Sheet (Corporate Financing) Sponsors use all the assets and cash flows from existing firm to guarantee the additional credit Drawback: Risk to existing operations Financed “Off” Balance Sheet (Project Financing) Project not successful, project creditors have no claim on the firms’ assets and cash flows. Drawback: structuring & organizing is more costly – approx. 5 – 10% 2009 4

5. Characteristics of Project Finance The debtor is a project company Legally independent from Sponsors The investment is in a Capital Asset Lenders have limited recourse to Sponsors assets Risk (more) Equitably Allocated Cash Flows cover operating costs & debt servicing 2009 5

6. Why Use Project Finance? 2009 6

7. Who uses Project Finance? Industrial Sponsors Upstream / Downstream e.g. BHP Billiton, Rio Tinto, BP Public Sponsors Social Welfare Projects e.g. UK Government (PFI / PPP) etc. Contractors / Suppliers BOT / BOOT e.g. Bechtel (US), Leighton's (AUS) Financial Investors Distressed assets, infra. Funds e.g. MIG, Cintra 2009 7

8. Private Public Partnerships In general, two forms based on a concession agreement: Private Party constructs works that will be used directly by the public administration i.e. hospitals, schools, prisons. Concession provides for construction and operation of the asset (possibly with support of a public grant) i.e. toll roads BOT (Build, Operate & Transfer) BOOT (Build, Own, Operate & Transfer) 2009 8

9. The Project Company 2009 9

10. The Project Company The success of the project depends on the network of contracts and the allocation of risk between the different counterparties Turnkey Construction Contract O&M Agreement Purchasers & Sales Agreement Supply & Raw Material Supply Agreements 2009 10

11. Risk Management Project Finance as a Risk Management Technique System for distributing risk among involved parties Minimizes the volatility of cash inflows & outflows Process of Risk Management Risk Identification Risk Analysis Allocation of Risks (ARTS) Residual Risk Management 2009 11

12. Global Project Finance Market 2009 12

13. Global Project Finance Market Overall Market Declined 61% (YTD, Qtr 3) Telecommunications Projects Increased 36.5% Sasan Power Ltd. (India) – Top Deal $2.8 Billion Dolphin Energy (UAE) – Top EMEA Deal $2.2 Billion 2009 13

14. Global Project Finance Market 2009 14

15. Global Project Finance Market 2009 15

16. Global Project Finance Market 2009 16

17. Global Project Finance Market 2009 17

18. Global Project Finance Market 2009 18

19. EMEA Project Finance Market 2009 19

20. Summary Project Finance relates to financing of capital assets investmentsmade by specific economic entities or project companies (“Off” Balance Sheet) Project Cash-Flows are the primary source of loan reimbursement Project Finance is a Risk Managementtool Over the past 20 years Project Finance has migrated from developed to developing markets 2009 20

21. Case Questions … To be completed and presented in Groups of 3. 2009 21