ING Natural Resources Asia

Introduction to Project Finance

Contents
1. Introduction
2. What is Project Financing?
3. Project Finance Lenders
4. Fundamentals of Project Assessment
5. Risk Allocation
6. Security Package
7. Introduction to Project Finance Loan Documentation
8. The Current PF Market
9. Practical Examples
10.Case Studies
11.Contact details

2
1. Introduction
▪Many projects require massive amounts of funding and involve high risks.

▪Range of parties involved:

• may include governments, development agencies, export credit agencies, suppliers, purchasers and
contractors as well as borrowers and lenders.
• their interests in making the venture a success might derive from different sets of priorities
• their willingness - and capacity - to accept and share risk in the project will depend not just upon the
financial interest that they have vested in the project but also upon the legal, political and economic
environment in which they are operating
• parties will spread the financing burden and will have recourse to the project’s future cashflows

Project Financing

3
Risk Sharing

Completion Force
Risk? Majeure?

Reserves
Political
Risk? (Natural
Risk?
Resources)

Operating Price Environmental

Market Risk?
Risk? Risk? Risk?

4
2. What is Project Financing?

5
2. What is Project Financing?
▪ “Project Finance” is the arrangement of debt, equity and/or credit enhancement for the construction
and/or operations of a particular facility in a capital-intensive industry.
▪ In project finance, lenders gain comfort from and base their credit approvals on the projected cash
flows from the operation of the project rather than the general assets or corporate credit of the project
sponsors.
▪ The credit decision is not based on a balance sheet & income statement of an established company.
▪ The borrower is in most cases a new start up “special purpose vehicle”.
▪ Repayment is based on projected cash flow, which is governed by contracts over a defined period.
▪ Traditional project finance structures can range from non-recourse (where the reliance is completely
on the merits of the project) to limited recourse (where the sponsors can provide technical, operational
and even financial support).
▪ Lenders will concern themselves closely with the feasibility of the project and its sensitivity to the
impact of potentially adverse factors.
▪ A successful structure will entail a satisfactory and economic allocation of project risk among the
various interested parties.
▪ The extent to which any party will be willing to accept project risk depends on its ability to understand,
manage and mitigate the risk and the return it anticipates that it will receive for taking that risk.

6
What is limited recourse financing?

Full-Recourse
Project
Financing
Equity
Repayment of loan fully Project sponsors Funding
guaranteed by project
sponsors.

Guarantee
Debt
Funding &
Repayment

Banks

7
What is limited recourse financing?
Limited Recourse
Financing Project

Equity
Repayment of loans directly Project sponsors Funding
related to the success of the
project, with limited support
from the project sponsors
(e.g. through a completion
Limited support (e.g.
guarantee during
completion guarantee or Debt
construction or through contingent equity in place) Funding &
contingent equity in place). Repayment

Banks

8
What is limited recourse financing?
Non-Recourse
Financing Project

Equity
Repayment of loans solely Project sponsors Funding
dependent on the success of
the project.

Debt
Funding &
Repayment

Banks

9
When is Limited Recourse Project Financing used?
When?

▪ large capital investment required up-front (e.g.):

• upstream oil & gas developments
• pipelines / refineries / petrochemicals / vessels
• large scale infrastructure
• power projects
▪ when one of the project sponsors / partners is financially constrained
▪ when the project will produce a defined revenue stream that lenders can base a credit decision on
▪ privatisation public sector (reduce public debt)
▪ joint ventures: Match business risk with appropriate cost of funding
▪ explicit risk allocation between sponsors and lenders: e.g. political risks
▪ project assets and cash flows can be ring-fenced
▪ economics and risks are transparent

10
When is Limited Recourse Project Financing used?
Advantages

▪ Limitation of recourse. Sponsors are able to finance large-scale projects which will have less of an
impact on their balance sheet than corporate borrowing, enabling them to protect their assets from
difficulties particular to an isolated project .
▪ Non-restrictive covenants. Clauses such as cross-defaults that could prevent the development of a
project are removed since its operations are not influenced by external defaults.
▪ Potentially favorable financing terms. Projects may enjoy a better credit rating than sponsors due
to the structure of cash flows. In this instance, project financing will enable projects to be developed
regardless of the financial condition of sponsors.
▪ Political risk diversification. For sponsors with operations around the world, project finance enables
risks to be ring-fenced in specific countries without events in one country contaminating others.
▪ Optimal risk sharing. Project finance enables project-related risks to be allocated to those parties
best able to price and absorb them. This improves the success profile of a project since all parties have
an economic interest in achieving project close.
▪ Favorable accounting treatment. Although true off balance sheet treatment is seldom achieved,
favorable accounting treatment for the Sponsors is still possible, and rating agencies will treat the
(limited or non-recourse) project finance debt more favorable than corporate borrowing.

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When is Limited Recourse Project Financing used?
Disadvantages

▪ Timeliness. Project finance deals do take considerably longer to put in place than corporate facilities,
particularly where ECAs or other agencies are involved.
▪ Complexity. Project financing requires complex contractual arrangements to be put in place, with
tight documentation and a high level of disclosure from the sponsors / project to lenders.
▪ Costs. For a creditworthy sponsor, project financing seldom results in a lower costs of funds for that
sponsor. The initial costs can be quite high as well, especially the legal costs associated with the
complex documentation.
▪ Recourse. Although Project finance is meant to be limited recourse, whenever something goes wrong
with the project the first place the lenders look is to the sponsors.
▪ Administrative burden. Apart from the initial documentary complexities, project lenders also have
on-going monitoring requirements and where ECAs or other agencies are involved these can be quite
burdensome.

The advantages and disadvantages will have to be analysed for each of the project
sponsors, each of which may have different objectives.

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Objectives of the Project and Sponsors

Typically, a key
objective of the
Constraints Details Objectives
project and its
sponsors is to Limiting the amount of equity required Maximise amount
Balance sheet
Limiting sponsors’ exposure to project of limited recourse
maximize the amount constraints
risks debt
of equity risks that
Size of the Liquidity within international and Tap largest pool of
are allocated to intended financing domestic markets for long-dated tenors potential lenders
lenders for fixed
Minimise lead time
returns. Target COD date; penalty for delays
Milestones for project
Fixed construction schedule
financing
Competition between potential lenders Competitive
Competition
to obtain optimal terms and conditions pressure amongst
among lenders
Obtaining domestic fixed rate financing potential arrangers

Sources of Mix of domestic and foreign lenders Achieve the right

financing ECA and multilateral participation currency mix

Key risks Well structured

(dynamic EPC / Fuel Supply / O&M agreements and
commercial and Foreign currency / Interest rate risks financing
financial)

13
Objectives of the Project and Sponsors
Objectives Details

▪ Minimize the sponsors’ direct equity contribution through subordinated financing structures and
Maximise amount contingencies
of limited recourse ▪ Maximise limited recourse debt, effectively protecting project sponsors
debt ▪ Maximise the sponsors’ equity IRR through leverage

▪ Maximise liquidity for the transaction by tapping the right pool of lenders
Tap largest pool of
potential lenders ▪ Involve ECAs and multilateral agencies to address political risk issue and for direct lending

Minimise lead time ▪ To quickly execute the financing plan enabling the project to meet the targeted timetable
for project
financing

Competition ▪ To achieve the most competitive financing through tight commercial contracts and by introducing
amongst potential competitive pressure among potential arrangers
arrangers

▪ Balance FX risk in terms of EPC cost, tariff structure and financing cost available
Achieve the right ▪ Optimize the currency mix in terms of float/fixed and return enhancing structures
currency mix

Well structured ▪ To minimize various financial risks which may negatively affect the Project and shareholder returns
agreements and ▪ To achieve a balance of appetite, pricing, liquidity and risk
financing

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Key Project and Financing Issues
In project finance, the
Project and its sponsors
need to focus on extracting
value in three key areas: RETURN
RISK MITIGANTS
ENHANCEMENTS
1) Mitigating Risk; Environmental clearance Avoidance of WHT
Turnkey EPC Contract Tax shields after tax holidays
2) Enhancing Returns; and Sizing LDs with market standard Shareholder loans / Sub debt
Performance guarantees Equity bridging structures
Matching tariff indexation with funding Back-ended equity
3) Optimizing the Financing Project
Fixed rate funding Development Fee
Plan. Standard insurance package and
Expense recovery
Sponsors
Accelerated D/Es
FINANCING

The dynamics between each

OPTIMAL FINANCING PLAN ISSUES
of these three areas need to
Indexation in project tariff Depth and liquidity of funding markets
be balanced, such that the ECA involvement (PRI and direct loans) Avoidance of WHT
ECA and Insurer premium Lender experience in project finance
pursuit of one does not Interest rate pricing advantages Minimisation of Lender fees
adversely impact the Ability to achieve long-term fixed rate funding Terms and conditions
Syndication strategy and flexibility Flexibility to refinance
achievement of the others.

15
3. Project Finance Lenders

16
Project Finance Lenders
The location of the project will often dictate which lenders are willing to provide funding to the project.

The financial institutions typically involved in a project financing are:

▪ Commercial Banks
▪ Export Credit Agencies
▪ Bilateral Agencies
• e.g. FMO, KfW
▪ Multilateral Agencies
• Asian Development Bank
• World Bank
• MIGA
• IFC,etc
▪ Debt Capital Markets / Project Bonds
▪ Islamic Financing

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Commercial Banks
Finance Parties

Commercial Banks Project

- Commercial Banks

- Export Credit Agencies

- Bilateral Agencies General:

- e.g. FMO ✓flexibility in structures and tranches
✓strong appetite for high yield, well-structured project financings
✓both domestic and international banking market can be tapped
- Multilateral Agencies ✓clean country risk exposure limits scarce: provisioning requirements for commercial banks.
✓country risk credit enhancement often needed through:
> Asian Development Bank  offshore escrow account
> World Bank  Export Credit Agencies
 Bilateral Agencies
> MIGA  World Bank
> IFC  MIGA
 IFC, etc
Relevance to projects with higher country risk:
- DCM / Project Bonds
Commercial Banks are willing to lend to some projects without having direct political risk
insurance, however they may require a parallel tranche of debt that has the involvement of
- Islamic Financing an Multilateral Agency (“ML”) / ECA (acceptable sweet / sour ratio)

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Export Credit Agencies
Finance Parties
Commercial Banks Project
- Commercial Banks

- Export Credit Guarantee

Agencies ECA

General:
- Bilateral Agencies
✓large amounts and long maturities; OECD guidelines allow for up to 14 years
- e.g. FMO ✓limited / tied to equipment sourcing: up to 85% of exported equipment and up to 15% of
- Multilateral Agencies related local costs
✓ECAs enhance liquidity, and some ECAs can make direct loans (e.g. K-Exim, JBIC)
> Asian ✓typically up to 90%-100% cover for political risks
Development ✓usually up to 90-100% cover for commercial risks
✓flexible structures
Bank ✓time consuming process
> World Bank ✓high fees up-front and low interest rate
✓most active ECAs: Sinosure, China Exim, JBIC / Nexi, K-Exim, Ksure, US-Exim, SACE,
> MIGA ECGD, Atradius, COFACE, Hermes / KfW
> IFC
Relevance to projects with higher country risk:
✓multiple political risk cover required
- DCM / Project Bonds ✓ECAs may be restricted by lack of available cover or experience regarding the region
✓most important source of financing for projects in high risk countries under the current market
circumstances
- Islamic Financing ✓OECD equipment sourcing may be more expensive than other sourcing

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Bilateral Agencies

Finance Parties Bilateral Agency

Guarantee
- Commercial Banks

Commercial Banks Project

- Export Credit Agencies

General:
- Bilateral Agencies
✓involvement evaluated by FMO on a case by case basis
- e.g. FMO ✓no host government guarantee required
✓strict on environmental standards
✓eager to increase exposure to emerging markets
- Multilateral Agencies ✓tenor up to 15 yrs, typically 7-12 yrs
✓not directly linked to a country’s specific goods and services, but some sourcing required
> Asian Development
Bank
> World Bank
> MIGA
> IFC

- DCM / Project Bonds

- Islamic Financing
Multilateral Agencies

Finance Parties Commercial Banks IFC and / or ADB A-Loan

- Commercial Banks

IFC and / or ADB B-Loan Project

- Export Credit Agencies

General
- Bilateral Agencies
✓lending only to private sector
- e.g. OPIC ✓IFC understand project financing
✓up to USD 100 mln A-loans and USD 200 mln B-loans (can be higher on case-by-case
basis)
- Multilateral Agencies ✓no explicit transfer & conversion guarantee, but IFC loans have never been rescheduled
(preferred creditor status)
> Asian Development ✓tenor up to 10 years (typically 5-7 years)
Bank ✓tenor A-loan potentially longer than B-loan
> World Bank ✓A- and B-loan drawdown: approximately pro rata
✓IFC can take equity investments as well
> MIGA
Relevance to projects with higher country risk:
> IFC
✓strict on environmental issues
✓mitigates transfer & conversion risk
- DCM / Project Bonds ✓slow decision-making process
✓success of B-loans depending on market circumstances and “sweet-sour” ratio
✓sponsor support required during syndication: relationship banks
- Islamic Financing ✓could serve as nucleus financing, with other institutions relying to a great extent upon IFC’s /
ADB’s project due diligence
Multilateral Agencies

Finance Parties MIGA* Insurance Project Owner

Insurance
- Commercial Banks

Commercial Banks Project

- Export Credit Agencies

General:
- Bilateral Agencies
✓MIGA cover is limited to USD 200 mln per project: debt and equity
- e.g. OPIC ✓covers political risks up to 90% only
✓MIGA cover is only available to projects which are at least 51% privately owned
✓to insure debt, MIGA requires that equity be insured at a ratio of one part equity to ten parts
- Multilateral Agencies debt
✓larger amounts (up to USD 400 mln) of cover are available through re-insurance and co-
> Asian Development insurance programs with other development agencies or private insurers
Bank ✓tenor: up to 15-20 years
> World Bank ✓needs host government acknowledgements

> MIGA Relevance to projects with higher country risk:

> IFC ✓multiple political risk cover required

✓strict on environmental issues (World Bank guidelines)
✓can share due diligence with other World Bank institutions such as the IFC
- DCM / Project Bonds ✓MIGA requires a pledge of the project shares
✓can arrange cover faster than most of the ECAs

- Islamic Financing

*Multilateral Investment Guarantee Agency

Multilateral Agencies

Finance Parties
World Bank Government

- Commercial Banks Guarantee

Commercial Banks Project

- Export Credit Agencies

General:
- Bilateral Agencies
✓World Bank Partial Risk Guarantee: can cover breach of sovereign contractual undertakings
- e.g. OPIC ✓World Bank Partial Credit Guarantee: can cover all risks to extend maturities
✓IBRD lending: can lend at favourable terms to governments and government onlends at
commercial terms to the project
- Multilateral Agencies ✓sovereign counter guarantees required for risks covered
> Asian Development ✓in lower income countries: soft IDA credits
Bank ✓tenor: up to 15 years

> World Bank Relevance to projects with higher country risk:

> MIGA ✓multiple political risk cover required

✓depends on whether the host country governments are willing to issue state guarantees
> IFC ✓application process is time consuming
✓Partial Risk Guarantee and Partial Credit Guarantee: few benchmark transactions so far
✓strict on environmental issues
- DCM / Project Bonds

- Islamic Financing
DCM / Project Bonds

Finance Parties
Bond investors Project
- Commercial Banks

General
- Export Credit Agencies
✓USD traditional private placement: sold to sophisticated US investors who do not require
liquidity nor a rating;
- Bilateral Agencies ✓144A private placement (up to USD 100 mln): sold to qualified institutional buyers in the US;
requires liquidity and a rating from S&P / Moody’s
- e.g. OPIC ✓144A / Reg S (above USD 100 mln): similar to 144A, but broader investor base because it
can also be sold to investors outside the US
✓public bond: generally the cheapest funding source as it is sold to the broadest investor
base, but requires SEC registration and US GAAP financials
- Multilateral Agencies ✓bonds in general: (i) faster execution, more flexible and longer maturities than commercial
> Asian Development banks, but (ii) more difficult workout schedule, less flexible drawdowns and prepayments
Bank Relevance to projects with higher country risk:
> World Bank ✓cannot be used as a nucleus financing
> MIGA ✓to raise the largest amount possible without having to officially register with the SEC, a 144A
/ Reg S offering seems the best alternative
> IFC ✓substantial amount and cheap funding only if investment grade rating (> BBB-)
✓Relatively limited appetite in the market unless (i) political risk insured by bilateral agencies
and multilateral agencies (e.g. World Bank), or (ii) umbrella structure with IFC or ADB, and (iii)
- DCM / Project Bonds construction risk is mitigated

- Islamic Financing
Islamic Financing
Murabaha (Credit Sale) Financing – WC Financing

Finance Parties
Project (as Agent Cost
Financier
- Commercial Banks of Financiers)

1. Spot purchase of 2. Sale of goods (on Cost +

- Export Credit Agencies goods from Supplier
Cost deferred terms) to Project Profit

- Bilateral Agencies
Supplier Project
- e.g. OPIC

- Multilateral Agencies
> Asian Development General:
Bank ✓comparable to trade term loan facility
> World Bank ✓can be secured or unsecured
✓used to finance purchase of raw material and inventory, equipment and machinery or shares
> MIGA and commodity warrants
> IFC ✓tenor: 1-18 months
✓pricing: comparable to conventional pricing

- DCM / Project Bonds

- Islamic Financing
 Islamic Financing
Lease (Ijara) Financing: Example of Forward Lease – Term Financing

Finance Parties Istisna Ijara

- Commercial Banks Financier Financier

2. Financier enters into Works Purchase 1. Financier forward-leases 3. Customer delivers the
- Export Credit Agencies Contract with the Customer Price the assets assets to the Financier

Project Project
- Bilateral Agencies
- e.g. OPIC 2. Contractor delivers
Price EPC Contract
the assets

Contractor Contractor
- Multilateral Agencies
> African
Development Bank General:
> World Bank ✓Ijara financing is comparable to project and asset finance on either a Fixed Rate or
Variable Rate
> MIGA
✓three types: Direct Lease, Sale & Lease-back and Forward Lease
> IFC ✓can be a secured financing
✓used in consumer financing (car and house financing), infrastructure projects and big
ticket assets like aircraft, LNG carriers, oil rigs, industrial plants, etc
- DCM / Project Bonds ✓tenor for USD facility: 5-10 years
✓tenor for local currency facility: can be more than 10 years
✓pricing comparable to conventional pricing
- Islamic Financing
Funding Challenge - Sponsor Goals

▪ The sponsors’ focus is to maximize equity return and ensure the realization of the project.

▪ The path to this decision requires the prioritizing, and then management, of fundamental and often
opposing, goals:
› Maximize debt tenor?
› Minimize cost of debt?
› Minimize covenant restrictions?
› Maximize flexibility post-closing?
› Minimise time to achieve closing

▪ These complications are further amplified when working in the Emerging Markets.
The Financing Options - Overview of Investor
Profiles
Sponsors must balance a number of factors when raising debt from the various lenders.

Commercial Multilateral Export Other Capital

Banks Agencies Credit Bilateral Markets
Agencies Agencies
▪ Least expensive pricing 1 2 3 2 2

▪ Longest tenors available 3* 1 2 1 1

▪ Most flexible covenants 2 3 3 2 1

▪ Ability to proceed 1 3 3 2 1

expeditiously to closing

Note: Asia is not a homogeneous region. Each country must be evaluated case by case.
Developing the Optimal Financing Plan

▪ The optimal financing plan must balance the key objectives of the sponsors against the unique
advantages and limitations of each pool of financing being considered, including USD and local-
currency denominated debt, hybrid financing instruments, shareholder loans and straight equity.

▪ Several factors must therefore be considered in developing the right mix of debt and equity as well
as the right mix of local currency and USD denominated debt. These factors may move the decision
point from a strict matching of the tariff indexation found in the Offtake Agreement to a slightly
different mix of USD and local currency debt.

HYBRID
DEBT FINANCING (USD/Local Currency) EQUITY FINANCING
INSTRUMENTS

Equity
Tariff Market Interest Shareholder
Pricing Tenor FX Risk Accounting WHT Dividends Bridge
Structure Liquidity Rate Risk Loan and Sub Debt
Loan
4. Fundamentals of Project Assessment
Risk Analysis

Project Financing risks

may be divided into Project Risks External Risks Financing Risks
various categories. The
inability to find
appropriate mitigation
▪ Completion and ▪ Fuel Supplies ▪ Floating Interest
strategies for each of
Construction ▪ Demand and Market Rates
these risks may result in
the inability of the ▪ Cost Overruns ▪ Environmental ▪ Exchange Rate
project to pay debt ▪ Technology ▪ Infrastructure
service.
▪ Operating ▪ Political
▪ Sponsor ▪ Regulatory
▪ Force Majeure
▪ Exchange Rate
▪ Inflation
Project Financing Criteria

Technical feasibility of the project

▪ What is proposed to be done?
▪ Is the proposal fully justified?
▪ What are the technical risks and uncertainties?
▪ Is the proposed phasing of implementation realistic?

In satisfying itself as to the technical feasibility of a project, a lender will usually rely on a feasibility study
put together by independent experts. There is a preference for the adoption of tried and tested
technology.

Economic viability (the economic test)

The economic test must show that, on the basis of cash flow projections, sufficient cash will be
generated by the project to pay for all operating expenses, debt service, taxes, royalties and other costs
(with ample cushion for contingencies such as changes in exchange and interest rates, inflation and
market demand) and to leave a surplus for the project company to meet its target for return on equity.
Project Financing Criteria

Country Risk / Host Government Support

Lenders will need to be comfortable with any country risk, and if they are not comfortable with taking
country risk that it is insured by an agency which specialises in political risk insurance.
Under all circumstances due diligence must confirm that the project has the full support, explicit
demonstration of this may be required (via a law), of the host governments.

Market Risk
Satisfactory due diligence will have to be performed to get the lenders comfortable with both the offtake
and payment risk of the offtakers.

Contractual Structure
All documentation (financing and project) must be seamless and complementary. Additionally, where
allowable it should be governed by an acceptable law, and allow for international arbitration.
Credit Base

Lenders to a project on
a limited recourse Long-Term Contracts
basis should consider
the following points in
their credit
assessment. Creditworthy Offtakers

Reliable Suppliers of Inputs and Services

Limited Recourse
Financing
Sponsor Support Performance Obligations

Government Undertakings

Quality of Asset and Cash Flows

Sources of Repayment

Project Finance may

be characterized Strong Consistent Cash Flows
primarily as cash-
flow based lending
where potential
Debt Reserve Funds
sponsor support is
only called upon in
the instance of any
cash shortfall. Letters of Credit
Debt Service

Contingent Equity (if required)

Government Guarantees of Offtakers

Exercise of Collateral
5. Risk Allocation
Risk Allocation

Operating Cash flow

1. Project risks 30 costs

Pre-completion 20

- Political 10

- Construction
0
Post-completion
1 2 3 4 5 6 7 8 9 10 11 12
- Operating -10

- Market / volume Depending on:

-20

- Price ➢ type of project risk

-30
➢ type of lending party
- Environmental
➢ pre- or post completion
- Political -40
there will be a different risk
- Force Majeure sharing arrangement.
-50
Capital
expenditures
-60
 Risk Allocation

Financial
2. Completion Test 30 Completion

20
Technical Test
Physical
- physical completion Completion
10
- capacity test met
- efficiency test met
- offshore payment test met 0

Legal Test 1 2 3 4 5 6 7 8 9 10 11 12
-10

- licenses, permits, etc.

-20
Environmental Test

- oil spill plans, etc. -30

Economic Test
-40

- loan life cover ratio Limited lenders’ Extensive

- debt service cover ratio risk appetite - Risk lenders’
-50
- reserve tail offset with Completion risk
- DSRA Guarantees. Turnkey appetite
-60
EPC Contracts
Risk Allocation

Risks: Mitigants:
3. Risk sharing ▪ political violence (war and terrorism) ▪ completion guarantee from
(overseas) sponsor(s)
▪ expropriation
Pre-completion ▪ project of strategic importance to host
▪ Breach of Contract country
- Political
▪ ECA or Multilateral Agency
- Construction involvement

Post-completion

- Operating

- Market Lenders will expect host country Central Bank approved offshore payment structure and
political risk cover from ECAs / MLAs / PRI and government support. ECA / MLA / PRI will
- Price usually only cover risks that are within a reasonably control of the governments. Other risks
would have to be guaranteed by the project owners. Lenders may require direct agreements
- Environmental with the governments.
- Political

- Force Majeure
Risk Allocation

Subject to acceptable
3. Risk sharing Equity MLAs / Commercial Capital sweet (with political
Investor ECAs Banks Markets risk cover) / sour ratio
(no political risk cover)
Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure
Risk Allocation

Risks: Mitigants:
▪ risk that some of the project owners ▪ contingent equity from relevant
cannot fund their equity cash calls for sponsor on escrow account prior to
3. Risk sharing
the project construction start

Pre-completion ▪ development construction delays: ▪ sponsor completion guarantee linked

upstream, midstream and to co-completion of upstream and/or
- Political downstream downstream projects

- Construction ▪ shortfalls in expected capacity, ▪ strong “fixed price, date certain turn
output, efficiency or product quality key” EPC contract to be in place with
Post-completion reputable and experienced EPC
▪ cost overruns: supplies, contractor
transportation, machinery, equipment,
- Operating
raw materials, cost of contractors and ▪ EPC contract to be in place with
- Market labour adequate liquidated damages
payable by the EPC contractor in the
▪ availability of land, building materials, event project specifications are not
- Price
energy, raw materials and according to design
- Environmental transportation
▪ adequate insurance to be in place
▪ availability of work force,
- Political
management personnel and reliable Lenders may expect guarantees from the
- Force Majeure contractors project owners for repayment of their
loans if the project is not completed for
▪ force majeure: events beyond reasons other than political events.
reasonable control of the project In case of multiple guarantors, the
owners, including fire, flood, blended credit rating should be
earthquake, etc. but only to the extent acceptable to the lenders.
not caused by political events
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure
Risk Allocation

Risks: Mitigants:
▪ quality and experience of the operator ▪ operating & maintenance (“O&M”)
3. Risk sharing and the project management agreement with reputable and
experienced party
▪ level of fixed and variable operating
Pre-completion costs ▪ appointing an O&M contractor with a
direct interest in the project (e.g.
- Political
▪ labour / union problems
sponsor, supplier or offtaker)
▪ changes in standard operating
- Construction ▪ long term supply agreements for
practices
materials and feedstock, either fixed
Post-completion ▪ type of technology being used: are price or linked to product’s sales price
facilities projected to remain
- Reserves ▪ adequate insurance to be in place
technologically competitive?
▪ adequate hedging to be in place to
- Operating ▪ logistics, supply and price of
address interest rate risk and
materials and feedstock
- Market potential currency mismatch
▪ financial risks: exchange rate
▪ project to be of strategic importance
- Price (devaluation) and interest rate
to the host government
fluctuations
- Environmental ▪ ECA or Multilateral Agency involved
▪ insurance risk: business interruption,
- Political etc.
Lenders will expect a top quality operator
- Force Majeure ▪ legal risk: change in law (e.g. tax, with a track record on a cost, management
environment), enforceability of and technical level.
security package, etc. Lenders will expect environmental and
sponsor lock-in covenants as well as
adequate insurance.
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure
Risk Allocation

Risks: Mitigants:
3. Risk sharing ▪ market demand for the product: local ▪ long term offtake agreements to be in
and export place for the project’s product
Pre-completion ▪ impact of supply on the market ▪ offtakers to be reputable and
creditworthy counterparties
- Political ▪ multiple markets competing for supply
▪ opinion from a reputable independent
- Construction ▪ availability of transportation systems: market consultant confirming the
pipelines, cargoes, etc. rationale for construction of the
Post-completion project (addressing supply, demand
▪ rival sources of supply: existing and
planned and price issues)
- Reserves
▪ buyers’ payment risk
- Operating

- Market

- Price

- Environmental

- Political

- Force Majeure Lenders will require export routes to creditworthy offtakers.

Lenders will expect arm’s length sales contracts and infrastructure sharing agreements.
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure
Risk Allocation

Risks: Mitigants:
3. Risk sharing ▪ Potential drop in product prices ▪ Long term contracts in place with
fixed price components
▪ Potential increase in feedstock prices
Pre-completion ▪ Long term contracts in place with
product sales prices linked to
- Political feedstock prices
- Construction ▪ opinion from a reputable independent
market consultant confirming the
Post-completion rationale for construction of the
project (addressing supply, demand
- Reserves and price issues)
- Operating Volatility of e.g. oil prices: Brent Spot Prices for the period 1/1/1999 - 10/2/2009
160

- Market 140

120

- Price Lenders will expect

100
acceptable debt service cover
ratios under base case oil
USD

- Environmental 80

60
prices as well as acceptable
- Political break-even oil / gas prices for
40
each repayment period and
- Force Majeure 20 over the life of the loans.
0
Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09
Risk Allocation

▪ The project’s cashflows will be projected using parameters from the various
project agreements, with assumptions confirmed by independent technical and
3. Risk sharing market consultants
▪ Prior to financial close the debt service capacity of the project will be assessed
Pre-completion
with certain financial ratios such as (i) the Debt Service Cover Ratio (“DSCR”) and
- Political the Loan Life Cover Ratio (“LLCR”), and will be monitored / tested throughout the
tenor of the financing
- Construction
Cash flow for available for debt
service
Post-completion
20
- Reserves Interest

10
- Operating Principal

- Market 0

- Price 3 4 5 6 7 8 9 10 11 12
-10
- Environmental
Completion and ongoing tests for:
-20
- Political DSCR
- Force Majeure -30
LLCR

-40
Risk Allocation

▪ DSCR = Debt Service Cover Ratio

3. Risk sharing
= Cash Flow Available for Debt Service (CFADS) / Debt Service (DS)

Pre-completion = (Gross Revenues - Operating Cost - Ongoing Capital Expenditures - Taxes) /

(Principal + Interest)
- Political A period by period test to check that the Project is generating sufficient cash
flow to service the debt.
- Construction

Post-completion ▪ LLCR = Loan Life Cover Ratio

- Reserves = NPV (CFADS, Discount Rate) / Outstanding Balance

- Operating A life of loan test, to check that over the life of the loan the project generates
sufficient cash flow to service the debt.
- Market

- Price

- Environmental

- Political

- Force Majeure
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure
Risk Allocation

Risks: Mitigants:
3. Risk sharing ▪ specific areas of interest will include, ▪ sponsors, EPC contractor and O&M
but not limited to: contractor to work according to
transparant HSE principles
Pre-completion - indigenous people and involuntary
resettlement ▪ appointment of independent
- Political environmental consultant guiding the
- loss of biodiversity and natural project parties
- Construction habitat: air, land and water
▪ involvement of Multilateral Agency
Post-completion - gas flaring, air emission, ground (e.g. IFC)
water contamination, ambient noise
- Reserves
- oil spill response plans
- Operating - revenue management plan
- Market ▪ seismic risks due to the active
geophysical faults in the region and
- Price the terrorist / guerilla activities, both
of which could disrupt exports
- Environmental
materially and pollute large areas
- Political

- Force Majeure Lenders will expect the involvement of an environmental consultant, environmental spill
plans and ongoing environmental reports / monitoring.
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure
Risk Allocation

Risks: Mitigants:
3. Risk sharing ▪ Political Violence (War and Terrorism) ▪ project to be of strategic importance
to host country
▪ Transfer and Currency Convertibility
Pre-completion risk ▪ involvement of ECA or Multilateral
Agency
- Political ▪ Expropriation
▪ offshore repayment structure
- Construction ▪ Breach of Contract

Post-completion

- Reserves

- Operating

- Market
Lenders will expect Central Bank approved offshore payment structure and political risk
- Price cover from ECAs / MLs / PRI and government support.
ECA / MLA / PRI will usually only cover risks that are within a reasonably control of the
- Environmental governments. Lenders may require direct agreements with the governments.

- Political

- Force Majeure
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market

- Price Will not accept risk

- Environmental

- Political

- Force Majeure

Subject to acceptable
sweet / sour ratio
Risk Allocation

Risks: Mitigants:

3. Risk sharing ▪ political risk not covered by the ECAs ▪ Good assessment of potential force
majeure risks associated to the
▪ accidental flood project and geographic area
Pre-completion
▪ accidental fire ▪ Insurance
- Political
▪ accidental explosion
- Construction
▪ earthquake
Post-completion
▪ acts of man (strikes)
- Reserves

- Operating
Lenders could accept these risks after completion, but only to the extent that there is no
- Market insurance market for it.

- Price

- Environmental

- Political

- Force Majeure
Risk Allocation

3. Risk sharing Equity MLAs / Commercial Capital

Investor ECAs Banks Markets

Pre-completion

- Political

- Construction Legend:

Post-completion
Accept risk
- Operating
May not accept risk
- Market
Will not accept risk
- Price

- Environmental

- Political

- Force Majeure
Risk Allocation

4. Financial model REVIEW

Modelling
by
The lenders will test the project’s Bank / FA
Independent Advisers
ability to withstand adverse
conditions.

The main parameters will

include:
INPUT
- debt service cover ratio
- loan life cover ratio ▪ oil price
- project life cover ratio ▪ costs (capex, opex)
- reserve tail (if applicable) ▪ planning
Independent
- alternative offtake routes ▪ financing costs
Auditor
- debt service reserve account ▪ tax
- upside mandatory ▪ inflation
prepayments SENSITIVITIES
> oil price ▪ low oil price
> reserves ▪ high costs OUTPUT
- downside mandatory ▪ delay in start up
prepayments ▪ high interest
> oil price
> reserves
▪ Cover Ratios
These tests would typically be ▪ Financial Statements
applied at completion and
thereafter on an ongoing basis.
Risk Allocation (e.g. Oil / gas Project)

Political Technical Commercial

5. Chain of projects Risk Risk Risk

SUBSURFACE SURFACE LIQUEFACTION, STORAGE SHIPPING END-USER

DEVELOPMENT DEVELOPMENT AND LOADING
UPSTREAM DOWNSTREAM

Production

Liquefaction plant Regasification

plant
Gas Gas
Separation LNG storage LNG storage transmission
Treatment Loading Unloading
and distribution
Gas Transport
(pipeline-360km)

Condensate
Gas For export or
Reserves Gas Liquids local use
storage
Risk Allocation: Documentation

Because of the limited recourse nature of a typical Project Finance transaction as well as the
optimisation of risk distribution, documentation tends to be more structured and complex..

Project Documents Financial Documents Security Documents Other Documents

• Offtake Agreements • Onshore and • Asset Mortgage • Political Risk

• O&M and Project Offshore Facility • Escrow Agreements Coverage
management Agreements • Contingent Equity
• Trust Agreements
agreements • Common Terms Support
Agreements • Pledge of Shares
• EPC Contract • Government
• Hedging • Security Sharing Undertakings
• Supply Contracts Agreements
• Performance • Insurance
Guarantees
• Technical
Agreements
Risk Allocation

6. Risk sharing parties Sponsor

Offtaker Constructor

Conclusion:

Insurers Project Operator

Risks are being allocated
Company
to parties who are best
placed to manage those
risks.

Buyer Government

Lenders
6. Security Package
Security Package

The lenders will seek a The lenders’ main legal concerns are:
legal opinion on the
enforceability of the ▪ ensuring that they can take “security” (= step-in rights, ownership rights) over the
security package under the
contracts; and
relevant legal systems.
▪ ensuring that the key contracts remain in place if and when they enforce security.

To the extent that the

lenders feel themselves There are at least two reasons for taking security:
exposed to uncertainty,
they may wish to: ▪ security serves a defensive as well as offensive purpose: no one else can take
security over it; and
- be indemnified by the
▪ security may entitle lenders to use an asset as opposed to merely selling it.
project sponsors in case of
unenforceability of the
security package caused
by local law issues; and The security package would typically include the following:

- enter into “direct ▪ assignment of the sponsors’ rights under all the project contracts;
agreements” with the
▪ pledge of the project shares;
relevant governments and
other parties to obtain ▪ pledge of the offshore escrow accounts;
certain acknowledgements
or undertakings, some of ▪ assignment of the insurance proceeds; and
which may have to be
enacted by law. ▪ lien on the physical project assets’: equipment, goods in transit, etc.
Security Package

▪ Project Finance makes it necessary to secure the financing with the ability to either prevent the
disposal of the assets without lender consent or to exercise step-in rights to replace the existing
operator with one assigned by the lenders.

▪ Typical security packages consist of the following:

ASSIGNMENT OF RIGHTS
INTANGIBLE ASSETS
• Construction contracts
• Pledge of shares in the • Concession and operating
Project company rights
• Dividend rights • Offtake agreements
• Supply contracts
• Joint venture agreements
SECURITY
TANGIBLE ASSETS ESCROW ACCOUNTS
• The Project • Sinking funds
• Equipment • Debt service
• Inventory CREDIT SUPPORT
reserves
• Sponsor support undertakings • Project accounts
• Export Credit Agency support
• Government undertakings
7. Introduction to Project Finance Loan
Documentation
Introducing a Financing Term Sheet

• Purpose

- Describe key terms and conditions of the financing plan and structure sought by the Project Company/Borrower from
the financial markets

- Drafted by the Project Company’s financial adviser and international legal counsel and reviewed and approved by the
Project Company and its Shareholders

- Should be as detailed as possible so that it can be easily converted into finance documentation

- It is not legally binding but should be accepted by Lenders as part of their commitment to the Project

- Common Terms Agreement: this is required when there are several classes of Lenders involved such as ECAs and
banks

• Parties

• Financial Terms

- amount and tranches

- purpose

- tenor

- availability

- repayment, prepayment and final maturity

- fees, expenses, interest rate and margins

Introducing a Financing Term Sheet (cont’d)

• Conditions precedent to initial drawdown and subsequent drawdowns

• Representations, undertakings, covenants and Events of Default

• Project forecasts and debt coverage ratios tests

• Security

• Taxes

• Governing law and jurisdiction

Sponsor Perspective vs. Bank Perspective

Sponsor Perspective Bank Perspective

• Equity return • Return limited to fees and interest – limited upside

- unlimited upside • Low expected return: low risk

- high gearing • Objectives

- limited downside - clear definition of Project and expected Cash Flows

• Objectives - removal of risk from Project Company

- high gearing - priority access to all cash flows

- minimise cost of debt - recourse to as many creditworthy stakeholders as

possible
- minimise sponsor support

- restrict lenders recourse to project assets and

revenues

- maintain asset management

- flexibility
From Term Sheet to Finance Documents

Converting Financing Term Sheet (or Common Terms Agreement) and key principles of Security Package to
legally binding agreements including:

• Loan Agreement(s) between Project Company, Facility Agent, Security Trustee and other financial institutions

• Security Trustee Deed between the same parties

• Direct Agreements between Project Company, relevant contractual counterparty and Security Trustee

• Shareholders’ support agreement(s), if any, between relevant shareholder, Facility Agent and Security Trustee

• Mandated lead Arranger Fee Letter

• Security Documents
➢ Onshore / Offshore Escrow Account Agreement
➢ Assignment of Offtake Agreement
➢ Pledge over Account Receivables
➢ Share Pledges
➢ Mortgages
➢ Deed of charges and assignments
8. The Current PF Market
Current market conditions
Asian and domestic markets

- The financial markets in general continue to be under pressure due to ongoing economic uncertainty
(particularly in Europe) and looming regulatory concerns

- As such banks remain keen to place this liquidity according to their risk appetite and relationships with
client, with returns (i.e. pricing) being key consideration

-In general banks outside of Europe and the US have been less severely impacted by the financial
crisis, especially with respect to exposures to real estate in the UK/ US. This is particularly true of Asian
banks

- Japanese banks in general remain liquid and have been filling some of the gap left by the European
banks who had been very active in the Project Finance markets in the past

- Outside of Europe/ US, many domestic markets are still liquid in terms of local currency (due to high
deposit/ savings ratios) but USD liquidity is still relatively limited as cost of long term USD funding for
banks remain high

- Domestic banks tend to lack experience in project financing and as such often require the comfort of
experienced international lenders who has a more specific risk appetite to do the due diligence and
structuring, and lead the negotiation of documentation.

- As an additional source of liquidity, domestic banks are becoming increasingly important. They have
limited access to USD, although it may be expensive and local currency would always be preferred
Current market conditions
Chinese Banks

- Chinese banks are becoming increasing active overseas, as is Sinosure

- Some of the Chinese banks overseas branches can fund from non-PRC deposits and inter-bank
borrowings, but there is limited capacity for this and it is expensive

- With the appropriate regulatory approvals the Chinese banks can fund directly from their PRC entities
(branches)

- However, their experience overseas is limited and the process can be laborious

- Within the PRC, Chinese banks have considerable liquidity, in USD as well as RMB

- Chinese banks are more familiar with funding under comprehensive corporate guarantees and are
relatively unfamiliar with non recourse or limited recourse financing
9. Practical Examples
Practical examples: Oil / Gas project

1. Project finance PRI

Funding

Upstream: ECAs Banks MLA 1 -B MLA 1 - A Bonds

▪ unincorporated JV (JOA)
▪ equity financed Guarantee Debt Debt Debt Debt

Downstream: Upstream JOA Pipeline JV

▪ incorporated JV
▪ equity and limited Equity Equity Equity
recourse financed
▪ pre-completion guarantee
(several) with political risk Co. 1 Co. 2 Govt.
carve-out by sponsors
▪ cross-defaults Funding

▪ recourse to all assets and

rights of downstream MLA 2

▪ partial recourse to
upstream
 Practical examples: Oil / Gas project

2. Project finance MLA 1 - A Comm. Banks MLA 2 – A

▪ unincorporated JV (with MLA 1 - A&B MLA 2 - A&B

JOA)
▪ equity and limited
recourse financed for
some sponsors (with
several pre-completion
guarantees with political Co. 1 Co. 2 Co. 3
risk carve-out)
▪ equity financed by the Cash calls Cash calls Cash calls
other sponsors
▪ security limited to PSA /
JOA rights in the Project; Upstream and Pipeline JOA
no other recourse
▪ no cross-defaults
Cash calls Cash calls
▪ multi-stage development

Co. 4 Co. 5
 Practical examples: Oil / Gas Pipeline

3. Corporate finance Pipeline JV

Cash calls Cash calls Cash calls Cash calls

▪ incorporated JV
▪ severally equity and debt Co. 1 Co. 2 Co. 3 Co. 4
financing
▪ no cross defaults or
Debt Debt Debt
cross-claims
▪ waiver of bankruptcy
proceedings Lender Group 1 Lender Group 2 Lender Group 3
Bonds Comm. Banks ECAs
▪ no asset claims
▪ all ECA eligible funding to
one of the sponsors Assignment Assignment Assignment

▪ recourse “limited” to
assignment of Transportation Transportation Transportation
Transportation Contract Contract 1 Contract 2 Contract 3
proceeds (“use or pay”)
▪ ultimate security not
Project related
Practical examples: Oil / Gas Project

Ideally under a MLA umbrella or with

4. Corporate finance Financial Institution
a ECA guarantee.

▪ existing oil exports Loan

pledged as security for
loans
▪ loans are used to develop
future projects Payment Company X
▪ ultimate security not
project related

Oil / Gas Loan

Offtaker Project
10. Case Studies
Features of Debt Financing Options
Structured Pre-
PF/RBL Borrowing Base Hybrid Corporate
Export Finance

Tenor 3-6 7+ 7+ 5 - 7+ 3-7

Reserves/Production
N/A P90 P90/P50 P90/P50 N/A
profile

Reserve Tail
N/A Yes Often Sometimes N/A
Requirement

Balance Sheet/ Balance Sheet/

Debt Sizing Offtake contract based LLCR/PLCR based LLCR/PLCR based
EBITDA based EBITDA based

Covenants Average Comprehensive Comprehensive Link to reserves or PV Limited

Security Package Limited Comprehensive Extensive Limited Unsecured

Applicable in emerging Applicable in emerging Applicable in emerging

Offtake Contracts Required N/A
markets markets markets

Offshore Account Applicable in emerging Applicable in emerging Applicable in emerging Applicable in emerging N/A
Structure markets markets markets markets

Due Diligence
Limited Extensive Extensive Limited Minimal
Requirements

Ongoing Monitoring N/A Limited Periodical Limited N/A

Timing of Execution Relatively shorter Longer Longer Relatively shorter Relatively shorter
Pre-Export Loan
Main Features
• Financing structure based on offtake contracts
• Mainly interesting for companies that have a large portfolio of producing assets in developing
countries
• To be able to use this type of loan, a borrower needs to have strong offtake contracts with reputable
and creditworthy international buyers, and minimum delivery quantities per month are required
• The offtake contracts are pledged to the lenders

Pros:
• Limited due diligence requirements (no reserve reports or debt redeterminations during tenor)
• Limited security package (i.e. assignment of offtake contracts)

Cons:
• Applicable to producing oil and gas fields only
• Offtake contracts with reputable and credit worthy buyers required
• Relatively short tenor (3-5 years)
• minimum monthly delivery quantities included and additional deliveries are required in case of a cash
flow shortfall
Borrowing Base Structure
Main Features

• Loan amount based on the reserves of a borrower

• Extensive due diligence on the reserves is done at the start of the facility as well as during the tenor
of the loan
• Available loan amount is determined semi-annually on the basis of the net present value of future
cash flows, which is divided by borrowing base cover ratios (loan life cover ratio (LLCR) and field life
cover ratio (FLCR))
• Reserve tail ratio is included to ensure that a certain percentage of initial reserves is still in place at
maturity of the loan

Pros

• Relatively long tenors compared to corporate and pre-export loans (7 years)

• Facility structures can be tailored to specific asset characteristics and to allow for development risk

Cons

• Periodic loan availability re-determinations, based on independent reserve report, cash flow forecast
and LLCR and FLCR is intensive and time consuming process
• Restrictive covenant package of LLCR, FLCR, additional debt restrictions, and dividend restrictions
is typically included
Reserve Based Corporate Loan
Main Features

• The Reserve Based Corporate Loan is a combination of a pre-export loan and a borrowing base
loan into one hybrid financing solution
• The loan amount is sized on the basis of the borrower’s reserves, but the due diligence
requirements are more limited than for a borrowing base financing

Pros:

• Requirements regarding offtake contracts are limited

• Tenor of 5 years provides borrower long-term liquidity
• Covenant structure is relatively light when compared to a borrowing base financing
• Flexibility to add reserves to increase borrowing capacity

Cons:

• Annual reserve report required

 Reserve Based Lending
Principal route to finance oil and gas reserves

• Reserve based lending is typically based on a diversified asset portfolio of 1P/2P reserves
• Lenders are willing to take limited appraisal and development risk
• Borrowing base will be a function of developed nature of reserves, cash flow projections, field life
cover ratio (“FLCR”) and loan life cover ratio (“LLCR”) and reserve tail requirements
• Debt amount will be re-determined periodically, monitoring proven oil and gas reserves, production
Overview profiles and oil price assumptions; initial and on-going input from an independent reserve engineer
and cash flow projections are required
• Various degrees of security depending on credit stature of borrower
• Timeframe for structuring and arranging a borrowing base facility [4-6] months

• Tenors of typically [5-7] years

• Reserve tail of [25-30%] is required to mitigate operational risks
Typical • Loan life cover ratio (NPV of Cash Flow Available for Debt Service (“CFADS”) during tenor of facility
facility terms / Senior Debt Outstanding) typically ranges between [1.4 - 1.7]
& conditions • Field life cover ratio (NPV of CFADS during field life / Senior Debt Outstanding) typically ranges
from [1.5 - 2.0]
Reserve Based Lending

• Determine size of 1P and 2P reserves and production profile over the project life
• Agree on a price deck for oil and gas
Assumption • Determine opex and capex
s required • Agree on other assumptions (incl. tax)
for debt • Calculate NPV of future cash flows over the project life to calculate the borrowing base facility
amount amount
 Reserve Based Finance
In the context of the development of proved oil and gas reserves
To finance development of proved oil and gas reserves (Senior lenders will not take any appraisal or exploration risk)
Debt amount is function of cash flow projections and subject to Field Life / Loan Life cover ratios and reserve tail
requirements
If field is not operating yet, focus on P90; if field is operating, P50 can be considered
Different assumptions
US$ m

Different cover ratios

Available loan amount

Year
Reserve tail
Require initial and on-going input from Reserve Engineer and projection of cash flows from Technical/Modelling Bank
Debt amount re-determined periodically based on monitoring of reserves, production profile and oil price assumptions

Pros Cons
• Large lender universe • Extensive due diligence requirement
• Relatively long tenors (subject to cash flow projections / reserve tail) • Ongoing assessment of reserves, production and cash flow forecasts
• Flexible structures possible for projects with strong economics • Restrictive covenant package (i.e. distribution of dividends)
• Comprehensive security package (including assets,contracts,
accounts)
Borrowing Base Facility
Introductory concepts

•General Characteristics:
- Reserve based lending for a large portfolio of multiple fields
- Portfolio must be diversified and no single asset can make up a significant or dominant percentage of the cash flow
- P50 reserves across the producing assets can be used for debt sizing
- Looser covenants and lower pricing are lower than for single asset and/or development financing

•A Specific Calculation Methodology

Divide NPV
Semi-annual re-calculation Semi-annual
of NPV of Cash Flows Loan Life
until Loan Maturity Borrowing Base Funds remaining
available in borrowing
By Target LLCR
base re-calculated
Semi-Annual Analysis semi-annually to
of Portfolio Cash lower of LLBB
Flows and Field or PLBB or
Abandonment Costs Divide NPV alternative mandatory
Semi-annual re-calculation amortizing amount
Semi-annual
of NPV of Cash Flows Project Life
until aggregated Borrowing Base
End of Field Lives By Target PLCR
 Borrowing Base Facility (cont’d)
Borrowing Base Debt Sizing Typical structuring considerations

- Diversified asset portfolio

Loan Life / LLCR
› Limit on NPV contribution from OECD vs Non-OECD
Project Life / PLCR countries
› Limit on NPV contribution of any single country
and/or field
› Limit on NPV contribution of non-producing assets
Multi-Asset P50 / P90
Reserves Production - Use of P90 or P50 reserves
- CAPEX Add-back
Revenue

- Borrowing base re-determinations

› Frequency
Borrowing › information requirements (i.e. reserve report)
Base Funds - Reserve tail
- Disposal of Borrowing Base Assets
- Inclusion of new Borrowing Base Assets
- Abandonment liabilities
Years
Borrowing Base 25% Reserve - Oil price hedging
Loan Term Tail
 Selected financings
An overview

Lundin Sinopec Block Exxon Mobile

Oranje-Nassau Tullow Total Gabon Addax
Petroleum 18 Angola Nigeria

Facility amount
88 1,850 600 850 1,500 1,400 270
(USD mln)

Reserve estimate 2P 2P 2P 2P 2P 1P 2P

Reserves (MM
35 189 358 176 218 514 181
bbl)

Tenor (yr) 5 7 8 7 5 7 7

UK (40%), Angola (5 Nigeria (5

Countries North Sea Gabon Norway, UK, NL Gabon, Nigeria
Africa (60%) fields) fields)

FLCR 1.5 1.4 - 1.4 1.5 1.55 -

Other financial
YES YES YES YES YES NO NO
covenants

Reserve Tail (%) 30 20 42.5 25 20 25 30

Closing Date May 2009 May 2009 April 2008 December 2007 August 2005 May 2006 December 2005
11. Contact Details
Contact details

Bruce Macfarlane
Managing Director
Head of Natural Resources, Asia Tel: + 65 6232 6222
Structured Finance, Singapore Email: [email protected]

Shiv Sivarajah
Director
Natural Resources Asia Tel: + 65 6232 6145
Structured Finance, Singapore Email: [email protected]