Gas Pipeline Project Financing Gas Pipeline Project Financing Achmad Fadhiel Chief Financial Officer The 7 th International Indonesia Gas Conference & Exhibition Jakarta, Januari 2015
Challenges on Structuring a Gas Infrastructure Project • Domestic Liquidity Issue : USD based Currency Loan vs Rupiah Loan • Bank : Limited Player in the Industry • Domestic Banks funding ability vs Foreign Bank. • Long-Term tenor requirement. • Higher Project Risk Profile: Current gas reserves are located offshore in the eastern region that leads to higher Capex requirement in absence of good eastern region that leads to higher Capex requirement in absence of good infrastructure. • Higher Infrastructure Cost : Most of the domestic gas consumers are located in Java and Sumatera. • Indonesia country risk is perceived to be higher compared to some of its adjacent neighbors. 2
Competitive and Innovative Project Financing – is the Key • Structure of a project financing scheme for a new gas infrastructure projects is very important since it will have cost impact on Pricing of Gas and Capital expenditure. • Naturally if the gas infrastructure project is being developed in remote or offshore, Bank will either require some sort of credit enhancement or slightly larger equity participation from Project Sponsor. larger equity participation from Project Sponsor. • Bank will rely its credit assessment based on project’s projected income and security over the financed assets. If it is a green field project then the Bank will charge higher cost of borrowing. 3
Corporate Financing vs Project Financing items Corporate Financing Project Financing Borrower Corporate SPV (Project Company) Recourse Full financial recourse to Project Sponsor Limited Recourse to Project Sponsor Loan From overall corporate business. From cash generated by the project. repayment In case of shortfall of cash flow from the project, the repayment may come from project, the repayment may come from other business. Credit viability Based on historical and projected cash flow Based on projected cash flow from the analysis of the corporate rather than the project. project Security Limited “perfection of security” Complex documentation to perfect security Sponsor’s Large sponsor equity investments necessary Less equity required that leads to higher Equity to maintain B/S ratios sponsor’s equity returns Interest Can be structured to be paid by the Project Capitalized into project loan and amortized During Sponsor. during repayment tenor Construction Tenor Depends on combined cash flow of the Depends on the project cash flow. corporate. 4
Advantages / Disadvantages Advantages Disadvantages • Provide Non-recourse/limited recourse • Higher risk exposure for the creditor(s) scheme for Project Sponsor. which is translated into higher fee and interest rate. • Can avoid restricted covenants for sponsor’s • other business / transactions. Tight supervision of the project from creditor(s) and may request for project • Provide risk sharing. reporting based on the progress of the • Collateral can be either assets or cash from • Collateral can be either assets or cash from project. project. the project. • Often require credit enhancement such as • Creditor will participate to solve the problem coverage from insurance company or Export should anything happen that may defect the Credit Agency(s) and guarantee from parent project going concern and will not directly company. liquidate the collaterals. 5
PROJECT FINANCING CASE: GAS PIPELINE PROJECT 6
Case One Right of First Purchase Financial Partner: - Strategic Partner - Infrastructure & Pension Fund Investor - Sovereign Wealth Funds - Regional Development Funds & Multilaterals - Trading Partners / Off takers Equity injection Debt For Pipeline Dividend Capex Payment Project Company Bank Jointly owned by Debt Investor and Repayment Financial partner(s) Gas offtake Arrangement or Transport Contract Gas Supply “use or pay” for contracted Arrangement pipeline capacity Domestic Buyers Gas Supplier 7
Potential Partners Profile Financial Target Equity Advantages Considerations Partner Returns (IRR) ▲ Long-term partners ▼ Potentially challenging competitive dynamics Strategic High – target ▲ Enhance credit standing and provide Partners above industry in some cases ▼ May want ability to influence day-to-day average access to additional funding sources ▲ Brings additional operational sector operations knowledge/personnel ▲ Substantial capital available at ▼ Require board seat(s) and active role Infrastructure Average – in ▼ Reluctant to take development risk & Pension line with relatively low cost ▲ Long-term partners ▲ Long-term partners ▼ Often require ongoing cash distributions ▼ Often require ongoing cash distributions Funds Funds sector norm sector norm ▲ Willingness to take minority positions ▲ Provide political and financial ▼ Requires substantial scale to attract interest Sovereign Flexible – ▼ Limited industry knowledge or expertise Wealth Funds target LT support ▲ Willing to take minority positions ▼ Typically look for valuation affirmation from investment ▲ Opportunity to develop additional with strategic another “strategic participant” rationale partnerships regionally ▲ New entrants seeking opportunity to ▼ Typically desire control Regional Flexible – ▼ Long time horizon to close Development target LT deploy capital in the sector ▲ Limited impact on current business ▼ Typically not involved in late stage ‘growth Funds & investment Multilaterals with strategic plan equity’ market ▲ Potential to bring industry expertise ▼ Will likely require preference rationale ▲ Good sources of deal flow ▼ Short term approach to transactions Trading High – trading ▲ Entry points into new markets ▼ Seek return upfront as opposed to strategic Partners margins alignment and limited equity capital ▼ Seek to load Project Co. with own equipment 8
PROJECT FINANCING CASE: STRUCTURED FINANCING (ECA BACKED PROJECT FINANCING) 9
Structured Buyer’s Credit Export (ECA backed) Project. Completion Mech. Completion Guarantee EPC Performance Guarantee Operating Contractor Company EPC Contract 15% Down Payment 85% of invoice Payment Pa 85% Holding/Parent Loan Payment Guarantee Bank Company 95% Coverage of : - Political Risk - Commercial Risk Insurance Premium E C A 10
Project Financing + ECA Backed Assignment from Cash Waterfall Limited Equity Proj. Sales Revenue Arrangement < 30% Invoice Project Project Proj. Owner Revenue Proj. Proj. Receiv Acc. Disburs. Acc. Invoice Cash flow from other business ��� Principal & Debt Reserve Interest Acc. Acc. EPC Contractor Proj. Financing Bank Proj. Opr. Account Loan Proj. Operational Fund Provide Cover /Guarantee Private Risk Cap Market E C A Insurance Hedging Instr. Proj. Construction & Proj. Commercial Company Project Development Phase Operation Phase 11
Export Credit Agency (ECA) • Government institutions or a quasi-government institutions which primary focus to support exporters for its capital good transactions. • Financing facilities are in the forms of Direct loan, Guaranteed Loan and Credit Insured Loan. • In some OECD countries, ECA(s) may provide direct financing that are no different than regular commercial banks. • Financing facilities covered by ECA can be in the form of tied program or untied program. Financing facilities covered by ECA can be in the form of tied program or untied program. • In financing a project, ECA may: � cooperate with other ECA from foreign countries since the equipment for the project may come from various countries (multi source). � Cooperate with the equipment provider of the project (supplier’s financing) or the Project Sponsor/Owner (buyer’s financing). 12
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