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Project Finance
Green Final
| Term | Definition |
|---|---|
| project finance definition | financing a group of projects on a non-recourse basis through a specially created single purpose entity |
| non-recourse | in case of a breach, no assets in the single purpose entity to take |
| primary prerequisite for successful project financing | long-term financing contract |
| global project finance funding | primarily loans, a bit of equity and bonds |
| Power Purchase Agreement | Sale of brown electricity and green attributes, credit support, minimum delivery obligations |
| Interconnection Agreement | Transmission service agreement, minimum service criteria, cash collateral |
| EPC contract acronym | Engineering, Procurement, Construction contracts |
| EPC contract | supply of equipment and construction services, delay damages and liquidated damages, warranties |
| O&M Agreement | operation and maintenance of plant, availability and heat rate guarantees and bonus, credit support |
| Asset Management Agreement | scheduling of power plant and profit sharing |
| Land-lease agreements | access to land and easements |
| Partnership or LLC agreement | Cash flow distribution and allocation of tax items, management of company, indemnities, buyout rights |
| Equity Capital Contribution Agreement | Fixed and contingent capital contribution |
| Risk assessment for project financing | Construction, Operation, Commodities market/fuel supply, offtake, transmission interconnection, resource, regulatory, project administration, political, currency/inflation/interest rate, underwriting, financial |
| Managing technical and resource risks | know what you want to build and if it has been done before, thoroughly assess site (especially permits/access rights), thoroughly assess resource with independent engineers, financial models, distribute risk |
| Technology choice | extremely important for financial institutions to get comfortable, ie Solar PV vs Solar Thermal, new tech is seen as riskier (harder to get financing), even incremental improvement causes headache |
| how to mitigate risk for bank | bankability analysis, turn-key EPC contract, strong warranties, supplier credit to back guarantee claims, insurance |
| Environmental Considerations | Phase I Environmental Assessment (ESA), II if necessary, species, wetlands, historical sites, permits, community, international |
| MBTA | Migratory Bird Treaty Act |
| BGEPA | Bald and Golden Eagle Protection Act |
| bird laws | MBTA, BGEPA |
| Permits you need | water, clean air, wetlands, ESA take potentially |
| Debt financing considerations | recourse/non recourse, minimum DSCR, reserve accounts |
| Bond vs Bank loans to compare | when you can obtain, payment schedule, term length, rates, payment schedule, oversight, prepayment, restructuring, size |
| Bonds vs Bank loans when you can obtain | loans can be before actual work starts, bonds when viable |
| Bonds vs Bank loans payment schedule | bonds are typically lump sum vs. loans in tranches |
| Bonds vs bank loans term | typically 5-10 years for loan, bonds can match project length |
| Bonds vs bank loans rate | loan typically floating, although some rate swaps, bonds are fixed |
| Bonds vs bank loans payment schedule | loans typically more flexible to cash flows, bonds fixed |
| Bonds vs bank loans oversight | loans have fairly significant control and oversight, bonds less |
| Bonds vs bank loans prepayment penalties | low or none for loan, high for bonds |
| Bonds vs bank loans restructuring | easier to restructure loan, may leak information to public with bond |
| Bonds vs bank loans size | you can exhaust available commercial credit lines, not for bonds |
| Mini-perm loan | a loan you get when you cannot secure permanent financing, usually used to pay off construction before project becomes profitable |
| Bond financing rate based off of | credit rating, which can be long although some rating agencies make it less painful |
| Typical underwriting criteria for renewable energy banks vs credit agencies | 1.0 DSCR for P99 or 1.3 P50 at banks, credit rating (bonds) typically requires 1.5 DSCR P50 |
| Overall bonds vs loans | loans used much more because although bonds can reduce financing costs it is offset by much more expensive and long financing process |
| Project Finance disadvantages | longer execution time, higher transaction and debt costs, intricate risk allocation, high lender oversight (reporting and decision-making), higher insurance requirements, more disclosure |
| Modigliani and Miller Proposition | Capital Structure is irrelevant as long as the firm's investment decisions are taken as a given |
| Evidence M and M prop is wrong | people use project financing with high transaction costs anyways, use huge debt even if huge risk and minimal tax shields |
| Corp vs Project Finance comparisons | Financing vehicle, type of capital, dividends/reinvestment, cap investment decisions, trans costs, credit evaluation, investor/lender base |
| Corp vs Project Finance financing vehicle | multi-purpose firm vs single purpose entity |
| Corp vs Project Finance type of capital | permanent with indefinite equity vs. finite time horizon matching life of project |
| Corp vs Project Finance dividend policy/reinvestment | corporate management decides vs. fixed dividend payout with no reinvestment |
| Corp vs Project Finance transaction costs | standardized so low vs. relatively high for complex special purpose vehicle |
| Corp vs Project Finance capital investment decisions | opaque to creditors vs. transparent |
| Corp vs Project Finance credit evaluation | overall financial health vs. technical and economic feasibility of project |
| Corp vs Project Finance investor/lender base | broader/deep secondary market vs. higher and thinner market |
| Project Finance Advantages | agency conflicts |
| Project Finance agency conflicts | mitigates because all pre-agreed, also reduces underinvestment, increases risk management motivation |
| Moody's observations project finance default/recovery | high default rate during initial years (construction) then default risk even below A rated transactions, 80% recovery rate from default |
Created by:
zkogut7
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