project finance in africa: a central and west african perspective presented by barrister duga...

Barrister Duga Titanji,Ph.D

African Legal Support Facility/Pan-African Lawyers

Union (ALSF/PALU)

PROJECT FINANCE IN AFRICA: A CENTRAL AND WEST AFRICAN

PERSPECTIVE

PRESENTED BY BARRISTER DUGA TITANJI, Ph.D


Introduction1. The main terms involved in project finance: 2. From government’s point of view, the advantages and

disadvantages of BOT projects and under what circumstances a government will be concerned about a BOT structure.

3. The principal risks involved in project finance.4. Project bankability.5. Lenders’ main concern about BOT project finance.6. Security issues in project finance.7. To what extent do the issues for lenders in BOT projects differ

from the issues for lenders in other projects?8. From a commercial lender’s view, what are the main

distinctions between lending to a private sector borrower and a sovereign borrower?

9. How does a sponsor support the projects?10. The risks undertaken by host government in sanctioning and

participating in BOT projects.


What is a project finance?Types of project finance;The Nature of project Finance;Why project finance and why project finance for Africa?Project finance versus other forms of corporate finance;The parties to a project finance deal;Identifying the risks and the appropriate measures to curb risks;The project finance structure and the role of the corporate lawyer in project finance;


What is project finance?The term Project Finance is generally used to refer to

a non-recourse or limited recourse financing structure, in which debt equity and credit enhancement are combined for the construction and operation or the re-financing of a particular facility;

In such a case, lenders base credit appraisals on the projected revenues from the operation of the facility; rather than the general assets or the credit of the sponsor of the facility and rely on the assets of the facility including any revenue producing contract and other cash-flow generated by the facility as collateral debt;

In such projects the debt terms are not based on the sponsor’s credit support or the value of his physical assets in the project.


Project Finance can therefore be defined as financing of natural resource projects or other assets or undertaking which is repaid principally from the cash flow generated from the project or the financed asset.It is normally used to refer to the provision of loan or other non-equity finance for the purpose of implementing projects. There are basically two types of project finance operations:Non-recourse; andLimited recourse project finance.


Non-recourse Project FinanceThis refers to financing based entirely on the

merit of a project, rather than the credit of the project sponsors;

The credit appraisals of the non-recourse project finance and lending, is therefore predicated on the underlying cash flow from the revenue and proceeds of project contracts, independent of the non-project assets of the project sponsor;

In a non recourse debt system, the project sponsor (owner), has no direct legal obligation to repay the project debt or make interest payments if the project cash flow proves inadequate to service debt.


Limited recourse Project FinancingSince under non-recourse project finance

there is no liability on the project sponsor there are certain instances where the project sponsor will be expected to assume limited obligations and responsibilities for the success of the project;

This is known as limited recourse project finance;

How much recourse is necessary is determined by the inherent risks presented in the project and ability of the credit market to assess the risk.


The Nature of Project FinanceThe typical project finance model is the BOT

project;BOT projects come in different “models” depending

on the precise structure or activity; Some examples are BOOT (Build Own Operate

Transfer), where the sponsor owns the project assets and transfers ownership to the government;

LOT (Lease Operate Transfer) where existing assets are leased to the operator;

ROT, (Rehabilitate Operate Transfer) where the asset exists prior to the implementation of the project, and the purpose of the project is its rehabilitation (e.g., oil barges).


Why Project Finance and Why Project Finance For Africa?

To limit recourse to direct balance sheet obligations;

An appropriate answer to risk sharing between parties;

Project finance is usually suitable for industrial developments requiring substantial upfront capital investments;

To achieve high leverages / longer tenors

It is particularly important for African Countries


African Governments are not always well suited to deal with all project risks;Complex structures are not always integrated locally;Limits public expenditure; Would help African states realise development projects without directly disbursing funds;


Project Finance Compared with other Forms of Corporate Lending

Project Finance Corporate Lending Objective Provide funds for the

realisation of a specific project

Target A special purpose vehicle

company undertaking the project

Depends on Adequacy of the project

cash flow to repay its debt Case of default Limited or non recourse

against shareholders

Objective Lend money

Target A Company

Depends on The credit worthiness of the

whole company Case of default Recourse against the

Company and/or its shareholders


Techniques of Corporate FinanceEquity;Quasi-Equity;Debt Financing;Bonds;Sources of debt FinancingSingle Lender Financing;Multi Lender Financing;Export Credit Agency;Development Finance Institutions (DFIs)Joint Venture/Offtake agreements;Infrastructure Financing;Other debt Finance institutions


Understanding the Parties to a Project Finance Deal

The project company/borrower: a special purpose company, incorporated under the laws of the country in which the project is to be implemented and owned by the project sponsors;

Project sponsors: who will provide the equity finance for the project, in the form of share capital and who will also provide or procure additional finance in the event that the cost of carrying out the project exceeds the amount originally estimated and financed;

Project lenders: usually a syndicate of international banks making foreign currency loans;


Contractors: who will be responsible for constructing the project. Equipment suppliers: Where equipment is supplied under separate contracts from the construction contract, in respect of plant and equipment incorporated in the project e.g. gas turbines for power stations, or computer equipment for control and manufacturing systems. An operator, to operate and maintain the project, and/or a project manager (in either case usually one of the project sponsors); Suppliers of raw materials (in the case of manufacturing project) or unrefined or unprocessed commodities, e.g. unrefined oil in the case of an oil refining project; Purchasers of the project product; The host government, as the grantor of exchange control consents, tax holidays, operating licences, planning consents and other necessary authorisations.


Risks and Risk MitigationCredit RiskMitigation: - stand-by facilities, performance bonds and

completion guarantees.Completion RiskMitigation: -substantial penalties for delayed

completion; contractor and/or equipment suppliers are not paid in full unless and until plant and equipment meets the required performance criteria; cost overruns are realistically assessed and financed by sponsors or other sources of finance; loan is disbursed following “milestones”, etc.

Economic/Marketing RiskMitigation: long term sales or processing contracts;

Hedging of currency risks; factoring of appropriate margins to meet material fluctuations;


Financial/Currency Risk Mitigation – quote in hard currency; Political RiskMitigation: make sure licences are clearly and unambiguously worded, political insurance etc. Legal RiskMitigation: Use “best practice” techniques to mitigate practical risks.Environmental RiskMitigation : Environmental Impact Assessments


The Project Finance Structure and the Role of the Corporate Lawyer in Project Finance


The Contractual StructureProject contracts

Concession agreement Construction contract on a turnkey basis (EPC) Off-take agreements Supply agreements Operating and maintenance agreement (O&M)

Finance documents: Loan Agreement/Common Term Agreement; Intercreditor agreement; Equity support;

Security documents.


The Security PackageBasic security package include:

Pledge of shares of the shareholders in the Borrower

Pledge of all assets of the Borrower Assignment of project contracts & insurance Pledge of Borrower’s accounts and receivables Direct agreements with the parties to the

commercial contracts

Adequate Intercreditor protections Unanimous voting on fundamental aspects

(duration, pricing)

Identify conflict of interest between creditors and negotiate adequate compromises


Role of the Corporate LawyerTerm Sheet negotiation;Drafting of Documents: Loan Agreements;General Finance Documents;Security Documents;All Project Documents; Assistance in security perfection formalities;The Preparation/drafting of conditions

precedent to draw down;


Quick Check-list of Issues to Address in the Loan Agreement1The Interpretation Clause2. Availability and Drawdown of Loans3. Conditions Precedent4. Joint and Several Obligations5. Financial Termsa. Interestb. Repayment and Prepayment6. Events of Default7. Representations and Warranties8. Covenants9. Provisions Relating to the Maintenance of the

Lender’s Profit10. Governing Law and Jurisdiction

project finance in africa: a central and west african perspective presented by barrister duga...

Documents

bot project finance

project finance structure

project debt

nature of project finance

parties project finance

project finance deal

term project finance

project bankability