Understanding critical factors to create a bankable project

Presentation to 12th FPSO Congress

20th September 2011, Singapore

WHOS INVOLVED

The key to a long lasting and successful business relationship is mutual understanding of your business partners strengths, weaknesses and needs.
Floating Production Contractor

Banks

Field Operator/JV Partners

WHOS INVOLVED

All too often we end up with misconceptions

Floating Production Contractor

Banks

Field Operator/JV Partners

HOW BANKS WORKand why it matters to you

Banks lend many times their available capital and borrow the cash to lend from other people. There is a mismatch between lending and borrowing long vs short

DEBT

LENDING Short term

Short term

Long term Long term

CAPITAL

HOW BANKS WORKand why it matters to you

The European sovereign debt crisis is causing a European banking crisis

banks are either losing capital or at risk of losing capital. Banks are having increasing problems funding in US$. Banks will in effect shrink.
DEBT

US$ Money Market funds have pulled back from lending to banks

Short term

LENDING Short term Banks appetite and ability to lend long term is likely to be more constrained

Long term Long term CAPITAL The European Central Bank estimates that Europes banks need 270,000,000,000 of new Capital 5

A REMINDER The Role of Senior Debt

Allows companies to do more than pure equity allows

Compare the firepower: Contractor with $1bn cash ($1bn equity / shareholders funds), or Contractor with $4bn cash ($1bn equity / shareholders funds and $3bn debt)? Compare the cost: Equity Investors target returns between 15% and 30% per annum Senior debt providers charge a margin based on credit risk eg. 2% to 4% Debt is tax deductible
The power of debt:-

Debt multiplies the power of Equity Take on more Projects Debt turbocharges the Return on Equity Project IRR of 12%. Debt cost 7% 100% Equity Equity IRR 12% 50% Equity / 50% Debt Equity IRR 17% 20% Equity 80% Debt Equity IRR 32%
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A TYPICAL TRANSACTION STRUCTURE

Equity Investor

Floating Production Contractor

Equity (50% dropping to 30%/20%)

Bank Senior Debt (50% rising to 70%/80%) Charter

Field Operator FPSO SPC Project SPC Contributions

Bank

Construction/ Conversion

JV Partners

Shipyard

HOW BANKS THINK The Repayment Questions

WHO PAYS? HOW MUCH DO THEY PAY? WHEN DO THEY PAY? CAN THEY AFFORD TO PAY? or WHERE WILL THEY GET THE CASH
TO PAY?

WHAT CAN CAUSE THEM TO STOP PAYING? WHAT CAN BE DONE TO AVOID THEM STOPPING PAYING? WHO ELSE CAN PAY? HOW CAN I GET THEM TO PAY? IF ALL ELSE FAILS, WHAT CAN BE DONE TO RECOVER THE MONEY?

RISK ASSESSMENT
When assessing whether to lend to a project banks look to the overall project risks, review all the Contracts, and examine who is taking what risks and why.
Contractor LIMITED RECOURSE Shipyard Non-Recourse Stabalisation / Regular Operation Offshore Commissioning / First Oil / Final Acceptance Off Hire / Termination 9 Recourse Field Operator

Design / Construction/ Integration / Onshore Commissioning Project Timeline

EFFECTIVE PARTNERSHIPS

UNDERSTANDING YOUR BUSINESS AND RISKS

A difficult business Heavy Industrial Engineering Projects with long timelines Its about People Project Management and Contracting Strategies Quality Suppliers and sub-contractors (eg. Shipyards) Building is hard, operating safely and efficiently can be just as challenging History tells us a lot .the devil is in the detail.

Use experienced bankers who know the sector and its history

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Thoughts and Observations around Contracts

Too often the Contract presented to the Contractor has history Take a couple of old contracts Add your nightmares Hammer the Contractor Present THE CONTRACT Risk / Reward balance has to be realistic especially in challenging economic
times

Experienced Banks have seen a lot of contracts the good, the bad and the ugly The problem is when does a bank get to see the Contract? IS IT BANKABLE?

Are we coming to the time when a Standard Contract is needed? Even if just to cover basic principles and boilerplate provisions.

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LASTLY..be aware of what Bank Risk Officers see!

The stuff of nightmares....

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NOTICE OF CONFIDENTIALITY AND DISCLAIMER

Disclaimer: This presentation is issued by Australia and New Zealand Banking Group Limited (ANZ, which term shall include its officers, employees, representatives and agents). The information and opinions contained in this presentation (upon which ANZ may have acted or may act for its own purposes) are published for the assistance of recipients but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipients. While such information and opinions have been compiled or arrived at by ANZ in good faith and from sources believed to be reliable, no representation or warranty, express or implied, is made or given as to their accuracy, completeness or correctness. Any opinions contained in this presentation may be changed by ANZ at any time and without notice. ANZ accepts no liability whatsoever for any loss or damage, whether direct or indirect, consequential or otherwise, howsoever arising (whether in negligence or otherwise) out of, or in connection with or from any use of the contents of and/or omissions from this presentation. The material contained in this presentation is confidential and may not be reproduced (in whole or in part) to any other person without the prior written consent of ANZ. ANZ is not acting as adviser: ANZ is not acting in an advisory capacity as to legal, taxation, accounting or regulatory matters. Accordingly, before entering into any transaction, you should seek independent advice concerning this proposed transaction on all of these matters.

THANK YOU

Questions?

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