Structuring Debt Financing for Infrastructure Projects

La Compagnie Benjamin de Rothschild

Structured Finance Advisory 2012

Table of content

I. Market environment Overview II. Infrastructure debt and project finance outlook III. Key debt structuring considerations and type of projects IV. Institutions and infrastructure projects debt V. CBRs as a financial advisor for infrastructure projects

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I. Market environment - Overview

I. Market environment - Overview

Geographic and Sector Breakdown

The UK is still the largest market, followed by France which tendered very large transactions which closed in 2011.
Transactions by region 2011
Other countries - 13.0%

Europe is still largely investing in energy and transport infrastructure where the requirements are significant.
Transactions by sectors 2011
Social & Defence - 4% Telecoms - 3%

Netherland - 2% United kingdom - 36% Belgium - 2% Norway - 3% Turkey - 4%

Power - 5% Water - 7% Oil & Gas - 36%

Renewables - 7%
Spain - 5%

Russia - 7%

Mining - 7%
Germany - 7% Italy - 7% France - 14%
Source: Infrastructure journal

Transport - 14%
Source: Infrastructure journal

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I. Market environment - Overview

Pipeline trend
In 2011, more than 350 projects reached financial close in Europe worth approximately 110 billion. Some landmark transactions were extremely capital intensive, with significant debt requirements: Tours-Bordeaux high-speed railway in France ( 5.4 bn) Nord Stream Gas Pipeline Phase II ( 3.9 bn)
Transaction count

Transaction volume in Europe by year

600 160'000

530
500

445 393 382 358

140'000

Acciona Portfolio Refinancing ( 1.6 bn) Ministry of Defence headquarters in France ( 1.5 bn) Bretagne-Pays de la Loire high-speed railway in France ( 1.2 bn) Nottingham Express Transit (phase II) in the UK ( 620 m)

120'000

400 100'000
In euros million

300

80'000

218
60'000 200 40'000 100 20'000

2006

2007

2008

2009

2010

2011
Source: Infrastructure journal

Value of transactions (EUR million)

Number of transactions

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II. Infrastructure debt and project finance outlook

II. Infrastructure debt and project finance outlook

Significant deal flow and funding requirements
The infrastructure deal flow in Europe is still huge in the long term and capital intensive: Europe faces massive infrastructure investment needs, in particular for transport, energy and broadband networks. The European Commission estimates such needs to amount to 1.5 trillion to 2 trillion with a view to meet the policy goals of the Europe 2020 Strategy for smart, sustainable and comprehensive growth. The completion of the trans-European transport network (TEN-T) programme. The trans-European energy networks (TEN-E) programme. Despite the current economic situation, Governments across Europe are still willing to stimulate their economy by launching infrastructures projects to boost productivity, competitiveness and economic activity. Debt and project finance remains an important source of funding. Steps are being undertaken to tap again the debt capital markets : The Europe 2020 Project Bond Initiative launched by the EIB. Important steps are also being taken by many governments to accelerate major infrastructure investment and house building with the implementation of guarantee schemes.

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II. Infrastructure debt and project finance outlook

The bank debt market liquidity is decreasing
The Bank market is not as deep and more constrained and risk averse for project financing: The liquidity available on the Bank debt market decreases because of the adverse economic conditions. The project financiers are also experiencing significant collateral damage from the forthcoming regulatory reforms primarily aimed at what is perceived as riskier banking activities and which limit liquidity available: The Basel III regulatory framework requires banks to hold greater levels of capital against long and less liquid project finance loans. The prudential rules lead to a capital reallocation decreasing the commitment capacity. The number of lenders active in infrastructure project finance is decreasing due to the more stringent credit risk criteria and exposure constraints, especially for volume risk transactions. Banks are also looking to deleverage their balance sheet, thus many portfolio of project finance loans are available presumably at a discount price.

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II. Infrastructure debt and project finance outlook

whilst the funding requirement remains significant
Refinancing and exits shall also drive debt funding requirement within the infrastructure sector: Projet finance deal flow Important refinancings for the period 2013-2018 are expected: More than 100 billion of debt has been raised over the 2009-2011 period in Europe for infrastructure projects split asbetweentransport (ca. 33 billion), renewable (ca. 35 billion), Social infrastructure (ca. 17 billion), power (ca. 14 billion), and telecoms (ca. 4 billion). The Eiffarie / APRR refinancing is one example of how the capital markets have been tapped. Equity providers are also looking to sell some of their participations in infrastructure assets and re-leverage the funding structure: Once a project is closed, industrial sponsors are more willing to recover some of their equity to finance new projects. Financial investors equity IRR targets do not allow them to increase their equity exposure to projects indefinitely and many of them are looking for an exit due to the duration of their fund.

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III. Key debt structuring considerations and type of projects

III. Key debt structuring considerations and type of projects

Greenfield vs. brownfield
Usually, infrastructure assets are classified in two categories: Greenfield assets: New projects being or to be tendered which are to be designed, built, financed and operated by a dedicated majority privately-owned special purpose vehicle (SPV). Lenders finance the investment phase, hence support the construction risks but also the operating/maintenance risks as they are repaid over a long period of time (15-25 years) once the project comes into operation. Such risks are mitigated by a comprehensive security package (including guarantees from the contractor and operator the SPV is using), a tailor made repayment profile and a string set of covenants including financial covenants (debt coverage ratios), creating strong constraints on the borrower. The debt component is structured in such way that lenders are repaid under very conservative/ adverse situations but there is a limited recourse to the shareholders of the SPV Brownfield assets: Secondary projects, already in operation, which can be refinanced on the basis of the assets performance post operation (usually after 3 to 5 years). They are safe assets with high visibility on revenue and very low risks. They usually allow for a higher debt leverage and a looser debt structure
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III. Key debt structuring considerations and type of projects

Risk profile evolution of an infrastructure project

The following chart illustrates the typical risk profile development of an infrastructure asset

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III. Key debt structuring considerations and type of projects

Availability based vs. revenue risk projects
The PPP framework is a well established model, implemented through the two main legal frameworks available: Availability based projects: The SPV is in charge of designing, building, financing and maintaining the infrastructure The SPV receives availability rent from the granting authority which will cover, among others, the financing and maintenance costs involved. This payment can vary depending on performance criteria agreed in the Contract (ex: social buildings). Volume/revenue based projects: The private SPV selected by the granting authority takes a volume risk on the infrastructure; the payment of operating expenses, the funding of the maintenance and renewal costs, the repayment of the debt financing component and the payment of dividends are dependent on the revenue generated by the private operator. Revenues of the SPV are generated by users of the infrastructure (ex: motorways concessions). Some projects can combine a rent paid by the public authority with some revenue risk. In such case, the rent varies depending on the attendance measured on the infrastructure.

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III. Debt financing characteristics and type of projects

Key features of infrastructure debt
Tenor Interest rate Margin [20 25] years Fixed rate ca.[3-4]%+Margin [200400] bps, the lower margin being for a) the construction period for a well established/ credit rated contractor, b) an availability based project where the counterparty paying the rent is a solid investment grade public sector entity; the higher margin being paid during the operation period for a volume risk-based asset [150-250] bps Complete security package Set of guarantees from contractors, operators, equity providers, public entities,... Tailor-made, but back-ended Exhaustive and providing lenders credit friendly features including financial covenants (debt service cover ratios), restrictions on distributions and baskets (limits on additional indebtedness, limits on acquisitions/disposals, etc,)

Upfront fees Security Guarantees Repayment profile Other covenants and undertakings

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IV. Institutions and infrastructure projects debt

IV. Institutions and infrastructure projects debt

Institutions could bridge the gap created by the decrease in bank debts liquidity

Important deal flow

Refinancings

Institutional investors, such as pension funds, insurers, mutual funds, and sovereign wealth funds, could potentially take up some of the slack in the market.

Participation exits

Decreasing bank project finance debt available when the deal flow is still on the rise, hence an opportunity for alternative players to enter the market
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IV. Institutions and infrastructure projects debt

Why would infrastructure assets be attractive to institutions?
Investing via debt instruments in infrastructure assets offers attractive investment features/ considerations for investors: A low volatility and a low correlation to other asset classes. Long term perspective through tangible assets with high visibility on future returns and a low risk of capital loss. A natural inflation hedge as the underlying assets revenue are, to a various degree, usually linked to inflation. Attractive all-in rate (margin + base rate + commitment fees during the drawdown period) Infrastructure assets provide a risk-return profile that sits between bonds and equity and enhance the efficiency of a portfolio through diversification. The recent liquidity constraints enabled to strongly improve the infrastructure contract risks allocation in favour of private financing providers.

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IV. Institutions and infrastructure projects debt

Institutions are already active in Europe
Recent examples of transactions: Acquisition of assets: acquisition by Dutch Pension Fund PGGM of majority stake in the UK University Partnerships Program (UPP) from Barclays Infrastructure Fund: UPP recently won a 230 million PPP project under a 125 year concession scheme. The transaction is a good example of direct investment in stable social infrastructure sectors with a long term focus. Refinancings: Eiffarie/APRR 5.6 bn of debt to be refinanced by 2013: APRR raised ca. 2.5 billion in bonds over 12 month at an average coupon of 4.83% to rebalance bank debt and to fund APRRs needs and CAPEX. The remaining 3.5 bn of debt was refinanced through the bank debt market. Debt portfolios: Bank of Ireland disposal of debt portfolio: 270 million in UK asset backed project finance debt to a Danish Pension fund at a 16.5% discount to par value. 200 million of UK infrastructure project finance loans portfolio sold to Aviva at a 19% discount to par value.

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V. CBRs as a financial advisor for infrastructure projects

V. CBRs as a financial advisor for infrastructure projects

An established franchise in project finance offering a full range of services
CBR, through its dedicated, experienced Structured Finance Advisory team, can offer a full range of services in a capacity of financial advisor as per the following situations: Project finance deal structuring or an asset acquisition Refinancing Acquisition of debt portfolios CBRs Project Finance franchise has established itself as a leading player over the last 10 years, leading the league tables as Global Transport and Global PPP Financial Advisor in 2011 (Infrastructure Journal league tables). CBR advises: Private consortia bidding and implementing greenfield projects or acquiring brownfield projects Granting Authorities tendering projects or renegotiating existing projects underlying concession agreements Institutional investors willing to finance or acquire single assets / assets portfolio, extend debt instruments, acquire project finance debt portfolios

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V. CBRs as a financial advisor for infrastructure projects

Track record
Project finance advisory
LEAGUE TABLES - INFRASTRUCTURE JOURNAL - FY 2011 Global Financial Advisors - PPP transactions (top 10 - worlwide)
Rank 1 2 3 4 5 6 7 8 9 10 Company Compagnie Benjamin de Rothschild Ernst & Young Deloitte Natixis HSBC Socit Gnrale KPMG Crdit Agricole Group PwC Macquarie Total US$ m 12'986 11'733 7'282 7'051 6'461 6'266 6'052 5'900 5'469 4'681 Deal flow 6 24 8 2 4 3 18 1 15 3 Market share (%) 12.6 11.4 7.1 6.9 6.3 6.1 5.9 5.7 5.3 4.6

European Infrastructure Financial Advisors (top 10 - all sectors)

Rank 1 2 3 4 5 6 7 8 9 10 Socit Gnrale Compagnie Benjamin de Rothschild Royal Bank of Scotland HSBC Ernst & Young Natixis UniCredit Crdit Agricole Group Deloitte Commerzbank Company Total US$ m 14'854 12'986 11'389 7'949 7'287 7'051 6'602 5'900 5'344 4'884 Deal flow 6 6 5 5 20 2 3 1 8 1 Market share (%) 11.9 10.4 9.1 6.4 5.8 5.6 5.3 4.7 4.3 3.9

Private equity advisory

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V. CBRs as a financial advisor for infrastructure projects

Indicative scope of work
CBR can assist in: Identifying /sourcing an opportunity/a project. Assessing the merits and economics of such project. Designing and structuring an optimum tailor made financing solution. Developing a financial model to test the economical and financial feasibility of the project. Coordinating the due diligence (legal, technical, insurance, tax, etc..). Preparing an evaluation/ financial projections and an appropriate set of sensitivities. Analyzing of the project risks and their financial impact. Preparing the relevant info package (information memorandum, due diligence reports, financials). Organizing a road show as appropriate. The credit analysis with the relevant parties. The negotiation, drafting and closing of the finance documentation.

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Contacts

Structured finance advisory department La Compagnie Benjamin de Rothschild 29, route de Pr-Bois P.O. Box 490 1215 Geneva 15 Switzerland (CH) +41 58 201 75 00 / (UK) +44 207 845 5983 Website: http://cbr.groupedr.ch

Warning La Compagnie Benjamin de Rothschild does not warrant the accuracy, reliability or legality of any information or material contained herein. The information supplied does not constitute financial advice and you should seek independent advice before undertaking any financial transactions based on information supplied herein. La Compagnie Benjamin de Rothschild does not accept any liability whatsoever for any loss or damage suffered or incurred as a result of your relying on information or material published in this study. The information supplied is provided subject to the laws of the Switzerland and may only be accessed from other jurisdictions at the same risks as the person accessing such information. Copyright Compagnie Benjamin de Rothschild 2012. Reproduction of part or all of the contents of any of these pages is prohibited except to the extent permitted below. This study is for personal use provided that it includes this copyright notice on each copy and that no alterations to any of the pages is made and do not use any of the pages in any other work or publication in whatever medium stored. LA COMPAGNIE BENJAMIN DE ROTHSCHILD 23