Development of project financing in Russia Prepared by: Alexey Evseev, FA, IFF, 3 rd year Inessa Tsvetkova, FA, IFF, 3 rd year Irina Polonikova, REU, IBS, 4 th year Anton Krestyanskov, REU, IBS, 4 th year Ekaterina Paramonova, REU, IBS, 4 th year Moscow, 2013
Presentation outline What is project financing? Distinctive features of project financing Sponsors of project finance deals Project financing structure Global market overview Project financing in Russia
Project financing The financing of long-term infrastructure, industrial projects and public services
Features of project financing - I Non-recourse loans are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors Limited recourse financing secured by a guarantee from sponsors
Features of project financing - II The debtor is a project company set up on an ad hoc basis that is financially and legally independent from sponsors Project company = SPV, Special Purpose Vehicle
Features of project financing - III Priority use of generated cash flows by the specific economic entity is to fund operating costs and to service the debt Only residual funds can be used to pay dividends to sponsors
Project financing vs. Corporate financing Factor Corporate financing Project financing Guarantees for financing Assets of the borrower (already-in-place firms) Project assets Accounting treatment On balance sheet Off-balance sheet Main variables underlying the granting of financing • Customer relations • Solidity of balance sheet • Profitability Future cash flows Organizing of project financing deal is much more costly than corporate-based financing
Sponsors of a project finance deals Each sponsor pursues a clear objectives, which differs depending on the type of sponsor: 1. Industrial sponsor- sees the initiative of upstream or down stream integrated or linked with their core business 2. Public sponsor-aims at increasing social welfare 3. Contractor-develops, builds or runs plants and is interested in participation in the initiative by providing equity or subordinate debt 4. Financial investor
Financial investors and contractors Financial investor invest capital in: 1. Greenfield projects - are characterized by highrisk and high potential return 2. Brownfield projects- have already passed the construction stage Contractor 1. Handling design and construction of the plant 2. During operational stage acts as a shareholder
Industrial and public sponsors Industrial sponsor Deals with oil companies. Supply feed stock for the power plant and converts a cost components into revenue, hence cash inflow. Public sponsor Uses different types of PPP Provides operation and maintenance services Uses concessions(public ownership of the facilities)
Project “Angel”
Project financing structure
Global market volume, by region (US$m)
Global loan by sector, (US$m)
Global trends, challenges, opportunities Trends • • Huge decline in PF number of deals and volume; Reliance on multilaterals, state support and development banks; Governmental cutbacks; Shift from Europe to South, West and North America; Challenges • Not enough investment into infrastructure – ($3 trillion actual need, 1/3 actual); • Gap between required spend and currently affordable increase – (private capital!) • Bank market uncertainty and liquidity constraints; Opportunities • Ensure long-term affordability and value for money; • Sustain effective delivery system, pipelines, etc. ; • Can acquire government owned infrastructure assets with discount (Greece, Portugal)
Project financing in Russia Reasons of rare banks participation: Lack of high-level professionals for project analysis in Russian banks and companies; Extremely high political risk, weak protection of investors; Project financing - the most long-term of all existing techniques and banks are not yet ready to it; Legal issues with the agreement of the shareholders; Legal problems creating collateral for project financing
Project financing in Russia Amendments to the legislation: Entering into a subordinated contract The possibility of a less formal approach to the description of the collateral The ability to be the pledgee not only to creditor, but also to third parties (also very important for syndicated lending) The possibility of appointment of the manager of the collateral (also very important for the syndicated loan)
Project financing in Russia Assignment of future rights and the ability to bulk assignment Cash collateral The creation of nominal bank accounts (similar to an escrow account abroad) Creation of joint-stock companies with exceptional competence Mortgage of the future property
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