An agreement entered between a producer and a buyer to buy/sell a certain amount of the future production. It is generally negotiated long before the construction of a facility to guarantee a market for the facility's future production and improve chances of getting financing for the installation concerned.
These agreements are fairly common in the natural resource sector, where capital costs to extract the resources are important. They usually include several protective clauses and can take months to negotiate.
Debt financing that is ranked behind that held by secured lenders in terms of the order in which the debt is repaid. "Subordinate" financing implies that the debt ranks behind the first secured lender, and means that the secured lenders will be paid back before subordinate debt holders.
a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership or equity interest in the company in case of default, after venture capital companies and other senior lenders are paid. Mezzanine financing, usually completed with little due diligence on the part of the lender and little or no collateral on the part of the borrower, is treated like equity on a company's balance sheet.
A business that focuses on operating in one specific financial area. The main advantage of monolines is that these companies have specialized skills and provide expertise beyond what can usually be expected from companies that businesses are spread across many different financial areas.
For example, monoline insurers give investors and issuers the confidence to participate in the market by providing liquidity and financial protection. Without fully understanding the entire system and how it all comes together, a company is unable to provide its customers with quality service. Due to the expertise that monoline companies have in the industry, they are able to reduce operating cost, enhance customer service and evaluate/manage risk much more efficiently.
The Project’s Cycle and Risks
Project cycle visualised
Revenue Models (Funding)
A back-to-back loan is a loan in which two companies in different countries borrow offsetting amounts from one another in each other's currency. The purpose of this transaction is to hedge against currency fluctuations. They are also called parallel loans.
Companies could accomplish the same hedging strategy by trading in the currency markets, either cash or futures, but back-to-back loans can be more convenient. However, currency swaps and similar instruments have largely replaced back-to-back loans. Regardless, these instruments still facilitate international trade.
a pre-agreed increase in the credit margin triggered at certain points in time that creates an incentive for the borrower (SPV) to prepay/refinance the original project debt
a pre-agreed restriction on dividend distributions that keeps more cash into the SPV and creates the same incentive as above.
Debt-Service Coverage Ratio
In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.
In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country's external debts.
In general, the debt-service coverage ratio is calculated as:
DSCR = Net Operating Income / Total Debt Service
a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan's principal. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term.
Cash Available For Debt Service (CADS)
a ratio that measures the amount of cash a company has on hand relative to its debt service obligations due within one year. Debt service obligations include all current interest payments and current principal repayments. Sometimes lease obligations are part of the denominator.
Loan life coverage ratio (LLCR)
a financial ratio used to estimate the ability of the borrowing company to repay an outstanding loan. LLCR is calculated by dividing the net present value (NPV) of the money available for debt repayment by the amount of outstanding debt. LLCR is similar to debt service coverage ratio (DSCR), but it is more commonly used in project financing because of its long-term nature. The DSCR captures a single point in time, whereas the LLCR addresses the entire span of the loan.
Project Life Coverage Ratio (PLCR)
- PLCR = NPV of CFADS over Project Life /Project Debt
- Unlike the LLCR where the CFADS is calculated over the scheduled life of the loan, the cashflow for PLCR is calculated over the “Project Life” (eg full duration of the concession or PPP contract) [DR for “tail”?]
- PLCR allows lenders to protect against relying on potentially more uncertain future cashflows.
PLCR expected to be higher than LLCR (unless …)
- The PLCR should be higher than the LLCR owing to a longer evaluation period
- But sometimes projects (eg in mining or resource-based) have a substantial rehabilitation or decommissioning cost towards the end of the Project Life, which can dramatically reduce the CFADS (numerator for PLCR).
Funds from operations (FFO)
refers to the figure used by real estate investment trusts (REITs) to define the cash flow from their operations. It is calculated by adding depreciation and amortization to earnings, subtracting any gains on sales, and is sometimes quoted on a per-share basis. The FFO-per-share ratio should be used in lieu of EPS when evaluating REITs and other similar investment trusts
There are seven main categories of intrecreditor issues:
(1) order of drawdown of funds
(2) maturities of the differing classes of finance
(3) priority of distribution of project revenues to the various classes of financier
(4) restrictions on financiers amending the terms of their own financing documents
(5) voting powers for waivers and amendments to financing documents and intercreditor arrangements
(6) who has the right to accelerate loans and to control the enforcement of security
(7) priority of distribution of the proceeds of enforcement of security.
A contract, often a deed, which regulates the respective rights and ranking of two or more funders (often both debt and equity) in a financing. Usually, the rights the contract regulates include rights to receive payments (such as principal, interest and fees prior to any enforcement of security) from, and rights to enforce security over the assets of, a common debtor.
a bank account that automatically transfers amounts that exceed, or fall short of, a certain level into a higher interest-earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds. In a sweep program, a bank's computers analyze customer use of checkable deposits and "sweep" funds into money marketdeposit accounts.
an offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price.
Securities and Exchange Commission laws require any corporation or individual acquiring 5% of a company to disclose information to the SEC, the target company and the exchange.
the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. This process can encompass any type of financial asset and promotes liquidity in the marketplace.
"Engineering, Procurement, and Construction" (E P C) is a particular form of contracting arrangement used in some industries where the E P C Contractor is made responsible for all the activities from design, procurement, construction, to commissioning and handover of the project to the End-User or Owner.
Contract for Difference (CFD)