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PROJECT FINANCING Emerging Trends. ENERGY CFO’s SUMMIT 14 th December 2012 Lalit intercontinental, mumbai. STRICTLY PRIVATE – NOT FOR CIRCULATION. Deepto Roy Partner PXV Law Partners. introduction. Indian Project Finance Project Finance- Evaluating Challenges
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PROJECT FINANCINGEmerging Trends ENERGY CFO’s SUMMIT 14th December 2012 Lalit intercontinental, mumbai STRICTLY PRIVATE – NOT FOR CIRCULATION Deepto Roy Partner PXV Law Partners
introduction • Indian Project Finance • Project Finance- Evaluating Challenges • Recent Regulatory Developments • Trends • What we will See
Introduction • Massive and Sustained Investment necessary in Indian Infrastructure • Sources of Funds • Government Expenditure- budgetary allowance, gap and viability funding • Domestic Rupee Borrowing • Multilateral Agency Funding • Equity Funding • Funding was becoming more “asset based” than “security based” • Expenditure in infrastructure
Introduction • Infrastructure funding gaps Rs 1,27,570 Crores in 2011-2012 • Ability of commercial banks to provide long term funds is limited • Significant liquidity issues resulting from international credit crisis for domestic and international banks • Over-leveraged borrower groups- presents a commercial risk for banks • Banks are running out of headroom in financing borrower groups and sectors • High cost of funds • Specialized NBFCs fund infrastructure but are restrained by lack of access to funds • Decreased pipeline of “bankable” projects • Project risks
Project finance- evaluating challenges • Political risk and uncertainty of Government actions • Uncertainty of tariff flows • Bankability of Project Documents- “pre-cooked” documents leave little room for commercial negotiation and risk mitigation • Competitive Bidding and related risks • Land • Management of the acquisition process • Local and political issues • New land acquisition rules • Environment • Management of the environmental impact assessment process • Increased vigilance by local and environmental groups • Multiple state and central government agencies involved • Multiple levels of approvals required • Litigation risk
Project finance- evaluating challenges • Fuel Supply • Uncertainty in relation to allotted coal blocks • Coal India Limited significantly behind targets in terms of extraction of coal (creating a supply shortfall) • Model coal supply agreement- guarantees only 60% supply • Indonesian coal regulation- affected projects with long-term fixed price power supply agreements • No pass-through of coal costs in bidding projects • “Many a slip between cup and lip”- sanction v. disbursement • Realistic appraisal of conditions precedent • Developer’s preparedness
Project finance- evaluating challenges • Different treatment of domestic and international lenders • International lenders are not protected under specific security enforcement legislation such as the SARFAESI Act and the DRT Act • No ability to access the CDR mechanism • Inter-creditor issues in relation to domestic and international lenders, in particular with respect to enforcement of security • Stamp duty risk • Maharashtra, ad-valorem stamp duty on loan and security arrangements • Registration and syndication related stamp duty issues in Gujarat • Bringing agreements for the purpose of filing forms makes the document subject to stamp duty • Cost implication for fronting and participation structures and syndication • Additional issues with security • Mortgage cannot be created over forest land- permission from forest department to allow lender’s nominee to use forest land- time consuming process • Enforcement of mortgage over SEZ land- lender’s nominee must be approved by SEZ developer/ user • Financing cross- country pipelines- no security can be created over the rights of way • Enfor
MEASURES TO ENHANCE INFRASTRUCTURE FUNDING • Use of foreign exchange reserves for Infrastructure Development through IIFC (UK) Ltd. • RBI invests in fully government guaranteed foreign currency denominated bonds in IIFCL for on-lending to Indian companies implementing infrastructure projects • Exposure norms in relation to borrowers and groups in the infrastructure sector has been enhanced – From 15% to 20% in case of individual investors and from 40% to 50% in case of borrower groups • Banks have been permitted to extend finance to funding promoter’s equity in cases of investment in companies operating infrastructure projects • Promoter’s shares in an infrastructure projects pledged to a lending bank have been excluded from the bank’s capital market exposure • Introduction of credit-default swaps to allow the banks to manage their exposure in a better manner • Measures to enhance the corporate debt markets • FIIs permitted to invest in unlisted infrastructure binds
REGULATORY CHANGES… ECBs • Recent Changes in Regulations related to External Commercial Borrowings (ECBs) • Liberalization of the security creation process- for security over immovable properties, corporate guarantees and pledge of shares • Increase in ceiling on ECBs to US $ 750 million in a year • ECB can be used to repay short term bridge finance for infrastructure projects under the approval route • ECB can be used to fund interest during construction (IDC) • Credit Enhancement • Rupee Loans with Non-resident guarantees not considered as ECB • Infrastructure Companies and Infrastructure Finance Companies can obtain “credit enhancement” for domestic debt raised through issue of capital market instruments such as debentures and bonds • Direct foreign equity holders can now provide credit enhancement for domestic capital market dent • Guarantee fee cannot exceed 2% • All in costs applicable once the credit enhancement is invoked
REGULATORY CHANGES… ECBs • Take out financing under the approval route • Tripartite arrangement between the domestic bank and overseas recognized lender to facilitate the take-out finance within 3 years • Fees payable to the foreign financier should not exceed 1% per annum • Prior approval of the Reserve Bank of India is required • Permission to obtain ECBs in Renminbi • For infrastructure companies, 25% of ECB amounts can be raised to re-finance existing rupee loans • 75% of the ECB must be used for capital expenditure • The purpose of the refinanced rupee loan should have been capital expenditure • Not available to companies in the power sector. • Indian companies can obtain ECBs from foreign equity holders designated in Indian rupees • Increase in all-in-cost ceiling for trade credits for imports into India
REGULATORY CHANGES… INFRASTRUCTURE DEBT FUNDS • Initiative by the Government of India to bridge the asset liability mismatch – idea floated in the Union Budget 2011-12 • November 2011- RBI and SEBI notified detailed guidelines for setting up infrastructure funds which can be either NBFCs or (IDF-NBFCs) or Trusts regulated by the SEBi Mutual Funds Regulations (IDF-MF) • Scheduled Commercial Banks are allowed to act as sponsors to the IDFs with the prior approval of the RBI • IDF NBFCs can raise funds through issue of rupee or dollar denominated bonds • Funds can be used to take-out loans in projects which have already reached COD and completed one year of operations • IDF NBFCs can fund only PPP projects whereas IDF MFs can funds non-PPP projects as well • Model tripartite agreement for NBFC-IDFs has been approved
INCREASED DUE DILIGENCE EMPHASIS • Lenders have become significantly more cautious on projects risks • Issues in relation to potential litigation with respect to regulatory approvals and allotment • Risk of cancellation of licenses- due diligence to cover not just the issue of the license but also the license allotment process • Involvement of forest land increases project risk significantly
EVOLVING NATURE OF SPONSOR SUPPORT • Traditional sponsor support-limited to cost overrun, shareholding and completion undertakings • Growing emphasis on sponsor credentials and commitment to support the Project • Evolving Nature of Sponsor Support • Capped and upcapped Cost overrun support • Technical support undertakings • Raw material, Feedstock Supply Arrangements, Transmission Support, Transportation Support • Offtake undertakings • Marketing assistance for sale of products • Tariff/ revenue gap funding • Termination payment gap funding- to fund termination payments in case of shortfalls under Concession Agreement • Project Management Support • Hedging Support
MULTILATERAL DEVELOPMENT Bodies/ ECA funded financings • IFC, ADB and OPIC are making significant debt and equity investments in India • With banks suffering from lack of liquidity, ECAs/ Multilateral Development Bodies have become a significant source of funding • Projects involving high capital expenditure • ECAs will fund “pre-approved” projects by allotting funds to a commercial bank • On-lending through a commercial bank • Cheap and long term funding • Independent agency verification • Higher up-front equity • Increased compliance requirements including environmental compliance (e.g. Equator Principles) and more stringent due diligence and documentation requirements
SUB-LIMIT FINANCING AND PHASE WISE PROJECT EXPANSIONS • Sub-limit financing • Facilities provided under umbrella commitments by banks • Facility may be limited to a component or part of the project • Development of Projects in several phases (large projects- power plants, refineries) • Several sets of lenders • Ring fenced security arrangements and separate cash waterfalls • Common facilities may be shared between different phases and should be available for use in case of enforcement of rights by lenders • Complicated inter-creditor and trustee arrangements
FINANCING RENEWABLE ENERGY • Indian financiers still not comfortable with financing renewable projects • Most projects funded on a balance sheet rather than project finance basis • Despite significant emphasis from the Government, regulatory gaps and uncertainties continue to exist • Problems with renewable projects • Regulatory risks • Technologies are at a nascent stage • Inexperienced developers • Price bids submitted without sufficient risk analysis • Power Purchase Agreements not bankable • Rapid devaluation of assets • Intellectual property intensive- risk of infringement litigation • Evacuation and interconnection risks • Possible Solutions • Payment security mechanism with budgetary allocation set up by the Government of India • Long-term tax free bonds by banks to fund renewable prjects • Credit guarantees from the Indian Renewable Energy Development Authority (IREDA)
WHAT we will see • Innovative Financing Structures • Increase access to Bonds and Debt markets to replace expensive rupee loans • Issuance of long term infrastructure funds- tax free status to ease raising of funds • Multilateral and development institution funding • Bringing in new classes of institutional investors (pension funds, insurance companies, provident funds) • ECA Backed Funds • Replacement of Rupee with ECB • NBFC Funding- NBFCs with focus on infrastructure permitted to avail ECBs upto 50% of their net owned funds for on-lending to the infrastructure sector • Issuance of municipal bonds by local governmental authorities to fund urban infrastructure projects and viability gap funding
ThaNK You Deepto Roy deepto.roy@pxvlaw.com +919654400716