Relationship between a Financier and a Special Purpose Vehicle

1. Relationship between a Financier and a Special Purpose Vehicle By Robert Johnson Managing Director, Project & Export Finance September 30, 2005

2. Parties involved in a PPP Government/ Public Sector Authority Public Sector Concession agreement Private Sector Debt funding SPV (Project Co) Financial Advisers Banks/ Capital Markets Investors Shareholders/ Equity Subscription Agreement Securities Lawyers Services agreement Insurance Construction contract Other Consultants Insurer Design Builder Operator/ Service Provider Sub-contractors Sub-contractors

3. Special Purpose Vehicles (“SPVs”) A company constructed with a limited purpose or life Frequently serves as conduits or pass-through organizations or corporations In relation to securitization, the entity which holds legal rights over assets transferred by the originator Financier Banks (acting as financial advisor and/or debt provider) Export Credit Agencies (ECAs), multilateral agencies Mezzanine / subordinated debt Equity investors Definition of “SPV” and “Financier” • Equity investors (the “Sponsors”) typically want non-recourse or limited recourse financing • The financier therefore has to rely on the SPV’s cash flow as (primary) source of repayment and its assets as security

4. Financial Advisor Business valuation Due diligence Risk assessment Bid preparation Negotiation Documentation Structure financing Market financing Coordination / manage timetable Lenders Technical bank Modeling bank Insurance bank Hedging bank Security trustee Facility agent Intercreditor agent Escrow agent Various roles for banks

5. Value-add of a financial advisor 1. Review Industry Factors • Assess how industry outlook might impact lender appetite • 2. Assess Project Competitiveness • Scale and technology • Low cost and strategic producers • Markets for products 3. Analyse Project Level Risks & Cash Flow Certainty • Completion and EPC contract • Feedstock, offtake & other operating risks • Financial modelling & sensitivity analysis • DSCR vs. tenor and downsides 6. Recommendation / Game Plan • Match option with Sponsor objectives • Recommend approach to ensure optimal solution is successfully completed SUCCESSFUL FINANCING OF THE PROJECT 5. Financing Options • Offshore vs. Onshore debt • Clean vs. ECA debt • Capital Market Alternatives • Other liquidity sources 4. Structuring Implications • Optimal Debt: Equity ratio • Quantum of Recourse • Contingent Support • Impact on financing costs

6. Objectives for equity vs. debt EQUITY OBJECTIVES DEBT OBJECTIVES / CONCERNS • Level of leverage is determined by: • Project cash flows / projected debt service coverage • Level of sponsor / sovereign support • Quality of risk mitigation • Sector outlook (particularly for cyclical industries) • Industry benchmarks and precedent transactions • Liquidity in the market • Country limits for banks Time to Financial Close Recourse to Sponsors Fair allocation of risks, returns and responsibi-lities Maximise Return on Equity High Debt Service Coverage Simplified Process Proper Risk Mitigation Competition Among Lenders Capital Recovery Maximise Certainty of Financing Adequate Due Diligence Less Onerous Covenants Lend at Attractive Margins

7. Contractual relationship – Areas of focus • Level of recourse to sponsors • Conditions precedent for funding • Cash flow waterfall • Repayment mechanisms • Controls on the management of the SPV • Monitoring project performance • Security • Default scenarios and remedies

8. Level of recourse to sponsors • Relationship dynamic: • Level of sponsor support may determine availability of financing, debt capacity, tenor, pricing and/or other terms and conditions • Types of recourse to the sponsors include: • Completion guarantee • Contingency equity commitment to cover cost overruns / construction delay • Falls away upon technical and financial completion tests • Cash deficiency support during operations • Triggered by debt service coverage ratio tests • Sponsor guarantees during the operational phase of the project

9. Conditions precedent for funding • Relationship dynamic: • All the arrangements for a functioning project has to be in place • Lenders must be comfortable with the economics and operating environment of the project • Examples of conditions precedent (“CPs”) • Satisfactory fixed-price, turnkey EPC contract with appropriate liquidated damages (“LDs”) • Satisfactory operations and maintenance (“O&M”) agreement • Satisfactory reports from independent technical advisors, market consultants, legal counsel • Financing and security documents signed and in full force and effect • Satisfactory insurance arrangements • Satisfactory environmental impact assessment (“EIA”) or management plan • Banks’ approval of base case financial projections • Confirmation that no event of default has occurred or is continuing • Valid Government licenses, consents and waivers

10. Cashflow waterfall • Relationship dynamic: • SPV typically must deposit revenues directly into lender-managed escrow accounts, so that lenders can control distribution of cash flow according to a strict “cashflow waterfall” • Example of a cashflow waterfall • Operating costs, maintenance capital expenditures taxes, statutory duties and levies • Interest payments • Principal repayments • Transfer to Debt Service Reserve Accounts (DSRA) Debt service for working capital facilities or other permitted indebtedness Dividend to shareholders (must satisfy financial tests prior to distribution)

11. Repayment mechanisms • Relationship dynamic: • Set aside excess cash flow for repayment purposes for a rainy day • Compensation received from third parties if things go wrong is immediately applied to repayment of debt • Accelerate repayment when project does well so that lenders can recover capital more quickly • Examples of repayment mechanisms • Debt Service Reserve Accounts (e.g., forward looking 6 months’ debt service) • Mandatory prepayment upon receipt of liquidated damages from contractors, insurance proceeds, etc. • “Cash sweep mechanism”

12. Control over the management of the SPV • Relationship dynamic: • Establish controls on the management of the SPV to ensure that lenders’ interests are adequately protected • Undertakings will be structured to take into account administrative convenience – covenants typically have thresholds attached • SPV can seek lenders’ consent to waive restrictions on a case-by-case basis • Examples of control provisions • SPV to use the debt facilities solely for purposes stated in the facility agreement • No change of shareholding / mergers • No additional indebtedness • No new investments or acquisitions (except permitted capital expenditures) • No sale or disposal of assets • No creation of liens on property or assets / assignment of incomes or rights to third parties • No change to SPV constitutional documents • No material change to key contracts • Arms-length transactions with related parties

13. Monitoring project performance • Relationship dynamic: • Financiers must be kept up to date with the project’s operational and financial performance, so as to spot potential problems early on • SPV typically has to undertake to provide technical and financial information to the lenders periodically • SPV must inform lenders of any material change in business conditions / key contracts / legal disputes • Examples of “informational covenants” • SPV’s annual projections based on the financial model, compiled using assumptions acceptable to lenders • SPV’s unaudited quarterly financials and audited fiscal year-end financial statements • SPV’s corporate information (e.g., minutes of board meetings) • Updates to technical and market consultants’ reports • Notice of proposed revisions to key contracts • Notice of adverse events (e.g., legal disputes, labor disputes, damage to assets, event of default)

14. Security • Relationship dynamic: • Financiers need to have all the rights, title and interests to the SPV’s assets • Typical example of security structure: • Rights to the SPV’s rights to the project site • Rights to key project documents, including the Concession, the EPC contract, product sales contracts, etc. • Pledge over the SPV’s shares • Charge over SPV assets, property and fixtures, plant and equipment, etc. • Floating charge over current assets • Assignment of all insurance policies • Charge over all benefits accruing under hedging or risk management contracts

15. Scenarios of default and remedies • Relationship dynamic: • Financiers will structure ways to accelerate repayment / exercise step-in-rights / enforce security if things go wrong with either the project / shareholders / key project parties • Most defaults scenarios include a “cure period” • Waivers can be sought subject to agreement by lenders • Typical events of default include: • Non-payment of debt service • Misrepresentation • Illegality • “Cross-default” • Termination of core project documents • Revocation of licenses or permits • Insolvency events • Failure to maintain adequate debt service coverage levels • “Material adverse change” • Nationalization / Government default on Concession – financiers would recognize this is extremely unlikely in the case of Hong Kong!

16. Key takeaways • The earlier a financier gets involved the better • Advise on project and contract structures to ensure bankable financing • Interests of financier and SPV are often aligned • Both want risks to be properly mitigated and transferred to parties that are best positioned to address them • Risk allocation and monitoring has to be fair and sustainable to ensure a working relationship • Has to be commercial to incentivize everyone to comply • Has to balance monitoring needs vs. practicality / administrative convenience • Transparency, open communication and good human dynamics are key • Financing relationship lasts as long as 10 to 15 years • A well-structured and well-maintained financier-SPV relationship is conducive to a successful PPP program

17. Robert Johnson Managing Director Head of Oil & Gas and Petrochemicals, Asia Grace Fung Oei Head of Global Corporates & Public Sector Client Relationships, Wholesale Banking Standard Chartered Bank (Hong Kong) Limited 9th Floor Standard Chartered Bank Building 4-4A Des Voeux Road Central Hong Kong Robert.Johnson@hk.standardchartered.com Standard Chartered Bank (Hong Kong) Limited 10th Floor Standard Chartered Bank Building 4-4A Des Voeux Road Central Hong Kong Grace.Fung@hk.standardchartered.com Tel (852) 2841 0357 Fax (852) 2523 4273 HP (852) 9880 7294 Tel (852) 2821 1513 Fax (852) 2523 5854 HP (852) 6336 3328 Thank you