BRD-NET Lancement Commercial - Cnr -cme

Financing Power Projects
A Lender Perspective
Costinesti, 15th of June, 2016
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BRD – Groupe Société Générale
Summary
I.
Financing Power Projects - the Lenders’ perspective
II. Environmental issues
III. BRD – major player on the energy market
IV. Conclusion
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BRD – Groupe Société Générale
I. Financing Power Projects – the Lenders’ view
1. General Context
 Romanian Power and especially the power generation sector is
dominated by old capacities (most of the power plants have
been built between 1950 and 1980)

Modest investment during the last years resulting in low
efficiency and high emissions

Strategy of the Government aims to modernize and revamp
old capacities in order to cope with the new environmental
standards, to build new capacities in order to replace the ones
shut down and to switch to renewable energy as the natural
resources are limited.
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BRD – Groupe Société Générale

Power projects are capital intensive requiring huge investments.
Therefore the financing of these projects is complex.

The traditional source of financing has been the government budget or
government sponsored borrowing (loans guaranteed by the state) as
most part of this sector is state owned or recently privatized.

Under the new rules of competition and state aide clearance established
by EU, the government support has been very much diminished/limited.

EU funds 2007-2013 limited to specific investments, especially related to
the environmental issues and energy efficiency measures.
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EU grants under 2014-2020 programmes are financing:
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Clean energy and energy efficiency in order to support a low carbon economy (~218
MEUR)
Energy efficiency of the centralized DH systems in selected cities (~275 MEUR)
Smart & sustainable energy transport system (~75 MEUR)
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BRD – Groupe Société Générale
2. Two main sources for funding investments:
Equity and Debt Financing
 Equity
 Sources: private or public sponsors
(shareholders), stategic investors, equity funds,
others (employees, individual investors etc)
 Returns: dividends
 Security of investment: none
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BRD – financement de projets
Equity and Debt Financing
 Debt
 Sources: commercial banks, international financing
institutions (EBRD, EIB, IFC, WB etc), Export Credit
Agencies (COFACE, HERMES…), supplier credit, financial
investors, private equity funds, sovereign loans etc.
 Security of investment (No recourse)
• Assets of the project
• Assignment of contracts
 Security of investment (Recourse or corporate based)
• Balance sheet of the owner
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Recourse (corporate) Financing

Power projects in developing countries are traditionally built as
extensions of an existing power plant.

Funds are provided on the account of the entire company.

As loan security, lenders have full recourse to the assets and
revenues of the entire company rather than recourse only to funds
related to the new plant.

The corporate loan is a simple mechanism: the company is granted
the loan by one bank or a club of banks in order to finance the
project and the loan is reflected in the balance sheet of the company

Conditions/securities:
Acceptable Debt/Equity ratio and some key financial covenants
Collateral/Guarantees to cover the amount of the loan
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BRD – Groupe Société Générale
Recourse (Corporate) Financing
 Advantages of the Corporate Loans
 Can be arranged quickly if conditions are met
 Simple documentation and security arrangements
 Disadvantages of the Corporate Loans
 Risks are mainly carried by the Company
 Loan is registered on the B/S of the Company increasing
the debt burden
 Repayment periods are not very long (5-10 years)
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BRD – Groupe Société Générale
Bond issue

Less extended on the Romanian markets, bonds represent a
legally binding obligation by the issuer to repay a principal
amount at a future date (medium to long term) and a stream
of interest (usually fixed rate interest).

It is a debt which is intended to be tradable and therefore is
subject to the control of regulatory authorities (CNVM or
BVB or other foreign stock exchanges).

Funds are provided by investors (insurance companies,
pension funds, asset managers, private equity funds,
private individuals…).
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BRD – Groupe Société Générale
Bond issue
 Issuers range from governments, banks, municipalities and
corporate involving different scale of risk; usually large
creditworthy companies.
 Banks could cover a range of roles such as intermediation,
placement of the issue in the primary market or custodial
services.
 Rating Agencies: such as moody’s, S&P and Fitch may provide an
opinion on the credit risk associated to the bond issue
 Conditions/security:
 Usually bonds are issued without collateral
 In some cases one can see covenants relating to ownership, parri
passu or financial covenants
 Tenor up to 10-15 years (longer for sovereing or sub-sovereign)
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BRD – Groupe Société Générale
Bond Issue
 Advantages of Bonds
 A clear alternative to traditional bank loan (volatile liquidity,
no capital requirements for banks)
 Long term financing appropriate especially for refinancing
assets
 Disadvantages of the Bond Issue
 Arranging a Bond issue may be a long process (approx. 6
months or more)
 Fully drawn up-front, so no flexibility in terms of drawings
 Likely to be used especially by corporate with solid financial
standing and visibility on further development.
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BRD – Groupe Société Générale
Non Recourse or Limited Recourse Financing
 An alternative to the corporate loan, especially when we are
talking about the construction of a new unit, is the setting up of
an SPV, dedicated to the development and operation of a new
project.
 In this case, the SPV is the Borrower in relation to the bank
 The Sponsor contributes with equity in the SPV
 The assets and the future cash flow of the project itself secure the
debt and not the other Sponsor’s available resources
 Since the repayment of the loan is primarily dependent on the
success of the project, lenders pay close attention to the project
risks.
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BRD – Groupe Société Générale
Non Recourse or Limited Recourse Financing

Which are the main risks ? – Risk matrix
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Political Risk
Regulatory Risk
Environmental Risk
Completion Risk (construction, cost-overrun, delays)
Supply Risk (proven technology)
Operating Risk (mentainance, balancing, managemen
Market/price Risk (energy price, GC price)
FX risk
Interest risk
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BRD – Groupe Société Générale
Non Recourse or Limited Recourse Financing: conclusion

Project Finance mechanism is complex:
 The SPV is granted the loan in order to finance the project
 The risks are numerous and diversified
 The source of debt service (interest, principal and fees) is primarily the cash
flow generated by the project
 The lender has no or limited recourse on the Sponsor

Conditions/covenants:
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Acceptable Debt/Equity ratio and other key financial covenants
Fuel supply security
Reliable general contractor and operation and maintenance contractors
Reliable cash flow projection based on LT power purchase agreements
Acceptable debt service coverage ratio
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BRD – Groupe Société Générale
Non Recourse or Limited Recourse Financing: conclusions
 Security package:
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Assets pledged in favor of the bank
Assignments of all project contracts
Accounts pledged in favor of the bank
Construction and Performance Bonds assigned/pledged
Pledge on shares
In case of limited recourse, corporate guarantee from the Sponsor
covering some risks related to the project (overrun costs, cash flow
shortfall etc).
 Who are the lenders:
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Commercial banks
International Finance Institutions (EBRD, EIB, IFC, WB, NIB etc)
Export Credit Agencies (COFACE, HERMES, SACE etc)
Mezzanine funds (specialized infrastructure funds)
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BRD – Groupe Société Générale
Non Recourse or Limited Recourse Financing: conclusions
 Advantages:
 Minimum risk carried by the Sponsor
 Loan does not appear in the balance sheet of the Sponsor
 Long maturities (12 – 15 years)
 Disadvantages:
 Takes longer time to reach financial closing
 Involves complex legal documentation and contractual arrangements
(external lawyers) and consultants (insurance brokers etc.)
 Strict requirements for due diligence (technical, environmental, legal
due diligence)
 High compliance for administration & reporting requirements
including for environmental matters.
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BRD – Groupe Société Générale
Public Private Partnership (PPPs)
 It is a partnership between the public sector and the private
sector for the purpose of delivering a project or a service
traditionally provided by the public sector
 The overall aim of PPPs is to structure the relationship
between the public sector and the private sector, so that the
risks are borne by those best able to manage them
 Increased value is achieved for public services through the
exploitation of private sector skills and competencies
 Transfer of appropriate level of risks and responsibility
 But, government maintains control where appropriate
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BRD – Groupe Société Générale
III. Environmental Issues
 Power Projects are particularly subject to environmental concerns
since the conventional power plants are most of them factors of
pollution
 Lenders requires that project Sponsors address relevant
environmental impacts since environmental issues might result
in serious financial losses
 Lenders impose under the loan documentation strict
guidelines/reportings for environmental impacts
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BRD – Groupe Société Générale
IV. BRD Groupe Société Générale – major player on
the energy market
BRD – an universal bank
 Retail Banking
 Corporate Banking
 Investment Banking
BRD - visit card
 An affiliate of Société Générale Groupe
 Second largest bank in Romania
 More that 50% of the large corporate are banking with BRD in
Romania
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BRD – Groupe Société Générale
IV. BRD Groupe Société Générale – major player on the
energy market
BRD – focus on energy sector
 The exposure of the bank approaches 1 billion EUR
 Facilities arranged both on short term and long term, corporate or
limited recourse,
 Clients based in production, transport, distribution and supply
 Large coverage of both public and multinational companies,
 Participation in all EU/EBRD’s energy efficiency frame facilities
put in place in Romania (EEFF & RoSEFF for companies and
MEFF for municipalities), including financing of ESCOs
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BRD – Groupe Société Générale
V. Conclusions
 Power is a strategic sector with huge investment needs
 Banks are interested to finance power projects based either on
balance sheet of the Sponsor or on a Project Finance basis
 While corporate based loans are quite simple, the Project Finance
and Bond issues mechanisms are more complex and require many
levels of due diligence and documentation
 Environmental matters are one of the key elements and banks are
using more and more responsible methods to address these issues
 Société Générale Groupe and its local affiliate are among the
leading banks in power project financing and applies responsible
rules for environmental assessment.
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Q&A
Thank you !
Contact: Carmen Arhip
Tel.: +40 21 301 4552
E-mail: carmen.arhip@brd.ro
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