Key Issues for Transaction Bankability and Financial Close

Key Issues for Transaction Bankability and Financial Close
Presentation by:
Andrew Alli
Chief Executive Officer
May 25th 2011
Requirements for Bankable Power Projects
There are a number of requirements for banks and private investors to finance
power projects in Nigeria across the value-chain, including but not limited to:
Legally binding long-term GSPA with credible supplier
Gas pricing pass-through to power off-taker in PPA
Credible gas processing, transportation and supply infrastructure
Appropriate guarantees and credit enhancement for gas payments
Fuel Supply
 Construction or Rehab: Competitive lump sum, turn-key EPC contracts
o Fixed delivery dates, liquidated damages, performance guarantees
 Operations and Maintenance: Performance-based term O&M contracts
o Proven technology, competitive procurement, credible operator
 Environmental & Social Impact Assessment (Equator Principles)
 Long-term concession contract with world-class technical partners
o Long-term capex investment and operations funding availability
 Independence and capacity implement system operator role
 Efficient, market-based system of rules for power contracts
 Customer base and mix: demographics, creditworthiness, retail/wholesale
 Operator: High technical capacity and operational experience
o Network operations and customer relationship management
 Capacity to invest in new technology and long-term business plan
o Towards reduction of aggregate collection losses
o Expansion of distribution network penetration
Private Power Finance: Key Structuring Considerations
Project Development Phase
 Early stage risk capital for:
Environmental Studies
Feasibility/Demand Studies
Consulting/Tendering Costs
Legal and Technical Fees
 Often comes up to 10.0% of
total project costs
Construction Phase
Operations Phase
 Construction finance to take project to completion:
 Financing Mix: Debt/Equity typically 70/30
 Normal Viability Metrics:
o Debt Service Coverage Ratios (DSCR)
o Project & Equity IRRs
 Requires long term (>10 yrs), low interest rate loans
 Equity funding usually required prior to debt availability
Early Stage Risk Capital:
Equity Investment:
Debt Financing:
 May be provided by:
o Private Funds
o Developmental Grants
o Private Sponsors
o Government Grants
o Vendor Risk Participation
 Requires patient investors
(public sector, specialized
funds, operating companies,
pension funds)
 DSCRs of up to 1.5x - 2.0x
may be required depending
on position in value chain
 This is a crucial stage in project
financing as decisions here will
determine project bankability
 Could take up to 5 years from
here to financial close
 Equipment contractors also
typical anchor investors
 IRRs typically in the 15.0% to
18.0% range
 Strong sponsors critical to
catalyze debt financing
• EXIM and Multilateral
financing typical
• Debt Service Reserve
Account (DSRA) typical
• Interest During Construction
(IDC), fees and expenses
typically rolled-up into cost
Private Power Finance: Key Risk Issues…/1
Licensing &
Pricing Risk
License for bankable period (15-25 years, with ease of renewal)
Tariff commercially viable, cost reflective, FX flexible, no reversals
Fuel supply: commercial pricing to ensure availability and quality
Bankable PPA (firm tenor, viable price, FX flexible)
Credible off-taker: Strong Disco with systems, management and trackrecord of good collections & payment (can be SOE or POE)
If Disco not credit-worthy, need sovereign guarantee for overall project
risk, and payment guarantee via LCs to mitigate delayed payment
Even with sovereign guarantee, must have strong Disco operationally,
to ensure collections and system sustainability
Fuel Supply
Bankable FSA: fixed price long term contract matching tenor of PPA
with credible fuel provider
Fuel availability and guarantee of supply and quality
Liquidated damages in event of lack of supply linked with liquidated
damages and payments on PPA
Alternative fuel, dual fuel projects also mitigate risk
Private Power Finance: Key Risk Issues…/2
Revenue formula & frequency of regulatory review
License or concession?
Tariff policy: simplify multiple tariff structures
Subsidy program that places no risk on the Disco
Ability for Disco to pass though uncontrollable costs
Customer demand study
Market Risk
Price sensitivity and willingness to pay
Demand /willingness to pay studies conducted by credible technical
Financiers will usually require a third party validation
Technical losses addressed via investment plan (ongoing capex)
Commercial losses and collections rate addressed via competent
management and incentives, prepaid meter roll out
Collections , domiciliation of payments into specified accounts as part
of payment security
Sample Project: Greenfield IPP in Ghana
Ghana is a fast-growing economy with significant electric power
supply deficits forecasted based on current pace of growth
Recently discovered commercial quantity oil & gas resources,
expected to start yielding revenues in 2010, with significant local gas
utilization potential
AFC (in conjunction with major local and international partners) is
working to develop a 340MW combined cycle thermal IPP to meet
existing demand, and potentially utilize discovered gas resources
The Project is appropriately structured and has widespread support
at the highest levels of local and national government in Ghana, as
well as strong private sector support
Project Highlights
Work is concluded regarding necessary permits, agreements,
approvals and licenses, as well as early stage project development
Financial close is planned for early 2012, with development plan
now moving into concluding phases
AFC co-sponsors will include local entrepreneurs, international DFIs
and international power companies
Sample Project: Cape Verde Greenfield Wind-Farm
Cape Verde is an archipelago country with outstanding wind
resources, a heavy reliance on expensive imported fossil fuel for
energy generation and a strong growth economy with one of the
better credit ratings in Sub-Saharan Africa
The Project comprises the development, construction, ownership
and operation of 30 wind turbines on 4 islands for an approximate
28 MW of installed capacity for Cape Verde
AFC is working with leading international developers, InfraCo, and
local electricity company, Electra, to deliver the project
The Project is appropriately structured and enjoys widespread
support at the highest levels of government in Cape Verde
Project Highlights
Project development work is near conclusion with all major
contracts and agreements (PPA, EPC, O&M) in place, as well as
€30.0m debt capital commitments from AfDB and EIB
Construction expected to be concluded in two phases each
completed within 40 to 60 weeks of commencement
AFC’s c.40.0% ownership interest in a €61.0m innovative renewable
energy project underscores commitment to this sub-sector in Africa
AFC Power Sector Financial Services Offerings
The Africa Finance Corporation offers specialized advisory expertise and principal
investment capabilities across the power sector value chain
Advisory, Capital Raising, Principal Investing
Oil & Gas Fields Tanks, Ships, Pipelines Greenfield IPPs, Captive Industrial Plants Discos, Services
Upstream Gas Production
Fuel Supply Infrastructure
Near production oil & gas
asset development
Gas gathering, processing,
and transmission
Post production asset
enhancement and refinancing
Gas-to-power for domestic
IPPs, utilities and industrial users
Power Generation
Greenfield Independent
Power Plants (IPPs), with both
public and private partners
Captive plants for industrials
Electricity Distribution
Independent distribution
networks, Privatization advisory
Post-privatization financing
For AFC Power Sector Financial Services, Contact:
Andrew Alli
President & Chief Executive Officer
Solomon Asamoah
Deputy CEO & Chief Investment Officer
Oliver Andrews
Director & Chief Coverage Officer
T: +234 279 9605
E: [email protected]
T: +234 279 9620
E: [email protected]
T: +234 279 9617
E: [email protected]
Africa Finance Corporation
A: 3A Osborne Road,
Ikoyi, Lagos
T: +234 279 9600
E: [email protected]

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