Co-published project finance guide: Interview


their project has sound economics, so in energy projects there will be a very high emphasis on fixed price take-or-pay without any merchant risk. I think you will also see for traditional bank debt a shift towards tighter covenant packages, along with mechanisms such as Libor [London Interbank Offered Rate] floors to protect pricing. But it will largely be relationship driven, so first time borrowers or soft sponsors will find it difficult. If project bonds, however, can be


introduced into a capital structure, another option is for borrowers to utilise a short- dated amortising bank tranche and a longer-term bond (or the ability to later add bonds to refinance the bank tranche or supplement the capital structure), with the bond proceeds being applied before the bank proceeds. Nevertheless, the use of a short-dated bank tranche does expose a sponsor to refinancing and market risk down the road – but at least post- construction.


IFLR: Where in the world do you see the most effective PPP programmes and what factors, in your view, have contributed to their success? UK, Canada and Australia are probably


the top three on my list. I’ve personally worked on some extremely successful programmes in Australia, largely because there was a clear and transparent government mandate and process to get it done. Execution has been swift and risk has been appropriately transferred from the government to the private sector, and there has been a clear set of principles to achieve that outcome. A successful PPP programme will also provide for alternatives to a pure availability-based pricing model, meaning that demand risk for the asset can be fully transferred to the private sector. The US, by comparison, seems to have


fallen behind the rest of the world due to a host of systemic and political issues. Optimistically, I see this improving over time, but historically there has been a lack of political will and a cohesive framework of PPP enabling legislation at the state level. One bright light, however, has been the US federal Tifia programme [Transportation Infrastructure Finance and Innovation Act], which provides qualifying transportation projects with cheap,


subordinated financing. It’s not designed to be a permanent piece in the capital structure, but it has been incredibly effective in bridging the gap for many US tollroads in reaching financial close.


IFLR: Renewable energy is often criticised as being prohibitively expensive. Is it feasible for clean power to rival fossil fuel generation? In the near-term, for renewable energy


generation to be cost-competitive with fossil fuel generation, those industries will continue to rely heavily on government subsidies, either in the form of feed-in tariffs or tax credit programmes. I think what has dogged the industry, certainly in the US, has been the lack of clear and established policy on how to support these industries on a long-term basis. For example, the US federal production


tax credits for wind facilities is set to expire at the end of this year. While the market is cautiously optimistic, no one knows if Congress is actually going to renew the programme. In context, the programme has already expired three times in the past, with Congress retroactively extending it several months later. All of this has placed the wind industry in a state of flux. These legislative uncertainties make it difficult to create an established and cost-effective renewable energy industry – especially in solar and wind. While technology and production cost efficiencies are improving, uncertainty over the receipt of government subsidies also puts the renewable manufacturing chain at risk, as it’s forced to stop and start every time there is a change in policy. Nevertheless, over time, I think that we


will see a converging trend in the cost of renewable and fossil fuel generation. For example, there are certain markets in which the cost of peaking power in solar and wind is cheaper than fossil fuel generation. However, given the relatively low price of gas at the moment, this trend may be slow coming.


IFLR: What is the ideal private practice lawyer/bank counsel dynamic when working on a project financing? What can they do to be most useful to inhouse Like most things in life, it’s open communication and establishing a


“First time borrowers or soft sponsors will find it difficult


” www.iflr.com


“Structurally, sponsors will need


to ensure their project has sound economics


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relationship of trust, which naturally evolves over time and after having worked collaboratively on a number of transactions. Project financings are inherently more complicated than other types of corporate financings, such as leveraged acquisitions. They involve a larger suite of documents and complexities that aren’t inherent in mainstream corporate financings. In addition to the project finance desk, I also cover two additional desks within the firm’s global capital markets, all of which could have up to 15 transactions going at any one time. It means that you can’t be on every call or across the drafting of every document, so you rely heavily on your external lawyers to steer the ship in a way that protects the firm but is also constructive in getting the deal done. In short, you are really reliant on your external lawyers to be your eyes and ears, and have the right measure of legal and commercial acumen to meet the firm’s and its client’s objectives.


IFLR: Reflecting on your career, what is the most interesting project you have worked on? I’ve been practicing for 12 years


throughout Asia, Australia and now New York, but I think one of the more interesting projects was a gold loan for a Papua New Guinea gold mine in 2005. The loan was actually in bullion (with a small revolver alongside) and was repaid in bullion – providing a natural hedge to the project. The general loan agreement had to be recast to provide for actual delivery and other legal aspects that we’d not had to consider previously. Even aside from that, it was an


interesting and complicated project. It involved political risk insurance placed in the commercial market, the need for a complex swap overlay to take out an existing swap, plus all the other legal and commercial issues that come along with constructing and operating a mine in PNG.


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