§8.8.6 Price and Volume Risk 164
§8.8.7 Usage Risk 167
§8.8.8 Risks for the Offtaker or Contracting Authority 169
§8.9 Input Supply Risks 170
§8.9.1 Input Supply Contracts 170
§8.9.2 When is an Input Supply Contract not Needed? 173
§8.9.3 Water and Wind 173
§8.9.4 Mineral Reserves 173
§8.9.5 Other Utilities 174
§8.9.6 Waste Disposal 174
§8.10 Force Majeure 174
§8.10.1 Force Majeure and Insurance 175
§8.10.2 Temporary Force Majeure 176
§8.10.3 Permanent Force Majeure 178
§8.11 Contract Mismatch 178
§8.12 Recourse to the Sponsors 179
Chapter 9
Macroeconomic Risks 183
§9.1 Inflation 183
§9.1.1 Inflation-Indexed Financing 185
§9.2 Interest Rate Risks 185
§9.2.1 Interest Rate Swaps 186
§9.2.2 Interest Rate Caps and Other Instruments 192
§9.2.3 Scale and Timing of Interest Rate Hedging 193
§9.2.4 Additional Costs 193
§9.2.5 Redeposit Risk 194
§9.2.6 Interest Rate Hedging before Financial Close 194
§9.3 Exchange Rate Risks 195
§9.3.1 Hedging of Currency Risks 196
§9.3.2 Finance in More than One Currency 197
§9.3.3 Conversion of Local Currency Revenues 198
§9.3.4 Fixing of Security in Local Currency 199
§9.3.5 Catastrophic Devaluation 199
Chapter 10
Political Risks 203
§10.1 Projects and Politics 203
§10.2 Classification of Political Risk 204
x Contents
§10.3 Currency Convertibility and Transfer 205
§10.3.1 Enclave Projects 206
§10.3.2 Countertrade 207
§10.3.3 Use of Offshore Reserve Accounts 207
§10.4 Expropriation 208
§10.5 War and Civil Disturbance 209
§10.6 Change of Law 209
§10.6.1 Change of Law Risk in Project Contracts 211
§10.6.2 Funding the Costs of a Change of Law 212
§10.7 Quasi-political Risks 213
§10.7.1 Breach of Contract and Court Decisions 213
§10.7.2 “Sub-sovereign” (or “Sub-state”) Risks 215
§10.7.3 Creeping Expropriation 215
Chapter 11
Political Risk Guarantees, Insurance, and Finance 217
§11.1 Mitigation of Political Risks 217
§11.2 Export Credit Agencies 218
§11.3 Export Credits 219
§11.3.1 Export Credit Structures 220
§11.3.2 The OECD Consensus 221
§11.3.3 Assumption of Risks and Scope of Cover 222
§11.3.4 Cash Collateralization 224
§11.3.5 Benefit of ECA Support 225
§11.4 Untied Cover and Financing 225
§11.4.1 Political Risk Insurance for Equity Investment 226
§11.4.2 Development Finance Institutions 227
§11.5 ECA Structures and Products 228
§11.5.1 United States 229
§11.5.2 United States 231
§11.5.3 Canada 232
§11.5.4 Japan 232
§11.5.5 France 233
§11.5.6 Germany 233
§11.5.7 Italy 234
§11.5.8 United Kingdom 234
§11.6 International Financing Institutions 236
§11.6.1 The World Bank 237
§11.6.2 International Finance Corporation 240
§11.6.3 International Development Association 241
Contents xi
§11.6.4 Multilateral Investment Guarantee Agency 242
§11.6.5 Asian Development Bank 243
§11.6.6 African Development Bank 244
§11.6.7 Inter-American Development Bank 244
§11.6.8 European Bank for Reconstruction and
Development 245
§11.6.9 European Investment Bank 245
§11.6.10 Nordic Investment Bank 248
§11.6.11 Islamic Development Bank 248
§11.7 Private-Sector Insurance 249
Chapter 12
Financial Modeling and Evaluation 251
§12.1 Model Inputs 252
§12.2 Model Outputs 253
§12.3 Macroeconomic Assumptions 253
§12.3.1 Inflation 254
§12.3.2 Commodity Prices 254
§12.3.3 Interest Rates 255
§12.3.4 Exchange Rates and Currency of the Model 255
§12.3.5 GDP and Traffic Growth 256
§12.4 Project Costs and Funding 256
§12.4.1 Project Costs 257
§12.4.2 Project Funding 258
§12.5 Operating Revenues and Costs 259
§12.6 Loan Drawings and Debt Service 259
§12.7 Accounting and Taxation Issues 260
§12.7.1 Capitalization and Depreciation of
Project Costs 260
§12.7.2 The Dividend Trap 262
§12.7.3 Negative Equity 264
§12.7.4 Timing of Tax Payments 264
§12.7.5 Value-Added Tax 265
§12.7.6 Withholding Tax 265
§12.7.7 Exchange Rates and Tax 265
§12.7.8 Inflation and Tax 266
§12.8 Equity Returns 267
§12.8.1 Net Present Value 267
§12.8.2 Internal Rate of Return 269
xii Contents
§12.8.3 Using NPV and IRR Calculations for Investment
Decisions 270
§12.8.4 Noncash Investment 272
§12.9 Debt Cover Ratios 272
§12.9.1 Annual Debt Service Cover Ratio 273
§12.9.2 Loan Life Cover Ratio 274
§12.9.3 Average ADSCR and LLCR 274
§12.9.4 Project Life Cover Ratio 275
§12.9.5 Reserve Cover Ratio 275
§12.9.6 Calculating Cover Ratios 276
§12.10 The Base Case and Changes in Assumptions 277
§12.11 Sensitivity Analysis 277
§12.12 Investors’ Analysis 278
§12.12.1 Investors’ Returns 278
§12.12.2 Timing of Equity Commitment 279
§12.12.3 Effect of Equity Resale 280
§12.12.4 Benefit of Refinancing 281
Chapter 13
Financial Structuring and Documentation 283
§13.1 Debt: Equity Ratio 284
§13.1.1 Level of Debt 284
§13.1.2 Effect of Cover Ratio Requirements 285
§13.1.3 Projects without Equity 286
§13.1.4 Calculation of Debt:Equity Ratio 287
§13.2 Debt Service 287
§13.2.1 Term of Financing 288
§13.2.2 Average Life 288
§13.2.3 Repayment Schedule 289
§13.2.4 Flexible Repayment 293
§13.3 Drawdown of Debt and Equity 293
§13.3.1 Priority of Drawing 293
§13.3.2 Procedure for Drawing 295
§13.3.3 Contingency Funding 296
§13.4 Interest Rate and Fees 297
§13.5 Control of Cash Flow 298
§13.5.1 The Cash Flow Cascade 299
§13.5.2 Reserve Accounts 300
§13.5.3 Controls on Distributions to Investors 302
Contents xiii
§13.5.4 Cash Sweep 303
§13.5.5 Cash Clawback 304
§13.6 Debt Prepayments and Refinancing 305
§13.6.1 Loan Commitment Reduction 305
§13.6.2 Partial Prepayment 306
§13.6.3 Refinancing 306
§13.7 Security 308
§13.7.1 Mortgages and Contract Assignments 309
§13.7.2 Security Over Project Company Shares 311
§13.8 Financial Close— Conditions Precedent 312
§13.9 Representations and Warranties 314
§13.10 Covenants 316
§13.10.1 Positive Covenants 317
§13.10.2 Negative Covenants 318
§13.11 Events of Default 319
§13.12 Waivers, Amendments, and Enforcement on Default 321
§13.13 Intercreditor Issues 323
§13.13.1 Interest Rate Swap Providers 325
§13.13.2 Fixed-Rate Lenders 326
§13.13.3 Lenders with Different Security 326
§13.13.4 Lessors 326
§13.13.5 Subordinated or Mezzanine Lenders 327
Glossary and Abbreviations 329
xiv Contents
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