International Finance Presented by: Eva Lewis January 22, 2013 The - - PowerPoint PPT Presentation
International Finance Presented by: Eva Lewis January 22, 2013 The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The
The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Project Finance
− Advantages & Limitations of Agency Solutions
− Types of PPP Contracts
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Citi welcomes the opportunity to discuss international financing regarding the logistics hub. We believe there are significant opportunities for funding infrastructure development projects and
Why is the proposed logistics hub critical? Expansion of the Panama Canal expected to be completed by June 2015 Increased economic activity Increased competition, products and services Access to foreign capital and investment Expansion, modernisation and privatisation of the Kingston Container Terminal
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Public Sector Debt but Massive Need for Infrastructure Investment
Public sector debt crisis changes dynamics of what governments can do alone Governments significantly underinvested – Squeezed public finances will see a turn towards private investment – Vital that investment continues for future social and economic security Massive new investment needs – New projects for growth (Greenfield) – Backlog of maintenance, renewal and extension (Brownfield)
Investment in Infrastructure
Local and Regional Governments Sovereign Wealth Funds Policy Banks Pension Funds Public Private Partnerships – Contracting the private sector for needs often fulfilled by public sector – Forms and source of funding
Diminishing Liquidity from the Bank Market
European crisis – Impacting European bank capital and ability to continue project finance activities – Impacting cost of funding of periphery ECAs Bank Regulatory Changes – Basel lll negatively impacting bank’s EM risk capital – Basel lll penalizing project finance Development of LCY Debt Capital Markets
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Government debt and social issues
Demand for infrastructure is set to continue to expand significantly in the decades ahead – Driven by major factors of change such as global economic growth, technological progress, climate change, urbanisation and growing congestion – As global population continues to grow, emerging markets become industrialised, and developed markets need to replace ageing infrastructure, the need for project finance (primarily senior secured), will continue to grow Significant Forward Investment Need – It is estimated that over US$50 trillion in capital investment will be required for roads, water, energy, airports, telecommunications and rail between 2010 and 2030 in OECD countries alone(1) – India’s 2012 – 2017 five-year plan embeds US$1 trillion equivalent for infrastructure and power needs – Estimated investment in alternative energy power generation sources in the U.S. of up to $800 billion over the next 5 – 10 years Government debt creates challenges to infrastructure development – Necessary development of ageing infrastructure systems is difficult to meet due to squeezed public finances – Requirement for private sector involvement as well as sustainable, efficient infrastructure solutions Infrastructure development necessary despite government debt constraints – Infrastructure ensures service and good delivery, promoting growth and prosperity, ultimately providing significant social and economic benefits, and enhancing public finances – A 60% improvement in infrastructure productivity could provide US$1 trillion in annual savings(2) Port capacity could expand by 30% by maximizing the efficiency of current operations – Failure to progress would cost in terms of congestion, environmental problems, unreliable supply lines and blunted competitiveness
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2. McKinsey Global Institute, “Infrastructure Productivity: How to Save $1 Trillion a Year”, January 2013
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Significant Forward Investment Need
As the world’s population continues to grow, emerging markets become industrialized, and developed markets need to replace aging infrastructure, the need for project finance (primarily senior secured), will continue to grow – It is estimated that over US$50 trillion in capital investment1 will be required for roads, water, energy, airports, telecommunications, and rail between 2010 and 2030 in OECD countries alone – The European Commission estimates €1.5 – 2 trillion of investment needs in infrastructure / power across the E.U. over the next 10 years – India’s 2012 – 2017 five-year plan embeds US$1 trillion equivalent for infrastructure and power needs – Estimated investment in alternative energy power generation sources in the U.S. of up to $800 billion over the next 5 – 10 years
Historically Bank Market Funded
Historically, 90 – 95% of all project finance debt globally has been funded by bank and ECA lenders – Percentage of project finance in the U.S. that is bond funded is meaningfully higher: 20 – 25% (mostly power / pipelines) – In the U.S., “core” infrastructure is mostly financed in the tax-exempt market Non-recourse nature of project / infrastructure financings engenders need for a specialized skill set in this space, the bulk of which is concentrated in the banking sector
Institutional Investors Will be Needed to Fill the Void
The scaling back of bank lending to this sector translates into an important opportunity for meaningful institutional investor involvement, particularly given the long duration nature of project / infrastructure assets Significant depth of potential capacity, particularly in the U.S. credit markets Standing precedents of power, oil and gas, mining, and infrastructure projects having all been financed via project bonds, on both a greenfield and brownfield basis Ratings infrastructure exists: each of Moody's, S&P, and Fitch have published ratings criteria specifically for project finance Secured nature of financings, together with stable cash flow profiles and comparatively high recoveries in default comprise the building blocks for a compelling relative value proposition Significant investments from pension funds and insurance companies for long-dated assets
Given global investment needs across power, transport, and social infrastructure, as well as natural resources, the demand for project finance going forward will remain significant.
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
▲ Strong track record in limited recourse bank financing ▲ Flexible source of finance (drawdowns, prepayments)
▼ Smaller market for
long tenors
Bank Debt
▲ $ denominated project bond market liquid ▲ Longer average life ▲ Index-linking to hedge inflation risk and lower initial financing costs
▼ Market risk
(availability, price)
▼ Rating requirement
Buy and hold institutional investors ▲ Terms can be very flexible ▲ Avoids some of the disadvantages of a public issue
▼ Suitable for small
amounts
▼ Small investors’ universe
Shareholder loans to achieve cash efficiency Bridge loans allow back- ending of actual disbursement to maximise return ▲ Long tenors may be available maturities and very attractive pricing ▲ No rating required
▼ Bank/Monoline guarantee
usually required
▼ Limited to a percentage
project cost Monoline insurers wrapping bond financing ▲ Increased certainty of financing (availability, price) ▲ Improved pricing and tenors ▲ Increased flexibility
▼ Investment grade rating
required Tranching of debt to match risks may be efficient (and allow, for example, investment grade rating on senior tranches) Junior debt could allow
concession length Specialised funds – typically higher return requirements than “industry” shareholders Regional banks and companies may provide local edge
Debt Capital Markets Private Placements Shareholder Equity Third Party Equity Junior Debt Credit Enhancement EAF Financing The required infrastructure development projects can be financed through a combination of several sources of financing.
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
What are Official Agencies?
Export Credit Agencies (“ECAs”), such as The National Export-Import Bank of Jamaica (EXIM Bank), are government agencies with a mandate to support exports from their home country, stimulating the home country economy and creating jobs
What Types of Loans Are Supported by Official Agencies?
Borrowers are typically in the developing markets, with some exceptions Types of loans include short term trade finance, long term corporate financing, aircraft and ship financing, complex project financing and financing of capital goods for trade purposes With the exception of short term trade finance transactions, tenors are typically between 7-15 years and fixed and floating rate financings are supported
Investment Highlights of Official Agency-Guaranteed loans:
Typically highly structured with multiple sources of repayment (borrower, Official Agency) and often with additional asset security Provide low risk exposure to the emerging markets and project finance Allow investors to diversify from traditional sovereign investments
Export and Agency Finance (EAF) arranges and offers advice on structured financings that manage risk and funding through various forms of support provided by official agencies
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Agency Type Description / Characteristics of Financing Advantages / Limitations Multilateral
member countries
and/or services
as direct lending ▲ Main source of long term capital in high volatile environments ▲ Relatively flexible eligibility requirements (untied) ▲ Withholding tax exemption ▲ Open for refinancing solutions (IFC) ▼ Needs to adhere to certain statutory requirement such as environmental ▼ Fairly extensive execution timeframe
Bilateral
investments into the - emerging markets
and/or services
to own government objectives
guarantees, partial guarantees and direct loans ▲ Main source of long term capital in high volatile environments ▲ Relatively flexible eligibility requirements (untied) ▲ Withholding tax exemption ▲ Open for refinancing solutions (FMO) ▲ Continuous innovative solutions ▼ Needs to adhere to certain statutory requirement such as environmental risk assessment
Export Credit Agencies
investment from
services
85% of the contract value ▲ Low subsidized pricing ▲ Very predictable terms and conditions ▲ Comprehensive guarantees increase financing appetite from financial institutions ▼ Rigid eligibility criteria ▼ Strict funding requirements
Agencies can be divided into 2 categories depending on whether their support is “tied” (Export Credit Agencies) or “untied” (Multilateral and Bilateral Agencies) to exports.
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Development of infrastructure Effective Risk Management Innovation and best practice Quicker implementation Alignment of interests On going maintenance Price certainty
Jamaica Public Service Company Limited – divestment of the GOJs 80% interest in the entity Sangster International Airport’s privatization PPPs are a means of contracting the private sector for the delivery of services traditionally provided by the public sector; PPPs seek to leverage the private sector’s expertise in project management. In an environment of budget austerity and increased demands for infrastructure improvement to support GDP growth, Latin American governments have looked to innovate PPP structures in order to access a broader array of financing alternatives for infrastructure projects.
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Types of PPPs Acronym Mode of Entry Operation and Maintenance Investment Ultimate Ownership Market Risk Duration (Years) Management Contract Contract Private Public Public Public 3 – 5 Leasing Contract Private Public Public Semi-private 8 – 15 Rehabilitate, Operate and Transfer ROT Concession Private Private Public Semi-Private 20 – 30 Rehabilitate, Lease / Rent and Transfer RLRT Concession Private Private Public More- Private 20 – 30 Merchant Greenfield Private Private Public More- Private 20 – 30 Build, Rehabilitate, Operate and Transfer BROT Concession Private Private Public Private 20 – 30 Build, Own and Transfer BOT Greenfield Private Private Semi-private Private 20 – 30 Build, Own, Operate and Transfer BOOT Greenfield Private Private Semi-private Private 30+ Build, Lease, Own BLO Greenfield Private Private Private Private 30+ Build, Own, Operate BOO Greenfield Private Private Private Private 30+ Partial Privatization Divestiture Private Private Private Private 30+ Full Privatization Divestiture Private Private Private Private Indefinite
Reference: Thomsen (2005), Hammami and others (2006)
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
themselves in exchange for a premium Export Credit Agencies
capital markets alternatives EAF Financing
suppliers and customers
Supply Chain Financing
Working Capital Financing There are a number of options available for International Trade Finance.
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
1 Improves the commercial relationship with the supplier and facilitates competitive payment terms. The supplier transfers all the payment and collection risk to the lender. 2 Potentially reduces operational costs and provides efficiency with electronic payments and remittance
and errors can be identified faster. The Borrower / Buyer allows its suppliers to utilize its credit rating to convert their Account Receivables (AR) into cash at a non-recourse basis. This will free-up the supplier’s lines of credit and reduce financing costs. 3 The program allows the Borrower / Buyer to improve Days Payables Outstanding (DPO) and achieve better competitive bidding/pricing. The supplier will reduce Days Sales Outstanding (DSO) releasing working capital from AR by accelerating AR to cash, helping them to power more sales and support job growth. Supply Chain Financing is a transaction structure consisting of:
beneficiaries.
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The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.
Presenter details: Eva Lewis Director Tel: 1 (876) 936-3245 Email: Eva.Lewis@Citi.com
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