PROJECTS December 2016 OVERVIEW Market Update 2 Brownfield - PowerPoint PPT Presentation

BROWNFIELD INFRASTRUCTURE PROJECTS December 2016

OVERVIEW Market Update 2 Brownfield Infrastructure Projects 5 Potential New Benchmark: Outer Suburban Arterial Roads Programme 8 Case study: LaGuardia Airport Terminal B Redevelopment Project 12 Conclusion 19 APPENDICES 21 Societe Generale CIB Infrastructure Project Finance 22 G Munro biography 25 07/12/2016 1

MARKET UPDATE

INFRASTRUCTURE FINANCE MARKET TRENDS  Bond financings were resurgent in the first half of the year totalling $15.82 billion, which was the highest half-year value since H1 2014, while all other types of funding were subdued. The total value of bank loans, at $65.54 billion, and DFI loans, at $19.75 billion, were both at their lowest levels since H2 2013, while equity investment fell to its lowest half-yearly total in more than five years to just $14.46 billion.  Asset acquisition financings recovered in H1 2016 to total $8.96 billion, while totals for both primary financings and re-financings fell. Primary financings hit a historic low of $67.28 billion in the first half, although second quarter deals represented more than two thirds of that total.  Landmark PPP refinancing of the Victoria Comprehensive Cancer Centre in Australia ● AUD 200m 5 year bank debt ● AUD 330m 11.5 year bank debt ● AUD 450m 24 year bond issued in the domestic and offshore market Source: IJ Global H1 2016 League Tables Analysis 07/12/2016 3

INFRASTRUCTURE FINANCE MARKET REGIONAL ANALYSIS  The European project finance market experienced a strong H1 2016 with loan volumes reaching ca. USD 50bn, an increase of 13% from this period last year (ca. USD 44bn). This trend is contrary to the global market where total volumes have reduced by 41% from H1 2015, the largest year-on-year decrease on record.  The infrastructure PPP (Public-Private Partnership) market has remained slow as the deal flow has reduced for greenfield projects. The main deals have been the refinancing of operating highways, new broadband infrastructure and the acquisition of operating infrastructure assets (e.g. gas/electricity distribution, airports).  An interesting market trend from a liquidity perspective has surrounded the vast inflows of liquidity from Chinese banks to the EMEA loan market with these institutions increasingly seeking leading roles in complex, long term financings. They have succeeded in plugging shortfalls in transactions including those where international sanctions have prohibited the participation of EMEA & US investors.  North American project finance year-to-date volumes totalled USD 28bn through Q3 2016, down 33% from the same period in 2015 as three jumbo LNG transactions totalling almost USD 20bn in the second quarter of 2015 make year-on-year comparisons challenging. The number of transactions was almost flat to last year at 84 versus 86 for the same period in 2015.  Mini-perm structures with tenors of 7 to 10 years continue to be the sweet spot for banks as appetite for longer maturities continues to decrease.  An institutional investor universe has developed for project finance loans with below investment grade credit profiles that are outside of most bank’s risk tolerance appetite.  Year to date Latin American syndicated loan volume plunged 77% to USD 8.5bn for the first nine months of 2016 versus USD 38bn for the same period a year ago and is expected to log its slowest year since volumes began to be tracked.  The Asia Pacific project finance market has continued to register volume decreases in 2016 and SG is forecasting volume to reach ca. USD 32.9bn, a 49% decrease versus last year’s figure.  While China continues to be the most active project finance country, project financing opportunities in the country tend to offer limited opportunities for international banks as transactions are largely denominated in local currency and tend to be done by Chinese banks due to their competitive pricing and stronger liquidity.  Indonesia has become the second largest market, mainly driven by two large transactions, Tangguh Train 3 LNG project and the development of the Central Java coal fired power project. Source: Societe Generale Debt Capital Markets 2016 Review 07/12/2016 4

BROWNFIELD INFRASTRUCTURE PROJECTS

BACKGROUND  What does a brownfield infrastructure project entail? ● Taking over an existing asset that needs to be refurbished, redeveloped or expanded. ● Getting the asset into the specified condition over an Initial Development Period. ● Operating and maintaining the asset for specified duration, normally around 20 years. ● Handing back the asset at the end of the contract in the specified handback condition.  There is an increasing trend towards using the PPP framework to renew existing infrastructure that has not been adequately maintained in the past or needs to be expanded to meet growing usage or demand.  The risk profile of these type of projects is significantly different from a conventional PPP and a number of additional issues need to be considered.  The asset usually needs to continue in operation through the Initial Development period.  Examples of recent brownfield infrastructure projects have achieved varying levels of success ● The four Local Authority Roads project in the UK for the upgrade and maintenance of their road networks:  Portsmouth;  Birmingham;  Hounslow, in West London; and  Isle of Wight. ● M25 London Orbital Road. ● A7 German Motorway PPP, for the widening of a 65km section of the A7 motorway north of Hamburg. ● The A63 Motorway project in France, for the widening and operation of the A63 motorway. ● La Guardia Airport Terminal B Redevelopment Project, currently under construction. 07/12/2016 6

KEY RISKS AND ISSUES  The upfront capital costs relative to the ongoing operating and maintenance costs are usually significantly lower than for a comparable greenfield project, resulting in high operating leverage.  The typical mitigant for higher operating leverage is higher base case cover ratios, but this can result in a sub-optimal funding structure Operating with lower leverage and an increased weighted average cost of capital (WACC). Leverage  Lenders will carefully consider O&M downsides and replacement analysis to determine a reasonable base case level.  Higher ratios can be partially offset through a more robust O&M security package or greater level of risk transfer to sub-contractors  Taking over responsibility for an existing asset brings condition risk.  Detailed technical Due Diligence is required to establish the condition of the assets and the extent of work and investment that will be Existing Asset required to get the asset into the specified condition. Condition  This risk will typically be passed down via subcontracting arrangements but can also be shared with the public authority.  Existing plans and documentation can be incomplete and inaccurate.  Very often the public authority will require additional flexibility to incorporate future modifications with limited concessionaire and lender approval requirements. Modifications  Lenders are typically sensitive to modifications as these can change the fundamental nature and risk profile of the asset. Regime  A regime can be agreed upfront setting the parameters within which modifications can proceed without lender approval This could be a fixed dollar cap, an operating risk assessment or a pre-defined adjustment to the payment mechanism to account for the change .  There needs to be a clear demarcation of the respective parties areas of responsibility as well as a regime for cooperating with each other.  Areas of responsibility and service standards need to be set out clearly in the contracts to ensure there are no misunderstandings or Interface Issues ambiguities.  The concessionaire may need to deal with multiple public sector authorities having jurisdiction over different parts of the underlying assets or ongoing operations.  The need to keep the asset in operation leads to increased complexity in scheduling and executing the initial development works.  It is vital for there to be close cooperation between the D&C Contractor and the O&M Provider from the outset. Managing  With the commencement of operating responsibility during the construction phase there is a heightened risk of construction works Operations During the leading to abatements and revenue shortfalls. Construction  Income earned from the O&M during the construction period can be used to reduce the funding requirement but there needs to be Phase sufficient buffer so to ensure no funding shortfall or there will need to be an element of Standby Funding to cover any possible shortfall.  Lenders pay particular attention to the impact of construction delays on operational capabilities and ramifications. 07/12/2016 7

POTENTIAL NEW BENCHMARK OUTER SUBURBAN ARTERIAL ROADS PROGRAMME