Project finance - HIGH-POWERED BUSINESS -m 18 corporate finance What's NewS Issue 1 January 1996 Energy, Utilities, telecommunications, media - all of these sectors fall within the target range of our project finance team. But what is 1 project finance? Why are these non-F&A O sectors so attractive for the bank? And how risky is this business? Dick Vaarties of project Project finance team: f.l.t.r. Roger Jansen, Marjan Brouwer, Dick Vaarties, Marcel de Goeijer, Monique Koelink and Wim Blaasse. finance explains. 'Essentially, project finance means you provide cashflow-based financing,' Vaarties says. 'By that I mean, someone comes to us with a project which is always a green-field operation - a factory, power plant or whatever - which has to be built. The repayments come out of the cashflow subsequently generated by the project. Because you're putting in the basically finance at the construction stage, you're financing something which has potential, but isn't even built. For the project to be interesting, it has to meet certain criteria. The most important one is that the future cashflow has to be as secure as possible. If you take a power plant as example, then before you become involved, you have to be sure there is an off-taker who is contractually committed to purchasing the power generated by that plant.' FUTURE CASHFLOW Projects are financed on the basis that during construction no repayments are made. 'That is why you only become involved in viable projects,' Vaarties 1 PROJECTFINANCIERING De Rabobank is de grootste verlener van projectfinanciering aan Nederlandse energiebedrijven. Waarom zijn deze en andere niet-agri sectoren zo interessant? En hoe risicovol is het financieren van nog niet gebouwde projecten? Dick Vaarties heeft de antwoorden. continues. 'Most contracts run for 15 years, starting after construction is completed. That's when you enter the so- called operational phase and you get your money back from then on. So, it is essential to have guarantees on off-take because our repayments come out of future cashflow. All projects have so-called "sponsors". These are major corporates which act as shareholder in the project. Although formal guarantees from shareholders in a project are not possible, or only to a limited extent, it is still important to look carefully at the quality of these "sponsors". Normally, you have at least two per project because no party will usualll own more than 50 percent of a project. This is crucial to keep the investment off-balance sheet for both parties.' LOW RISK If all this may sound like fairly risky business, Vaarties is quick to argue that it is often less problematic than straightforward credit lines. 'We only do project finance for very specific sectors, and only after extensive and very careful analysis. Again, energy is a good example here. When you do a deal on an energy project, you know it will be able to sell its product for at least 15 years to come at a specified price. Further more the bank has 1 a grip on the cashflow through project I accounts held by us, so you see the actual I performance of the project through its cashflow. On the contrary providing credit to a corporate which is based in part on past performance can be more risky - at least, we think so. Balance-sheet and P/L statements can be manipulated more easily than real cashflows.' POWER FOCUS Project finance was started in the bank around four years ago and the team has gradually been expanded. 'We began with only a few people and we're still not exactly large, so we had to focus our efforts. As Rabobank is strong on the domestic market and because there were opportunities in the electricity generating sector, we targeted those.' And quite successfully it appears. The team has managed to carve out a real niche in this area, and has already become the biggest provider of project finance to Dutch Utilities. P'illlH fc?:i i"H i .:!vn§ I lllHtUl i ii"!'!!

Rabobank Bronnenarchief

blad 'What's news' (EN) | 1996 | | pagina 18