Project Financing StructureDefinitionsEffects of subordinationInnovative Financing MethodsDebt financingCredit AssistanceOtherProject Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Transportation Project Finance – 3 Credit Assistance OtherAdditional Topics in Project Finance Jon Bottom Steer Davies Gleave 18 November 2008 1 / 14Outline Project Financing Structure Definitions Effects of subordination Innovative Financing Methods Debt financing Credit Assistance Other Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 2 / 14Outline Project Financing Structure Definitions Effects of subordination Innovative Financing Methods Debt financing Credit Assistance Other Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 3 / 14Project Financing Structure � Equity � Debt � Senior � Junior (Subordinate) � Mezzanine Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 4 / 14Effects of subordination – 1 � Senior lien debt has a higher payment priority than subordinate debt � Debt can be structured into tranches to take advantage of this � Suppose $100 is available for debt service, and debt service is $90 � Debt service coverage ratio (DSCR) is 100/90 = 1.11 – not very good Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 5 / 14Effects of subordination – 2 � Divide $90 debt into a $75 senior tranche and $15 junior tranche � DSCR of senior lien debt is 100/75 = 1.33 – much better! � DSCR of junior lien debt is 100/(75+15) = 1.11 – as before � Overall coverage is still 1.11 � But senior lien debt is higher quality and can be sold at lower financing cost � (We assume that the subordinate debt is marketable) Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 6 / 14Outline Project Financing Structure Definitions Effects of subordination Innovative Financing Methods Debt financing Credit Assistance Other Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 7 / 14Debt financing – 1 � Grant anticipation notes (GANs) – general term for debt secured by anticipated grant money � GARVEEs – already discussed, particular form of GAN secured by anticipated federal-aid highway funds (e.g. apportionments from the Highway Trust Fund) � GARVEEs can be beneficial for a project if � Large enough that normal funding mechanisms (pay-go, apportionments, tolls, etc.) are insufficient � Cost of delaying project greater than cost of financing � State is willing to pledge future federal highway funds to the project Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 8 / 14Debt financing – 2 Private activity bonds (PABs) � A PAB is a type of municipal bond � Proceeds from the bond issuance are used by a private entity, not by the issuing government entity � Under certain conditions, PABs qualify for income tax exemption on bond interest payments � One form of PAB (exempt facility bonds) is intended to finance transportation facilities owned or operated by private entities � Revenues from the facility are used to secure the bond payments � With SAFETEA-LU, highway and surface freight transfer facilities are eligible for PAB financing Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 9 / 14TIFIA Transportation Infrastructure Finance and Innovation Act � Offers three types of credit assistance to approved transportation projects � Direct loans from federal government � Loan guarantee – federal guarantee of debt service payment � Lines of credit – federal commitment to make loan if project revenues fall short � Project sponsors can be public or private entities � Senior project debt must be rated investment grade � TIFIA assistance must be < 33% of project costs � TIFIA assistance repaid from pledge of user charges or special state/local tax assessments (not other federal money) Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 10 / 14State infrastructure banks (SIBs) � SIBs are transportation infrastructure investment funds � Established and administered by states with federal approval � Capitalized with state funds and/or federal highway apportionments � Can offer transportation projects loans or credit enhancement � Public and private projects are eligible � States have great flexibility to operate SIBs � SIB can be repaid from project revenues or other sources Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 11 / 14Section 129 loans � Section 129 loans allow states to use regular federal-aid highway apportionments to fund direct loans to projects � Eligible projects must have a dedicated revenue stream pledged to repay loan � Revenue stream can come from project or other non-Federal source (not just tolls) � Public and private projects are eligible � States benefit by "recycling" federal highway apportionment � Projects benefit by offering up-front capital at potentially below-market costs, and providing project finance structuring options Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 12 / 14Other mechanisms – 1 Flexible match A wide variety of public and private contributions can counts towards the non-federal match for federal-aid projects � Formerly only cash could be used for non-federal match � Any other local contributions reduced project cost, but not matching requirements � Now other types of match (land, materials, services) are allowed Project Finance 2 Structure Definitions Effects of subordination Innovations Debt financing Credit Assistance Other 13 / 14Other mechanisms – 2 Toll credits Toll revenues that states use to build or improve non-toll highways count towards state matching share (usually 20%) to federal highway or transit funds �