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PROJECT FINANCE
INNOVATIVE STRUCTURES AND PROVEN MODELS

© Robert Polster
Board of Management of Volksbank AG – Investkredit (left-right): Martin Fuchsbauer, Gerald Wenzel, Michael Mendel and Wolfgang Perdich
VOLKSBANK AG – INVESTKREDIT
YOUR PARTNER FOR PROJECT FINANCE
The growing importance of project finance in Europe
reflects the increasing complexity of investment projects.
As different as they are, energy, infrastructure and real
estate projects all have one thing in common: they are
increasingly implemented and financed as project finance
transactions.
Project finance is in demand when classic models of
corporate lending cannot be applied. Typical cases are
projects that are too complex for financing to a standalone-corporation.
A number of partners will come together
in order to pool their respective strengths with the aim of
jointly bearing the various types of risks. Providers of capital
team up in order to base their financing on the profitability
of a project rather than on collateral from the sphere
of the project partners. Against this background, Volksbank
AG – Investkredit sees itself as a competent financier.
As The Bank for Corporates and a as a partner in longterm
investment projects, project finance is a growing
field of business for Volksbank AG – Investkredit. The
services provided are focused on consulting during the
phase of project planning and on structuring the financing
according to the specific project parameters.
The aim of this brochure is to give an overview of the
instruments and opportunities for cooperation with Volksbank
AG – Investkredit and to indicate typical situations
when project finance is needed. Our specialists will be
pleased to assist you in the structuring and realisation of
your projects.
Talk to The Bank for Corporates about financing your
projects.
3

DIFFERENCES BETWEEN CORPORATE LENDING
AND PROJECT FINANCE
In the context of money and capital markets, the term project
finance refers to a specific discipline of financing. Project
finance is the financing of an asset with the lender primarily
relying on the cash flow from this asset as the source for
the repayment of the financing. The asset itself is the main
collateral. The lender has no or only limited recourse to the
sponsors of the project.
Thus, project finance is also described as “cash-flow based,
limited-recourse (or non-recourse) financing”.
Comparison corporate lending – project finance
Corporate lending
Project finance
Bank
Non-/limited recourse
Bank
Loan
Collateral
Loan
Collateral
Corporates
Corporates
(Sponsors)
Equity
Special Purpose
Company (SPC)
Project
Project
With classic corporate lending, the relationship is directly
between the company and the bank (or, in the case of a
bond, the investors). This is reflected by increased liabilities
on the company’s balance sheet. With project finance,
the financing agreement is signed between the bank and
the special purpose company. The financing is therefore
“off balance sheet” for the project sponsors, who are,
accordingly, not (non-recourse) or only to a limited extent
(limited recourse) liable for the financing.
With corporate lending, the banks usually have a balancesheet
history of the companies which apply for financing.
As a result, credit risks and changes in creditworthiness are
easier to assess. In contrast, the creditworthiness in project
financing is primarily determined by the quality of the
contracts between suppliers, owners, off-takers etc. and the
special purpose company.
One major risk of project finance is the completion risk. The
revenue basis for the repayment of the financing and for the
employment of the funds of the sponsors and investors is
only secured, if a functioning asset is finally taken over for
operation.
4

CONSEQUENTLY, PROJECT FINANCE HAS THE FOLLOWING CHARACTERISTICS:
• Special purpose company
The project sponsors establish a new project company for
the single purpose of realising and financing the project. The
company’s special purpose is exclusively to realise and
administer the investment project. This company acts as the
borrower of the project loans and collects the equity.
• Risk allocation
As part of any risk analysis, the risks associated with the
project are to be identified, comprehensively structured
and then allocated to those parties best suited to bear
the individual risks.
• Lending on cash-flow basis
The financing is repaid from the cash flow of the special
purpose company. The ability for the loan to be repaid
depends on the profitability of the project.
• Off-balance-sheet character
The tangible and intangible assets of the special purpose
company represent the collateral for the financing. The project
sponsors assume no (non-recourse) or only limited
(limited recourse) liability for the project loan. Consequently,
the financing is not recognised in the balance sheet of the
sponsor.
Structure of a project finance transaction
Client/public sector
Concession contract
Direct contractual regulations
Sponsors
Equity
Special Purpose Company
Loan agreement
Banks
Equity
Turnkey
contract
Equity
Financial investor
Operation
contract
Equity
Contractor consortium
(construction company, suppliers)
Operator
5

THE STAGES OF PROJECT FINANCE
TRANSACTIONS
Project finance transactions usually consist of the following four steps
Financial close
Planning
Construction
Commissioning
Operation
Project team
Feasibility study
Financing package,
Financing model
Offer,
negotiations
Authorisations
(authorities)
Formation of
special purpose company
Completion
Financing
Completion
Supply
Construction
Tests
Handover
Acceptance
Commissioning
Operation
Maintenance
PLANNING
Step 1
The planning phase is very complex due to the parallel
nature of the individual tasks. The result of this phase is a
business plan; its implementation begins in the second phase.
Of crucial importance are the financing plan and the financial
model. In order to ensure the availability of the financing in
good time, it is recommended that banks and investors are
involved as early as possible in the planning process.
COMMISSIONING
Step 3
This phase is a particularly critical part of the project as this
is when the project is accepted by the sponsor and because
the ability to invoice the services is dependent on the full
functionality of the asset. From the bank’s point of view, once
the project has been properly accepted and commissioned
one of the core risks – the completion risk – has been
eliminated.
CONSTRUCTION
Step 2
In the construction phase it is essential to complete the
investment on time, within the planned budget and accord -
ing to the specifications and the functionality laid down
in the construction contract. Initial tests lead to the commissioning.
OPERATION
Step 4
In the operating phase, the asset is managed and continuously
maintained. The generated revenues cover the run -
ning costs and are used to amortise the financing.
6

THE ELEMENTS OF A PROJECT FINANCE
AGREEMENT AT A GLANCE
As project finance transactions are mainly cash-flow-oriented, the collateral is derived primarily from the assets of the
project itself. This characteristic is taken into account through contractual features typical for project finance:
• Lender(s)
A bank (or a syndicate of banks led by an arranger)
• Borrower
A special purpose company in which the sponsors hold
shares
• Tenor
Up to 15 years is generally acceptable, longer tenors are
possible; the maturity is usually shorter than the maturity
of the concessions, off-take agreement etc. covering the
project
• Repayment
No repayment of principal during the construction phase;
sometimes tailored repayment schedules
• Interest
Capitalisation of interest during the construction phase can
be agreed; scheduled interest payments during the operation
phase
• Collateral
Collateral, securities and assignment of rights, step-in
rights, etc.
• Financial covenants
These include, among other, debt service coverage ratios
(DSCR), the maintenance of reserve accounts for debt
service (DSRA), major repairs (MRA) and other purposes
• Employment of cash flows
“Waterfall Principle”: Sequence of employment of cash,
i.e. initially covering all direct expenses indispensable for the
operation of the project, lower in priority rank debt service
and, lastly, dividends payable to the sponsors [see chart].
The Waterfall Priciple (cash flow waterfall)
Income
Insurance
Material costs
Operating costs
Maintenance cost
Interest
Repayment of principal
Dividends
7

EXAMPLES OF SUCCESSFUL PROJECT FINANCE
TRANSACTIONS
In order to demonstrate both the variety of suitable targets for project finance and Volksbank AG – Investkredit’s range of
services as The Bank for Corporates, see below a selection of done deals:
JUNE 2010
AUGUST 2008
CZK 2.217.000.000
and
CZK 250.000.000
Term Loan and
Revolving Credit Facilities
CZK 600.000.000
Financing of
18 MW Windpark
in the Czech Republic
Arranger
Arranger
AUGUST 2007
SOLARIS
MAY 2007
Project Developer
18MW Photovoltaic
Solar Energy Park in Spain
EUR 157.845.000
Senior Secured Financing
EUR 1.520.000.000
Financing of the
takeover and expansion
of Budapest Airport (Hungary)
Co-Arranger
Co-Arranger
OCTOBER 2006
SEPTEMBER 2006
WINDTEX s.r.o.
EUR 6.665.000
Windpark financing in U tří pánů
(Czech Republic)
EUR 110.000.000
Financing of the
construction and operation of a
public safety communication
TETRA radio system in Austria
Arranger
Arranger
8

PUBLIC PRIVATE PARTNERSHIPS (PPP)
Public Private Partnerships are partnerships between the public sector and private enterprises in the provision and financing
of public infrastructure projects. The main purpose of such partnerships is to take advantage of the strengths of the respective
partners. Performance incentives for the private partners are intended to ease the organisational and financial burden of
the public sector.
BACKGROUND
The increasing economic integration in Europe and the
population growth in urban areas are placing enormous
demands on public infrastructure.
Many public infrastructure projects show a high degree of
potential for private business and therefore do not nec -
essarily have to be financed from public sector budgets.
Furthermore, technological risks strongly suggest a transfer
of risk to specialised private enterprises.
Against this background, innovative financing solutions are
required which assess the profitability of a project and, as a
result, optimise the use of public sector funds. From the
viewpoint of financing technique, therefore, project finance
can offer a suitable range of financing instruments to Public
Private Partnerships.
REASONS FOR PPP
Public Private Partnerships can be utilised in practically all
areas of public sector activity. Many Public Private Partnerships
in Europe show that public infrastructure projects
are very compatible with the requirements of private
financing.
In the case of road construction projects, for example, the
public sector transfers the right to construct and to operate
a motorway to a private concessionaire. This company
undertakes the construction, financing and operation of the
route and in return receives the right to levy tolls. Levying
tolls on a route represents direct remuneration for the
performed service and, therefore, a source of private income.
If the toll for political or social reasons has to be limited to an
amount which does not fully cover the costs, the public sector
would be obliged to cover the resulting deficit.
ADVANTAGES OF
PUBLIC PRIVATE PARTNERSHIPS
The advantage of Public Private Partnerships lies in combining
the strengths of the pubic sector with those of private sector
partners, thus creating economic synergies for both sides:
• Cost efficient realisation of projects (construction and
operation)
• Risks borne by those project partners which are most
suited to do so
• Budget relief through the use of private financing sources
and inclusion of the life-cycle costs of an investment into
the financing decision
• New performance incentives for private companies
9

REASONS FOR PROJECT FINANCE
• Renewable energy
Wind, photovoltaics, biomass, biogas,
hydropower,…
• Fossil fuels
Coal, gas,…
• Industries
Construction, utilities, plant engineering,…
• Public sector
– Infrastructure (roads, rail, airports)
– Supply and disposal (water, community heating,
waste water, refuse disposal)
– Structural engineering (schools, hospitals, prisons)
• Telecommunication
VOLKSBANK AG – INVESTKREDIT’S SERVICES
IN PROJECT FINANCE
Volksbank AG – Investkredit, as a specialist for medium- and long-term financing, offers its customers the following project
finance services:
• Structuring of project finance
Arranging
• Participation in project finance
Participations
• Consulting services
Financial advisory
• Technical consulting
in-house, external
• Financial modelling
10

YOUR CONTACTS
JOHANNES SEIRINGER
Head of Project Finance
Tel. +43(0)50 4004 - 4263
Fax +43(0)50 4004 - 84263
johannes.seiringer@investkredit.at
ANDREAS HANDLER
Project Finance, Participations
Tel. +43(0)50 4004 - 4336
Fax +43(0)50 4004 - 84336
andreas.handler@investkredit.at
© Wilke
© Elisabeth Kessler
© Wilke
SONJA JUSZT
Project Finance
Tel. +43(0)50 4004 - 4259
Fax +43(0)50 4004 - 84259
sonja.juszt@investkredit.at
© Michael Sazel
WOLFGANG PAYER
Project Finance
Tel. +43(0)50 4004 - 4262
Fax +43(0)50 4004 - 84262
wolfgang.payer@investkredit.at
BENCE NÁDASDY
© Stefan Badegruber
Project Finance
Tel. +43(0)50 4004 - 4260
Fax +43(0)50 4004 - 84260
bence.nadasdy@investkredit.at
We look forward
to talking to you.
© Aleksandra Pawloff
JUDIT KEREKES
Active Credit Management
Tel. +43(0)50 4004 - 4267
Fax +43(0)50 4004 - 84267
judit.kerekes@investkredit.at
© Aleksandra Pawloff
SYLVIA MEIXNER
Active Credit Management
Tel. +43(0)50 4004 - 4270
Fax +43(0)50 4004 - 84270
sylvia.meixner@investkredit.at
11

IMPRINT
Published by: Investkredit Bank AG, 1090 Vienna, Kolingasse 14 - 16, Tel. +43(0)50 4004-0, Fax +43(0)50 4004-3683, invest@investkredit.at, www.investkredit.at;
Editor: Andrea Vitali, Österreichische Volksbanken-AG, Marketing & Communications, 1090 Vienna, Kolingasse 14 - 16;
Graphic design and production: Dieter Achter, Österreichische Volksbanken-AG, Marketing & Communications, 1090 Vienna, Kolingasse 14 - 16
September 2010
December 2010