6.9.8 The Perspective of Top Management Stuart Myers argues that there is what he called a pecking order in raising funds for the firm. The pecking sequence is determined by the managers and their will to maximize their discretionary power over the use of funds. In this context, retained earnings will be the first to be picked, debt the second and new equity the last. In practice, the latter will have a higher level of scrutiny from outsiders: shareholders and markets in general will want know what is the purpose and rationale of the capital increase. This is a level of monitoring that will exist but with a lesser extent in terms of debt and even less with the retained earnings, being the payout ratio the key feature to be controlled by the shareholders meeting. In this line of reasoning Michael Jensen argued that earnings should be fully distributed as dividends, to force managers to ask (and justify) for new equity or debt instead of using, in a discretionary way, the retained earnings of the company. 6.10 CAPITAL STRUCTURE AND PROJECT EVALUATION 6.10.1 The WACC Method This method represents the use of the WACC as the discount rate of the project’s cash flows (before debt). It should be noted that the D/E associated with the computation of the WACC is the targeted D/E for the whole firm and not the D/E of the project. In fact if the company has, for instance a targeted D/E of 3 and the project has a D/E of 1, it means that in other financial decisions the firm will compensate the lesser use of debt of the project in order to track the targeted D/E of 3 and, therefore, the effect of the project in the capital structure of the whole firm will still be 3. If the firm has an evolving D/E target (within a process of leveraging or deleveraging the balance sheet), it should have a path to follow (D/E of 3 next year, 2.75 in the following year, etc.). In this case, we will use different D/E in the computation of each year’s WACC. This means that we will have a different WACC per year, until D/E ratio is stabilized in a value of 3; after this, WACC remains unchanged. The WACC will be computed using the required rate of return by investors (usually using the CAPM and the associated levered beta of the firm) and the cost of debt (reduced by the associated tax savings) as follows: 151 CU IDOL SELF LEARNING MATERIAL (SLM)
6.10.2 The WACC, CAPM and the all-equity financed case In the analysis of a project we defined a two-step approach, the first considering an all- equity financed project (to evaluate it on its own merits) and, then, considering the capital structure of the firm. The question is what should be the required rate of return by investors. It can´t be the same used in the WACC, as we are assuming no debt and therefore the firm´s risk profile is quite different. In order to solve this puzzle, we will use the following relationships between the unlevered beta, BU (a theoretical beta that the firm would have if it was all-equity financed) the levered beta, BL, (the real beta, observed in the market) and the debt beta, BD (reflecting the risk premium of the cost of debt over the risk-free rate): Often, practitioners simplify the BU formula by assuming a debt beta of zero (a reasonable simplification when the level and cost of debt is not too high): After computing the unlevered beta and using the CAPM we will obtain the required rate by investors assuming an all-equity financed case. 6.10.3 The APV method The adjusted present value method reflects, in way, the MM world with taxes. It basically states that debt will benefit the project through the associated tax savings (in theory, it will also affect negatively the project with the costs of financial distress, but these are very difficult to compute). Therefore: APV = NPV (all-equity financed case) + Present Value of the net benefits of debt (PVBD) The benefits of debt are mainly tax savings and, in more rare cases, some sort of specific advantage, typically created by the Government (reduced interest rate, non-refundable subsidy, etc.). The computation of the PVBD is quite straightforward. We identify all cash flows of debt (initial debt disbursement, payment of interest, principal and tax savings) and then we discount them at the firm’s regular cost of debt. To understand the use of this discount rate, let´s assume that the company doesn´t pay taxes and therefore there are no 152 CU IDOL SELF LEARNING MATERIAL (SLM)
tax savings. In this case PVBD should be zero, because debt is not generating tax benefits. We will only get this result (PVBD = 0) by discounting the loan’s cash flows at the regular cost of debt. Another way of looking to the choice of this discount rate, is considering a zero interest loan. The advantage in this case, is the difference between zero and the regular cost of debt. The only way to capture this advantage is, again, to use the regular interest rate of the company as the discount rate. The special case of evaluating project of unlisted firms Let´s now consider the case of an unlisted firm or, even if listed with a reduced free float and/or liquidity in the stock exchange, being its beta less representative. In these cases, we should use a proxy (benchmark) of the firm´s beta and there are two main alternatives: to pick a twin company (less frequent because it is very difficult to find a company very similar to the one we are evaluating) or to use an industry average or a selected peer average (more common) All-equity financed case As a starting point we have the BL, D/E and tax rate of the benchmark. We then compute the theoretical BU of the benchmark. Not assuming BD equal to zero: We need to have, additionally, an average cost of debt of the benchmark in order to compute the implicit BD (using the CAPM) Cost of debt = risk free rate + BD x market risk premium Levered case 153 CU IDOL SELF LEARNING MATERIAL (SLM)
The first step is similar to the all-equity financed case: compute the BU of the benchmark. From this BU we compute the BL of the firm taking into account the target D/E, cost of debt ant tax rate of the firm. In practice, we make the releveraging of the benchmark’s BU to account for the firm’s capital structure. Again, using the CAPM and the computed BL we can compute the required rate of return by investors (rE). Finally, we can compute the WACC, the discount rate of the project’s cash flows: 6.11 PROJECT LIFE CYCLE A project is not a one shot activity. Even a shooting star has a time and life span. Project lifecycle is spread over a period of time. There is an unavoidable gestation period for the complex of activities involved to attain the objectives in view. This gestation period, however, varies from project to project but it is possible to describe, in general term, the time phasing of project planning activities common to most projects. The principal stages in the life of a project are : • Identification • Initial formulation • Evaluation (selection or rejection) • Final formulation (or selection) • Implementation • Completion and operation Development projects are expressly designed to solve the varied problems of the economics whether in the short or long run. The surveys or in depth studies would locate the problems and the project planner will have to identify the projects that would solve the problems most effectively. At this stage, we are concerned with the kind of action and type 154 CU IDOL SELF LEARNING MATERIAL (SLM)
of project that would be required in rather broad term. In other words the surveys and studies will give us ideas and throw up suggestions which would be worked out in detail later and then evaluated objectively before being accepted for implementation. What types of surveys and studies are to be undertaken? The current socio-political economic situation has to be critically assessed. It will also be necessary to review it in its historical perspective necessitating the undertaking of a survey of the behaviour and growth of the economy during the preceding decades. On the basis of past trends, extrapolation may be made of future possible trends and tendencies, short and long term. There are scientific techniques for doing so which can be broadly grouped as forecasting methodology. It is however not sufficient to view the socio-economic panorama on the historical canvas. More detailed investigations from an operational point of view would be called for in respect of each economic sector. Initial Formulation:- Identification is only the beginning in the lifecycle of a project. Having identified the prospective projects, the details of each project will have to be worked out and analysed in order to determine which of them could be reckoned as suitable for inclusion in the plan, allocate funds and put into execution. As a follow up to the finding of techno-economic surveys, and number of feasibility study group are set up, as the name implies to examine the possibility of formulating suitable projects and to put concrete proposals in sufficient detail to enable authorities concerned to consider the feasibility of the proposal submitted. Evaluation or Project Appraisal: - After the socio-economic problems of an economy have been determined and developments objectives and strategies agreed, concrete steps have to be taken. The main form this takes is that of formulating appropriate development projects to achieve plan objectives and meet the development needs of the economy. Proposals relating to them are then put to the plan authorities for consideration and inclusion in the plan. These proposals as pointed out above take the following forms of feasibility studies : • Commercial viability • Economic feasibility • Financial feasibility • Technical feasibility • Management The scope for scrutiny under each of these five heads would necessarily render their careful assessment and the examination of all possible alternative approaches The process almost invariably involves making decision relating to technology, scale, location, costs and benefits, time of completion (gestation period), degree of risk and 155 CU IDOL SELF LEARNING MATERIAL (SLM)
uncertainty, financial viability, organisation and management, availability of inputs, know- how, labour etc. The detailed analysis is set down in what is called a feasibility report. Formulation :- Once a project has been appraised and approved, next step would logically, appear to that of implementation. This is, however, not necessarily true, if the approval is conditional to certain modifications being affected or for other reasons, such as availability of funds, etc. The implementation stage will be reached only after these pre-conditions have been fulfilled. Project formulation divides the process of project development into eight distinct and sequential stages. These stages are • General information • Project description • Market potential • Capital costs and sources of finance • Assessment of working capital requirement • Other financial aspect • Economic and social variables. Project Implementation: - Last but not the least, every entrepreneur should draw an implementation time table for his project. The network having been prepared, the project authorities are now ready to embark on the main task of implementation the project. To begin with successful implementation will depend on how well the network has been designed. However, during the course of implementation, many factors arise which cannot be anticipated or adequately taken note of in advance and built into the initial network. A number of network techniques have been developed for project implementation. Some of them are PERT, CPM, Graphical Evaluation and Review Technique (GERT), Workshop Analysis Scheduling Programme (WRSP) and Line of Balance (LOB). Project Completion :- It is often debated as to the point at which the project life cycle is completed. The cycle is completed only when the development objectives are realized. 6.12 DECISION MAKING Decision making is the process of making choices by identifying a decision, gathering information, and assessing alternative resolutions. Using a step-by-step decision-making process can help you make more deliberate, thoughtful decisions by organizing relevant information and defining alternatives. This approach increases the chances that you will choose the most satisfying alternative possible. Identify the decision 156 CU IDOL SELF LEARNING MATERIAL (SLM)
You realize that you need to make a decision. Try to clearly define the nature of the decision you must make. This first step is very important. Gather relevant information Collect some pertinent information before you make your decision: what information is needed, the best sources of information, and how to get it. This step involves both internal and external “work.” Some information is internal: you’ll seek it through a process of self- assessment. Other information is external: you’ll find it online, in books, from other people, and from other sources. Identify the alternatives As you collect information, you will probably identify several possible paths of action, or alternatives. You can also use your imagination and additional information to construct new alternatives. In this step, you will list all possible and desirable alternatives. Weigh the evidence Draw on your information and emotions to imagine what it would be like if you carried out each of the alternatives to the end. Evaluate whether the need identified in Step 1 would be met or resolved through the use of each alternative. As you go through this difficult internal process, you’ll begin to favour certain alternatives: those that seem to have a higher potential for reaching your goal. Finally, place the alternatives in a priority order, based upon your own value system. Choose among alternatives Once you have weighed all the evidence, you are ready to select the alternative that seems to be best one for you. You may even choose a combination of alternatives. Your choice in Step 5 may very likely be the same or similar to the alternative you placed at the top of your list at the end of Step 4. Take action You’re now ready to take some positive action by beginning to implement the alternative you chose in Step 5. Review your decision & its consequences In this final step, consider the results of your decision and evaluate whether or not it has resolved the need you identified in Step 1. If the decision has not met the identified need, you may want to repeat certain steps of the process to make a new decision. For example, you might want to gather more detailed or somewhat different information or explore additional alternatives. 157 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 6.4 6.13 SUMMARY • Evaluation of a project involves a careful consideration of the totality of the project with a view to seeing how useful or valuable it is Evaluation enables us to attach proper financial value to a project and also allows us the liberty of comparing it with other projects. • Project evaluation: The focus and purpose of an evaluation differs depending on the needs of stakeholders that may include project developers, funding agencies, local government, community, teaching personnel and students. By identifying the highlights and lowlights of a project, evaluation leads to conclusions that may affect future decision making. • The technical and engineering segment: The technical and engineering segment of project evaluation tries to evaluate the total technical and engineering soundness of a project. • The management segment: The management segment which follows the technical segment, focuses attention on the management aspects of a project. Projects only become successful if they are well managed. • The demand and market segment: This segment focuses attention on the demand for goods and services and relates it to the market. An evaluation of the demand for goods and services is very important because demand translates to revenues. 158 CU IDOL SELF LEARNING MATERIAL (SLM)
• The financial segment: The financial segment of project evaluation focuses attention on the financial aspects such as start-up costs, financial plans, renames and costs and income statements. • The economic segment: The economic segment considers projects from the macroeconomic point of view. • Stages of project evaluation: • Planning • Implementation • Completion • Dissemination • Reporting • The six phases of project management • Initiation phase • Definition phase • Design phase • Development phase • Implementation phase • Follow-up phase • Project life cycle is spread over a period of time. The principal stages in the life of a project are : • Identification • Initial formulation • Evaluation (selection or rejection) • Final formulation (or selection) • Implementation • Completion • 6.14 KEYWORDS • GERT -Graphical Evaluation and Review Technique • WRSP -Workshop Analysis Scheduling Programme 6.15 LEARNING ACTIVITY 1. Learn about the risk factors which are listed in any companies Red herring prospectus during an IPO ________________________________________________________________________ ________________________________________________________________________ 159 CU IDOL SELF LEARNING MATERIAL (SLM)
6.16 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1. What is the most common ratio used in project finance and how should you calculate it? 2. Why is the DSCR used and what range do you expect it to be in project finance? 3. Why use a project finance structure as opposed to corporate finance? Long Questions 1. What are key factors financial analysts should consider when evaluating prospective investments? 2. What is the general profile of a financial analysis reporting process? 3. How is the data for the financial feasibility study derived? 4. What three basic pieces of information are usually needed for each good, service, cost ? 5. Discuss about revenue for a financial analysis of a project B. Multiple Choice Questions 1. The situation in which the company replaces existing assets with new assets is classified as a. occurred cost b. mean cost c. opportunity costs d. weighted cost 2. The cash flows that could be generated from an owned asset by the company but not use in project are classified as a. replacement projects b. new projects c. existing projects d. internal projects 3. The situation in which the new business reduces an existing business of the firm is classified as a. non-cannibalization effect b. cannibalization effect c. external effect d. internal effect 160 CU IDOL SELF LEARNING MATERIAL (SLM)
4. In cash flow estimation, the depreciation shelters company's income from a. expansion b. salvages c. taxation d. discounts 5. In cash flow estimation, the depreciation is considered as a. cash charge b. noncash charge c. cash flow discounts d. net salvage discount Answers 1-c, 2-a, 3-b, 4-c, 5-b 6.17 REFERENCES Text Books: • Edward Yescombe, Principles of Project Finance, Yecombe Consulting Ltd., Academic Press • Michael Rees, Principles of Financial Modelling: Model Design and Best Practices Using Excel and VBA , The Wiley Finance Series) Reference Books: • Edward Bodmer, Corporate and project finance modelling, Wiley Finance Series 161 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7-PROJECT EVALUATION SOLUTIONS Structure 7.0 Learning Objectives 7.1 Project Finance Model Funding and Sculpting Exercise 7.2 Revised Exercise on Financing 7.3 Time Line on the Exercise File 7.4 Inputs for Operation in Exercise File 7.5 Inputs for Debts in Exercise File 7.6 Completing the Debt Sizing Section 7.7 Summary Sources and Uses Section 7.8 Periodic Cash Flow Pre-COD 7.9 Debt Balances with Interest Allocation and Fees 7.10DSRA Section 7.11Circular Reference from IDC, Fees and DSRA 7.12Cash Flow Waterfall Post-COD and Outputs 7.13Pro-Rate, Equity Up-Front and Catch-Up Debt 7.14 Summary 7.15 Keywords 7.16Learning Activity 7.17Unit End Questions 7.18 References 7.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain how model funding and sculpting exercise happens • State the Project Evaluation Solutions 7.1 PROJECT FINANCE MODEL FUNDING AND SCULPTING EXERCISE This chapter presents an exercise where you work through the financing section of a project model. In the financing exercise the EBITDA is given along with capital expenditures and various financing assumptions. With these assumptions the assignment that you can follow along is to put all of the equations in the model. The exercise makes you compute the debt size from sculpting and then apply the computed debt size in developing funding source and uses. The exercise includes a flexible method of up-front 162 CU IDOL SELF LEARNING MATERIAL (SLM)
or pro-rata equity financing, computing IDC which causes a circular reference, creating repayments and debt sizing using sculpting with a given DSCR and programming equations for a DSRA account. I have tried to explain issues in project finance funding using a step by step approach and a video on this webpage. The video explanation where I worked through the file with blank titles and describe various equations. This case uses a copy and paste macro to resolve circular references associated with interest during construction, fees and the DSRA. Please note that the exercise does not include development costs and fees; items that are paid for such as mezzanine ITC that may not be included in the borrowing base; income taxes that cause circular references; use of a letter of credit instead of a cash funded debt service reserve account; sculpting from multiple debt issues; sculpting from P50 or P99; sculpting where the debt size is given by the debt to capital ratio; on-going fees that are included in debt service; VAT facilities and many other items. 7.2 REVISED EXERCISE ON FINANCING It seems that each year I make a new project financing exercise that is relatively simple and that works through debt sizing, debt funding and a cash flow waterfall. Each year I think my last case was not sufficient, well structured, transparent enough, or efficient. So, here is my latest attempt (which may be replaced next year). This time I have started with a timeline, an assumption for EBITDA with fluctuating flows, which because of no working capital changes and taxes, is the same as CFADS. In the video at the end of this section where I work through the answer to the exercise, I explain how I create the timeline and I set-up the assumptions. But for the exercise, I begin with a file that includes a title, the time-line, EBITDA and capital expenditures and assumptions for debt. The file with the input assumptions, the timeline and the EBITDA and Capital Expenditure development is attached to the button below. The idea is that you can download the exercise file and then work through all of the equations by yourself. Then after you have worked through your assumptions you can compare your results with my results (maybe yours are better) and you can watch the video on how I have completed the model. 7.3 TIMELINE IN THE EXERCISE FILE I have given you the structure of the model by putting the titles in the file. This forces you to follow my structure where I start with a section on debt sizing (this is not a typical part of project finance models, but it often should be). I also believe that a separate section with a summary sources and uses of funds is very effective for setting up the periodic sources and uses of funds and I have included this when I created the titles and the structure. In this exercise, I hope that you will make you equations very simple and very transparent whereby you can find sources with the CNTL [ (followed by F5 and Enter), 163 CU IDOL SELF LEARNING MATERIAL (SLM)
and you can see the drivers of your equation by pressing the F2 key. I have included a couple of screenshots of the inputs and of the time-line set-up. Note a few things about how I have set-up the input page. I have put three thin columns to start and then put the category headings in column B (so that column A is the elevator column and immediately goes to the top). I have started with the financial close and put in a relatively long construction period of 36 months. The screenshot below illustrates the timing assumptions that I have made beginning with the financial close. The screenshot is the top of the input sheet that shows what you are to compute in the exercise including the PLCR, DSCR and LLCR. The DSCR will be the same as the DSCR input because of the assumption that debt is to be sculpted. The colouring is done with generic macros — please do not waste time on colouring yourself. And, please do not think you are a good modeller if you can quickly copy equations to the right. Using these time inputs I have created a master time line on the next page. If you do not have a master time-line that you will eventually use for the IRR and if you have separate time-lines for pre-COD and post-COD your model probably is messed up. The master time line uses the inputs for the number of pre-COD periods and then creates a flexible period from this data in the input sheet. I have made the construction period monthly and the operating period post COD semi-annual to correspond with the assumed debt repayment. The screenshot below illustrates this time-line in the model page along with some of the operating data. Not that I use the columns in the left to guide the model. There is a unit column, two driver columns, sum column and a start column. The screenshot illustrates how the flag for the pre-cod period is created and how the operating period is shown. You will have to create flags as you work through the exercise. 164 CU IDOL SELF LEARNING MATERIAL (SLM)
7.4 INPUTS FOR OPERATIONS IN EXERCISE FILE In these exercises I give you the capital expenditures and EBITDA/CFADS already input so you can concentrate on the financing equations. I have put an S-Curve derived from a normal distribution and I have put some varying cash flows and seasonality in the EBITDA. I name the EBITDA/CFADS because the exercise does not include working capital, taxes, LC fees or other items that are between the EBITDA and the CFADS. The screenshot below illustrates how I have set-up the operating assumptions for the model. I put in some seasonality and changing EBITDA so that you can understand the importance of sculpting for debt size and you can put together a graph of cash flow and debt service. When you implement these assumptions in the operating part of the sheet, you can use the LOOKUP function a lot. You should never use VLOOKUP or HLOOKUP or even the MATCH/INDEX combination. In the operation part of the sheet I have created counters for the plant life and the construction period so that you can put the lookup function in seconds. You will have to use the LOOKUP function in the exercise for things like the credit spread that varies over time. 165 CU IDOL SELF LEARNING MATERIAL (SLM)
7.5 INPUTS FOR DEBT IN EXERCISE FILE In the courses and in the exercise, I do not want you to waste time typing in inputs. So I have given you the inputs. The inputs for debt are arranged to the following categories: • Debt Size (DSCR or Debt to Capital) • Debt Funding (Pro-Rata, Equity Up-Front) • Debt Repayment (Tenure and Type) • Interest Rates and Fees • Credit Support The inputs that I have made for the various debt features are shown in the screenshot below. You will transfer various of these inputs into the driver columns of the model. After you are finished with the exercise file, your results at the top of the page should look something like the presentation in screenshot below. You can then change the debt parameters and operating parameters and see what happens. For now, please do not worry about the specific inputs as I have changed some of the inputs for the target DSCR, the debt tenure and other variables. I just want to show you the key outputs that you will be ultimately deriving when you have completed the exercise. I argue that the essential graph in a project finance model is the graph with cash flow and debt service illustrated at the top left of the screenshot. 166 CU IDOL SELF LEARNING MATERIAL (SLM)
Importance of Structure with (1) Debt Sizing, (2) Summary Sources and Uses, (3) Periodic Sources and Uses, (4) Debt Balance and (5) Cash Flow Waterfall Before working on the case, you should understand how I have set up the model structure. Please be creative and do not follow blah blah rules. I have put in a section for debt sizing which is the first part of the exercise that you should work on. This is generally not a separate part of models. Then I have put in a summary sources and uses of funds that I consider essential. After that you can much more easily fill in the month by month funding section with the MIN function. Finally, the model is finished with the debt accounts that are always part of the model along with a post-COD cash flow waterfall. I emphasize that you should not be wedded to a particular structure and you should be flexible and creative in your modelling. In this case with the debt size determined by sculpting I believe the model should start with operations and not development, construction, construction financing, operations, debt repayment and financial statements that is in many other models. I have included a video that describes the set-up of the model, the time line and how to create the exercise below. 7.6 COMPLETING THE DEBT SIZING SECTION The first section for you to complete is the debt sizing section. This section applies fundamental mathematical rules that: NPV of Debt Service is Debt at COD 167 CU IDOL SELF LEARNING MATERIAL (SLM)
and that NPV can be computed using the SUMPRODUCT with the Debt Service divided by and index of periodic interest rates that begins at 1.0 at the date of the COD. The screenshot below illustrates the process. First compute a debt repayment flag with the AND function using the starting date compared to the COD and the debt maturity finish. Then multiply the CFADS by the debt repayment flag. Get the interest rate from the input sheet using the LOOKUP function and then compute the periodic interest rate as the annual interest rate/12 * months in period at the top of the page. Use the periodic interest rate to compute an index that begins with 1.0 at the COD date — you can use the formula: Index = prior * (1 + periodic rate * operating flag) With the index you can compute the debt size as: Debt size = SUMPRODUCT(Debt Service/Interest Factor) You can compute the debt balance using a flag that is one month before the COD date and then use this flag for the draws. The repayment is just debt service minus interest and interest is computed from the opening balance multiplied by the periodic rate. These equations are illustrated in the screenshot below. 7.7 SUMMARY SOURCES AND USES SECTION The next section of the model for you to complete is the summary sources and uses section. This is generally not included in models but I strongly believe it should be. With the summary uses and sources you can show you copy and paste circular references in a transparent manner and you can use the balances to compute items in the construction funding part of the model (that I call the monthly uses and sources). I have put in titles for the capital expenditures and IDC and Fees and DSRA as shown below. Note that you can find the capital expenditures from the sum above, but you will have to put in the IDC, fees and DSRA later on and it will create a circular reference. After you put in the capital 168 CU IDOL SELF LEARNING MATERIAL (SLM)
expenditure sum and a place holder for the sum of all of the uses, you can put in the debt from the debt sizing section. Then the equity is just the total uses minus the debt. The screenshot below illustrates this. At the bottom of the sources and uses I show the amount of equity allocation to up-front equity and to pro-rata equity. (You may often have to divide up the equity into different parts such as EBL or shareholder loans). The pro-rata percents are the final part of this section below the sources and uses. The pro-rata can be computed by adding the debt and the equity pro-rata and then computing the percentages. 7.8 PERIODIC CASH FLOW PRE-COD Monthly Uses and Sources or Construction Financing In the next section we compute the funding requirements with the same titles as the summary uses of funds. Except, rather than putting in the sum, you put in the period-by- period capital expenditures. Again, you are not ready to put in the period by period IDC, fees and DSRA because these have not been computed yet. As with the summary sources and uses, compute the sum even though all the components (IDC, fees, DSRA) are not there yet. Once you have the funding needs, the task is to allocate the funding needs to debt and equity. The equity funding is split between up-front equity and pro-rata equity. You can compute the total equity commitment and subtract the opening balance of a separate account for the up-front equity. This will provide the remaining balance: Remaining balance to Fund = Up Front Commitment – Opening Balance 169 CU IDOL SELF LEARNING MATERIAL (SLM)
The amount of equity funding is then computed as the minimum of the funding needs and the remaining balance: Equity Funded Up Front = MIN(Remaining, Funding Needs) After the up-front equity is computed, you can compute the pro-rata funding of debt and equity. This is precisely why I computed the pro-rata percentages in the last section (look at the bottom of the screenshot above). So, you first compute the total pro-rate funding as the total funding needs less the up-front equity funded. Then, you split the pro-rata funding into debt and equity according to the percentages. 7.9 DEBT BALANCES WITH INTEREST ALLOCATION AND FEES In the next section you can compute the balance of the debt issues with the opening balance, draws and repayments. You can get the repayments from the debt sizing section and the draws from the funding section that was just discussed. You can then get the interest rate from the debt sizing section were we computed the periodic interest rate. Put an opening and closing balance together, get the draws and repayments and then compute the total periodic interest cost (monthly and later semi-annual). Then you can collect the total debt from the sources and uses statement to compute the up-front fees and the commitment fees. These two calculations depend on the debt commitment directly. The screenshot below illustrates how you can complete the debt balance calculation from the summary uses and sources as well as the construction financing. Finally, the amounts of IDC and fees can then be put back into the periodic construction financing sources and uses. But once you put the sum of the values into the summary sources and uses you will get a circular reference. 170 CU IDOL SELF LEARNING MATERIAL (SLM)
7.10 DSRA SECTION Modelling the DSRA can be painful. But to get started, first compute the required DSRA. Then you can compare the required DSRA with the amount that is already funded. The difference between the required DSRA and the amount that is funded is the amount that must be contributed to the DSRA account and the amount that can be withdrawn from the DSRA account. This is shown at the top of the screenshot below. The trick for this is to get the amount already funded from the opening balance of the DSRA account. Once you have computed the amount to contribute or withdraw, you can allocate the amounts to the pre-COD period or the post-COD period with the flags at the top of the sheet. You should make this allocation because the pre-COD goes into the sources and uses construction financing and the post-COD goes into the post-COD cash waterfall. There is a painful equation for the amount of the required debt service once you have the debt service. You should look forward one period and then accumulate the number of periods to sum. To do this you can use the formula below: Required Debt Service = SUM(OFFSET(Debt Service,0,1,1,Periods to Sum) 171 CU IDOL SELF LEARNING MATERIAL (SLM)
7.11 CIRCULAR REFERENCES FROM IDC, FEES AND DSRA Once you have finished the DSRA, you go back up to the monthly sources and uses of funds and then fill in the monthly IDC, the monthly up-front fee, and the monthly commitment fee. When you first fill in the numbers you will not see the dreaded blue lines for circular references. This is not the case when you link the pre-COD contributions to the DSRA. So wait with the DSRA for a minute. After linking the monthly values for IDC and fees, compute the sums in the left column as you would do for any account. This should still be ok. But when you put the sums up to the summary sources and uses you should get a circular reference. First, make a range name around columns for the fixed and computed ranges for IDC, fees and DSRA. The range names are illustrated on the screenshot below. With the range names, you can then create a range for the difference between computed and fixed. This is in the difference column of the summary sources and uses of funds after you make the column for the fixed and computed values. Assign the applied column on the left for the summary to the fixed value can create a macro to copy to the fixed from the computed. Then compute the total difference column. Put the range name for the difference into the macro with a Do While as shown below. To copy from the computed to fixed you can use RANGE(“range_name”).value as shown below. 172 CU IDOL SELF LEARNING MATERIAL (SLM)
You can attach this to a button and then run the copy and paste macro and start working on the DSRA circular reference which is more difficult. The DSRA requires you to compute fixed and computed values for the entire line. The first thing to is to insert lines for fixed and computed DSRA values as illustrated in the screenshot below. Then make range names around the entire rows. The computed value comes from the pre-cod value that was discussed in the last section. Then the applied number comes from the fixed value. As with the summary, you should compute the sums and this time compute the sum of the difference. Once you have done this put the range for the computed and the fixed values in the macro as shown above. If this is too confusing, you can watch the video below that goes though the entire solution. 7.12 CASH FLOW WATERFALL POST-COD AND OUTPUTS With the circular reference resolved you can now compute the cash flow waterfall. In our example, this is very simple. The main thing you do in our simple case is to link up to the EBTIDA, link the interest and repayment and link the DSRA withdrawal amounts that 173 CU IDOL SELF LEARNING MATERIAL (SLM)
provide positive cash flow. The final number in the cash flow waterfall is the dividends. With the dividends and the cash contributions from the periodic cash flow you can compute the equity cash flow and the equity IRR. To compute the equity IRR use the XIRR formula with the ending dates to be consistent with the interest assumptions that use opening balance and presume that the cash flows occur at the end of the period. After computing the equity IRR you can compute the DSCR from the cash flow statement. You can use an if statement and then not put in anything for the false: DSCR = IF(Debt Service > .1, CFADS/DS) This gives you a FALSE when there is no debt service. False is much better than 0 because than you can compute the minimum and average etc. The DSCR better be the amount that you entered in each period. It compute the LLCR calculate the CFADS over the debt period and then use the SUMPRODUCT with the interest rate index you computed in the debt sizing section to compute the PV of CFADS. Divided the PV of CFADS by the debt balance to compute the LLCR. The PLCR is the same calculation but you use the CFADS over the entire life of the project. To compute the debt life, create a counter for the debt period. Multiply that counter by the debt repayment, sum the product and divided it by the total debt at COD. Compute the debt IRR from all of the debt cash flows, positive for fees and debt service; and negative for the debt draws. Finally, you can make the graph using the NA() trick. 7.13 PRO-RATA, EQUITY UP-FRONT AND CATCH-UP DEBT In the above example, I assumed that if there was some up-front equity and some pro-rata, then the up-front equity would be issued and after that, all of the financing would be pro- rata. An alternative assumption could be that after the up-front equity, there is a period of all debt. I call this catch up debt. After the catch-up debt, the financing reverts to pro-rata at the debt to capital and equity capital at the input ratios. To model this, I suggest you create a simple case without other junk to isolate on the issue. The first thing to do is to set-up the summary sources and uses as usual. Note that you first compute the debt divided by equity in column D. Then you multiply this percentage by the up-front equity. 174 CU IDOL SELF LEARNING MATERIAL (SLM)
Next, you can make a real cash flow cascade. You start with the total financing requirements. Then, as usual, you compute the up-front equity. This leaves some funding for the catch-up debt. You can then make the same calculation with the total catch-up commitment, the remaining commitment and the opening and closing balance of the catch- up debt. Once the commitment is filled and the remaining balance goes down to zero using the MIN function, you can compute another level of the cascade. This remaining amount can be computed using pro-rata ratios. 7.14 SUMMARY 175 The inputs for debt are arranged to the following categories: • Debt Size (DSCR or Debt to Capital) • Debt Funding (Pro-Rata, Equity Up-Front) • Debt Repayment (Tenure and Type) • Interest Rates and Fees • Credit Support Remaining balance to Fund = Up Front Commitment – Opening Balance CU IDOL SELF LEARNING MATERIAL (SLM)
The amount of equity funding is then computed as the minimum of the funding needs and the remaining balance: Equity Funded Up Front = MIN (Remaining, Funding Needs) 7.15 KEYWORDS • DSCR – Debt Service Coverage Ratio • COD – Cost of Debt • DSRA – Debt Service Reserve Account 7.16 LEARNING ACTIVITY 1. Bring out the Importance of Structure with (1) Debt Sizing, (2) Summary Sources and Uses, (3) Periodic Sources and Uses, (4) Debt Balance and (5) Cash Flow Waterfall ________________________________________________________________________ ________________________________________________________________________ 7.17 UNIT END QUESTIONS 176 A. Descriptive Questions Short Questions 1. What is sculpting exercise. 2. What are user sections Long Questions 1. Discuss about the DSRA account in financial modelling 2. What is circular reference and mention its use in financial modelling. B. Multiple Choice Questions 1. Which of the following is not the input for debt ___? a. Credit support b. Debit support c. Debt repayment d. Debt funding 2. What is EBITDA a. Earnings before interest Tax and depreciation b. Earnings before interest and tax c. Both a and b CU IDOL SELF LEARNING MATERIAL (SLM)
d. None of these 3. What Project evaluation is a process of collecting and analyzing information in order to a. Plan project and know cash flows b. Determine Cash flows c. understand the progress, success, and effectiveness of a project d. None of these Answers 1- b 2-a 3-c 7.18 REFERENCES Text Books: • Edward Yescombe, Principles of Project Finance, Yecombe Consulting Ltd., Academic Press • Michael Rees, Principles of Financial Modelling: Model Design and Best Practices Using Excel and VBA , The Wiley Finance Series) Reference Books: • Edward Bodmer, Corporate and project finance modelling, Wiley Finance Series 177 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 8- CREDIT AGREEMENT Structure 8.0 Learning Objectives 8.1 Evaluation Costing 8.1.1 Calculating Personnel Time and Costs 8.1.2 Complex and Changing Circumstances-Allowing for Contingency & Complexity 8.2 Budgeting for Developmental Evaluation 8.2.1 Review and Finalise the Budget 8.3 Representations and Warranties 8.4 Project Loan/ Credit Agreements 8.4.1 Credit Agreement Basic Terms 8.5 Significant Provisions of the Project Finance Credit Agreement 8.6 Covenants 8.6.1 Types of Covenants 8.6.2 Project Financing Covenants 8.7 Export Credit Agencies and Multilateral Agencies 8.7.1 OECD Consensus 8.7.2 Categories of ECA Support in the context of Project Financing 8.7.3 The Changing Role of the ECA in Project Finance 8.7.4 ECAs and Credit Documentation 8.8 Multilateral Agencies 8.8.1 World Bank Group 8.8.2 European Bank for Reconstruction and Development 8.8.3 European Investment Bank 8.8.4 Asian Development Bank 8.8.5 Commonwealth Development Corporation Group Plc 8.9 Inter-Creditor Issues in Multi-Source Project Finance 8.9.1 Complexity of Inter Creditor Issues 8.9.2 Typical Inter-Creditor Issues 8.9.3 Common Terms Agreement 8.9.4 Insurance 8.9.5 Hedging Instruments 8.10 Events of Default and Remedies 8.10.1 Events of Default 8.10.2 Remedies 8.11 Summary 178 CU IDOL SELF LEARNING MATERIAL (SLM)
8.12 Keywords 8.13 Learning Activity 8.14 Unit End Questions 8.15 References 8.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain what is credit agreement • What significant provisions credit agreements will contain • Explain what is a covenant and the various project financing covenants • The various multilateral agencies that are involved • What is inter creditor issues • What are the remedies that are available in the case of a default 8.1 EVALUATION COSTING Evaluation expenses are highly situational and there are no magic formulas for calculating costs. After developing the budget matrix to identify what needs to be costed, the next step is to calculate the costs of individual expenses and sum them to obtain the total cost of the evaluation. When determining the resources needed to carry out the evaluation effectively take into account time, money, and expertise. Depending on budgeting and planning processes in your organization, you may be asked to make a rough estimate of evaluation costs some time before the start of the evaluation planning, and to develop a more detailed budget at a later stage. An accurate version of an evaluation budget can be based on the evaluation scope of work which outline the evaluation design, options, sample sizes and other considerations that have direct bearing on the costs. Be sure to estimate resources needed to facilitate the participation of those outside the organization commissioning the evaluation, such as program participants, partner organizations, and others. You may want to consult with key stakeholders who will be asked to participate in the evaluation. One effective way to break down the budget is by evaluation activities. Some activities will have repeatable costs. For example, hosting a focus group may have similar expenses each time such as, transportation allowances and refreshments for respondents, note-taking and transcription services, and meeting space rental. In the case of data collection activities, determine the cost of each activity and multiply those costs to achieve the 179 CU IDOL SELF LEARNING MATERIAL (SLM)
desired sample size. Another approach is to tackle large budget items such as personnel and travel. 8.1.1 Calculating Personnel Time (Level of Effort) And Costs The basic option for calculating personnel costs is to determine the amount of time required for each personnel member and multiply that by the daily rate to determine the cost for each person. An accurate estimate of the time required goes hand-in-hand with developing the budget. “Consider developing an evaluation time budget, as well as a cost/resources budget. … Many projects fail to budget sufficient time for the evaluation, producing results that are not as helpful or useful as initially expected.” Don’t forget to include sufficient time for reporting, as well as learning and follow-up on findings. Some organizations elect to pay for evaluations in their entirety or discrete tasks, using lump sum contracts rather than contracts specifying billable days. Nevertheless, an estimate of time and fair market price for personnel costs ensures that lump sum figures are reasonable. 8.1.2 Complex and Changing Circumstances - Allowing for Contingencies & Complexity. When situations are relatively stable, good planning is key to the execution of a successful evaluation. In complex or dynamically changing situations, responsiveness is of equal or greater importance. There are several ways that unpredictability may affect an evaluation plan and budget including: personnel turn-over, bureaucratic holdups, scheduling delays, developments in the field, shifting organizational priorities, tangled communications, and other unexpected changes arising from its context. Evaluation choices, such as the type of options used, can also contribute to the unpredictability of an evaluation’s costs. For example, the time and level of expertise needed to prepare a case study or to observe participants can vary widely and be difficult to estimate. How do you approach complexity and unpredictability in evaluation budgeting? Should unpredictability be managed or embraced as central to the evaluation process? The answer depends largely on the kind of evaluation. Develop budgets that estimate high and low boundaries of costs depending on various scenarios. Set aside some funds for unexpected changes in the design or execution. Negotiate some flexibility in meeting expenditure or reporting deadlines. 180 CU IDOL SELF LEARNING MATERIAL (SLM)
8.2 BUDGETING FOR DEVELOPMENTAL EVALUATION Developmental evaluation, on the other hand, is designed to provide real-time evaluative information to guide an initiative continually changing in response to its environment. If you have selected a developmental evaluation approach in recognition of the complexity of the evaluation and its context, the planning and budgeting process should be in alignment with the adaptive nature of this evaluation approach. Your budget should be as responsive as you expect your evaluation to be. The interview with Michael Quinn Patton provides specific advice on budgeting for developmental evaluations. 8.2.1 Review and Finalise the Budget Once there is an accurate assessment of the resources (time, money, and expertise) required to carry out the evaluation, it’s time to review and finalise the budget. This involves error-checking, reviewing cost allocations across the evaluation stages, and stepping back to reconsider the evaluation purpose in light of the costs. Error-checking can be as simple as reviewing your sums, or may include consulting with technical specialists, potential vendors, or field staff, about expense estimates. It’s also helpful to get an overview of how funds (and time) are distributed throughout the process. One way of assessing the evaluation budget is to step back and review how the resources have been distributed across the various stages of the evaluation. Calculate the percentage of funds (and time) allocated to each of the major stages. There are no hard and fast rules about how resources should be distributed across an evaluation process; the particulars of design and context will have a significant effect on how resources are allotted to each stage and activity. This overview may provide a helpful perspective as you review and finalize your evaluation budget. Are the resource allocations an accurate representation of the evaluation purpose, context and design? “Remember to include time for follow up and application of evaluation results – the most thorough evaluation will not help your program if the results remain in a folder on a shelf!” Finally, check that the benefits of conducting the evaluation will exceed the costs and that it is worthwhile proceeding. Evaluation should be purchased or undertaken only “when the likely usefulness of the new information outweighs the costs of acquiring it” 8.3 REPRESENTATIONS AND WARRANTIES The representation and warranty section of project contracts, including the project loan agreement, serves an important role in the project due diligence process. It basically confirms, legally, that certain conditions enabling the project to commence, are in place. A 181 CU IDOL SELF LEARNING MATERIAL (SLM)
representation is a statement by a contracting party to another contracting party about a particular fact that is correct on the date when made. A representation is made about either a past or present fact, never a future fact. Facts required to be true in the future are covenants. A warranty is sometimes confused with a representation, but in practice the two terms are used together, the contracting party being asked to represent and ‘warrant’ certain facts. Generally, a breach of a warranty could be enforced as a breach of contract. Because some courts blur the distinction between representations and warranties, the lenders typically require the borrower to ‘represent and warrant’ the same facts, and to state that the untruth of any representation or warranty is an event of default under the contract. It is important to note that linking this to an event of default enables the banks to exercise leverage over the borrower without necessarily having to initiate litigation. The two main conditions underlying the initial representations and warranties are: • to ensure that the legal status of the company exists, as this governs the ability to enforce the contract against a presumed set of assets, and • to ensure that the contracting party is duly authorized to enter into the transaction (ultra vires – subject to any corporate or partnership restriction relating to the transaction). Some lenders decide to verify this information as an added measure of prudence. 8.4 PROJECT LOAN/CREDIT AGREEMENTS Loan agreements define and regulate the financing instruments and interrelations amongst the various parties participating in the project financing. Loan agreements may be supplemented with an inter-creditor agreement which defines the rights that the project creditors will have in a default, including step-in and foreclosure. Another role of loan documentation is to ensure that the initial credit risk profile remains unchanged over the life of the facility. This is achieved by implementing various conditions and covenants in the loan agreement which define what the management can and cannot do. Loan agreements, via financial or ratio covenants, can also be used to oblige the borrower to maintain certain parameters such as liquidity, cash flow and other elements which may adversely impact the borrower’s (and project’s) risk profile. The typical project finance loan agreement will govern several elements: • Mechanistic provisions (e.g. loan payments and repayments); • Interest rates and provisions; • Lender protection against increased costs and illegality; 182 CU IDOL SELF LEARNING MATERIAL (SLM)
• Representations and warranties; • Events of default; • Miscellaneous provisions, including submission to jurisdiction. The credit agreement moreover will address matters that reflect the transnational nature of the transactions, e.g. waiver of sovereign immunity (in the case of projects with a government component); identification of the currency for debt repayments. The goal of the project finance lender is to address the control over as many project risks as is possible. To the extent risks (economic/political) cannot be adequately regulated, these must be addressed in the interest rate and fee pricing of the credit. 8.4.1 Credit agreements basic terms Typically, terms of the credit agreement will include the following: • Conditions precedent: These would include the delivery of certified copies of the borrower’s constitutional documents, of any relevant board and shareholder resolutions and of any key documents and the delivery of legal opinions confirming, inter alia, that the loan agreement was within the borrower’s powers and had been properly authorized. • Conditions precedent to each drawdown: Specific conditions to satisfy prior to each drawdown of funds (e.g. obtaining a completion certificate or engineering progress report). • Drawdown mechanics: The specificities relating to drawdowns (approvals, account numbers, dates, prorate allocations, etc.). • An interest clause: Interest is charged by reference to base rate; the loan agreement should stipulate which bank’s base rate is being used. • A repayment clause: A term loan may be repayable in one bullet repayment or in instalments of fixed or variable amounts. • Margin protection clauses: If a bank suffers an unexpected cost connected with making a loan, this will obviously erode its margin: Three main types of margin protection clause are included in loan agreements as a result: the grossup clause, the increased costs clause and the market disruption clause. • The illegality clause: This clause states that, if it becomes illegal for a bank to continue to make loans or otherwise participate in the loan agreement, the borrower must prepay the loans made by that bank and the bank’s obligations will be terminated. 183 CU IDOL SELF LEARNING MATERIAL (SLM)
• Representations and warranties: If things go wrong, the banks simply want their money back and the best way to do this is to give them a debt (and not a damages) claim. This is done by making the breach of representation and warranty under the loan agreement an event of default. The representations and warranties are often made ‘evergreen’, which means automatically renewable on a permanent basis. • Undertakings: These are things that the lender must do. A loan agreement will contain various undertakings from the borrower, ranging from the purely informative (e.g. provide annual accounts) to the financially protective (e.g. an undertaking not to create security in favour of third parties). The three key undertakings in a typical loan documentation are the negative pledge, an undertaking not to dispose of assets (unless waived) and an undertaking by the borrower not to change its business. The purpose of these undertakings is to force the borrower to keep the risk profile he had upon entering the transaction. • Events of default: Events of default in a typical loan agreement may include non- payment, breach of representation and warranty, breach of covenant, insolvency and ‘cross-default’. These are financial events of default which means that the borrower has failed to maintain or respect certain financial conditions. The cross- default clause basically comes into effect when the borrower defaults on borrowings or financial obligations with a third party. Since a cross-default is often an indication of serious financial problems, the cross-default clause enables the bank which is exposed to move to foreclose on the loan even if no default has occurred. 8.5 SIGNIFICANT PROVISIONS OF THE PROJECT FINANCE Credit Agreement The main provisions of project finance credit agreements are: • Additional indebtedness: Project-financed transactions, on occasion, need to issue additional debt for various purposes, such as capital improvements, cost overruns, changes in environmental or economic legislation, etc. It is important that the banks exercise control and therefore additional indebtedness should only be permitted if the banks grant their approval. Limitations on additional indebtedness therefore typically figure in a project finance loan documentation. • Distribution of dividends: In order to prevent funds from being siphoned out of the company, the loan documentation will typically put a limit on dividend payments. These limits will be defined in function of the borrower’s financial ratios such as available cash flow to financing payments. Here, the stronger the cash flow coverage, the higher the limit of dividends permitted. It is important 184 CU IDOL SELF LEARNING MATERIAL (SLM)
however to have an overall cap on dividends in order to ensure that project proceeds are ploughed back into the company and not siphoned off steadily, resulting in long term weakening of the borrower. • Grace periods prior to default: Due to the complex multinational nature of project finance, it is possible that payment delays may arise due to the trustee having administrative difficulties. Therefore project lending documentation will also include grace periods for missed principal and interest periods. However, too much leeway may invite difficulties, this is why such grace periods should be no more than three to five days. • Restrictions on intercompany loans: Project finance is, by definition, based on the use of a non-recourse vehicle providing certain off balance sheet benefits to sponsors. In order to ensure that the financial balance of such an arrangement is not upset, banks will require that there be restrictions on intercompany loans. This is to prevent the project sponsors of manipulating and weakening the project entity by making transfers to and from reserve accounts etc. • Reserve accounts: Project financing documents typically require projects to maintain several accounts with the project trustee. This may include a reserve account, a debt service reserve account, or an environmental legislation reserve account. Complying with such reserve accounts ensures that the project entity is protected in the event of any future legislative or regulatory changes. • Insurance: Project financings should ensure that all operating company and machinery is covered by reputable (investment-grade rated) insurance companies. It would be an added plus if the insurance company’s claims settlement procedures not extend indefinitely in an effort to improve its ‘liquidity management’. 8.6 COVENANTS Covenants are undertakings given by a borrower as part of a term loan agreement. Their purpose is to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. Covenants may, for example, place restrictions on merger activity or on gearing levels. Breach of a covenant normally constitutes an event of default and, as a result, the loan may become repayable upon demand. From the borrower’s point of view covenants often appear to be an obstacle at the time of negotiating a loan and a burdensome restriction during its term. As mentioned, they may also precipitate default. In order to negotiate an appropriate set of covenants, however, it is important for the borrower to have an understanding of the logic underlying the lender’s position. 185 CU IDOL SELF LEARNING MATERIAL (SLM)
In the first instance the lender is using covenants to protect itself against possible actions the borrower could take, especially in times of financial distress, which would damage the lender’s position. These actions are looked at in more detail below. Taking this a stage further, however, it can be expected that if the lender is unable to achieve adequate protection via covenants it will seek compensation, for example by requiring a higher margin. In some instances the covenants ideally wanted by the lender may be unduly restrictive and it may therefore be cost-effective for the borrower to be prepared to pay more for a greater degree of freedom. In other cases, however, it will be possible to negotiate an economically acceptable set of covenants in return for more favourable terms elsewhere in the contract. In instances such as these, debt covenants can be of benefit to both lender and borrower. 8.6.1 Types of Covenants The main covenants usually found in commercial bank loan agreements cover nonfinancial and financial covenants as well as events of default, which can be triggered by covenant violations. Non-financial covenants: Four important non-financial covenants are: • Negative pledge: this prevents the borrower from giving some future lender prior security over its assets. • Guarantees provided by members of a group of companies for the debt of other members of that group. • An undertaking to supply the lender with periodical financial information. Over and above the annual audited accounts, management accounts are the most frequently required, often on a quarterly basis. • Restrictions on capital spending, acquisitions and asset disposals. Financial covenants: The most common financial covenants used in UK bank lending stipulate minimum net worth, interest cover and gearing (ratio of borrowings to net worth). Current ratio, cash flow ratio (e.g. cash flow interest cover) and asset disposal/net worth covenants are also used, although less frequently. By way of contrast, gearing and asset disposal/asset covenants tend to predominate in UK bond and debenture issues, whereas direct dividend restrictions are common in US private lending agreements. Events of default: Events of default are those events, which, should they occur, permit the lender to require all amounts outstanding to become immediately payable. The typical events of default clauses are: • Failure to pay amounts owing to the lender when due. 186 CU IDOL SELF LEARNING MATERIAL (SLM)
• Failure by the borrower to perform other obligations under the loan agreement. It is due to this clause that a covenant violation triggers an event of default. • Any representation or warranty made by the borrower proving to be untrue. • Cross-default, i.e. where the borrower has triggered an event of default or has actually been put into default on any other loan agreement. • Where a ‘material adverse change’ has occurred in the borrower’s financial or operating position. This is clearly a catch-all clause and there is a view that where a company has negotiated a meaningful set of covenants, it can legitimately refuse to accept a continuing material adverse change clause. 8.6.2 Project Financing Covenants Because of the complexity of project finance, covenants in a project finance transaction are more complicated than those of a standard syndicated loan. They must cover all possible eventualities. The covenants are designed to: • Ensure that the project company constructs and operates the project in the manner contemplated in the technical and economic assumptions that are the foundation of financial projections. • Provide the lender with advance or prompt warning of a potential problem, whether political, financial, contractual or technical. • Protect the lender’s liens. These include covenants that the project will be constructed on schedule, within the construction budget and at agreed-upon performance levels; be operated in accordance with agreed standards; that project contracts will not be terminated or amended; and comply with operating budgets approved by the lender. Covenants in a project finance loan agreement include many of the same covenants required by lenders in asset based loan transactions. However, unlike asset based transactions, project finance loan documents are designed to closely monitor and regulate the activities of the project company. Hence, there may be a bespoke nature to the covenants, the variety of which are only limited by the characteristics of the project being financed. Some of these are summarized below: − • Reports on project construction and completion: Progress reports are important in confirming that the project is proceeding as planned. These reports typically contain information on construction progress generally; status of equipment orders, deliveries and installation; construction progress meetings; force majeure events; and target completion dates. Completion categories include mechanical completion (when the project is completed to the project specifications), operation completion 187 CU IDOL SELF LEARNING MATERIAL (SLM)
(when the project is operated at the levels guaranteed in the construction contract, and within environmental requirements), and final completion (when all provisions of the construction contract have been performed and the last minor portions of the work such as clean-up completed). − • Notice of certain events: Project finance loan agreements may contain provisions obligating the borrower to provide notice of certain events, including litigation, defaults, termination, cancellation, amendment, supplement or modification of any governmental permit, licence or concession, in order to provide the banks with advance notice so that corrective measures can be adopted. • Pay taxes: All taxes and other governmental charges must be paid when due and payable. • Compliance with laws: The project company will agree to comply with all laws applicable to it and to the project. • Obtain and maintain all approvals, permits and licences: The project company will obtain and maintain all approvals, permits and licences necessary or advisable in connection with the project. • No merger or consolidation: The project company will agree not to merge with or consolidate with any other entity. This is to ensure that the money is actually lent to the project entity and that the credit risks are not radically altered. − • Engineering standards for construction and operation: The project company commit to maintaining a specified standard of care and operation, typically ‘in accordance with good industry practice’. • Maintenance of properties: The borrower typically commits to maintain the projects and the assets in good working order. • Environmental compliance: The project company typically agrees to comply with the laws of the jurisdiction in which the project is located. • Insurance and insurance proceeds: The project company will be required to obtain and maintain insurance to satisfy the requirements of the lender concerning form, creditworthiness of insurers, and suitability of named insured, loss payee and subrogation provisions, and other concerns. • Adhere to project performance documents: The project company should agree to perform its obligations, and comply with each of the project documents, and not to intentionally create an event of default. 188 CU IDOL SELF LEARNING MATERIAL (SLM)
• Amendment, modification, termination, replacement, etc. of project documents: The project company will agree not to amend, modify or terminate, replace or enter into any project contract without the consent of the project lender. • Change orders: Generally, significant changes, however, must be reviewed by the lenders to determine whether they affect the construction costs, schedule and reliability of the project and, if so, ensure that they do not cause an event of default. • Change of business: The project company will agree not to engage in any business other than that assessed in the initial analysis – this is to avoid modifying the risk profile of the transaction. • Indebtedness: Additional debt is not permitted without the approval of the project lenders. This is to avoid having the company’s debt service capability unduly eroded. • Investments: The project company is prohibited to make any investments unless approval has been granted by the lenders. • Dividends and restricted payments: Released profits to the sponsors should be closely controlled by the project lender. Once the money is released, the funds are not typically available for use at the project. Release of profits is typically conditioned, there not being any default and all amounts required to be on deposit in various reserve accounts being present and the debt service ratios being adhered to. • Mandatory prepayment on the occurrence of certain events from excess cash flow: Project finance credit agreements typically contain mandatory prepayment sections to allow the lender to have a priority claim on cash flow before any transfers can be made to the sponsors. • Financial tests: Financial tests, such as debt service coverage ratios, minimum working capital requirements, net worth and the like, are the subject of negotiations that are typically tailored to the specific risks of the project. Financial tests can provide early indications of difficulties. One such test is the debt service coverage ratio; however, it is seldom viewed by project lenders as the only necessary covenant. • Special milestone dates: These may include dates that relate to construction deadlines and termination dates under off-take purchase agreements. These are incorporated into the loan agreement with covenants requiring the borrower to take required actions if the action has not been completed by the date specified. 189 CU IDOL SELF LEARNING MATERIAL (SLM)
• Change in the project: The company may be prohibited from changing or altering the project. In such cases, the definition of ‘changes’ should be clearly defined in the loan documentation. Changes for example consist not only of the type of business but also the scale or production volumes. • Project support: The borrowers may require that the project company supports the project in all respects, including completion. • Financial reporting: This covenant requires the company to provide appropriate accounts to the lenders: audited annual statements, interim statements, pro forma statements, quarterly or monthly statements, internal management accounts, etc. It is essential to specify if the statements are to be audited, and if so, in accordance with internationally recognized standards (e.g. IAS). • Use of proceeds: The project company will covenant that loan proceeds will be used only for their intended purpose (to be specified in the loan documentation). The project lender will want to avoid any use of proceeds for unapproved project changes or uses since that may be construed as assuming the liability in event of liquidation. • Security documents: The borrower will covenant that it will take all action required to maintain and to preserve security structures created by the lenders. • Operating budget: The project company is typically required to submit an annual project operating budget within 60 days of the beginning of the next financial year for approval by the lenders. • Trustee accounts: It is typical for all project revenues to flow through a revenue control account maintained by a trustee. This enables the lenders to monitor the income flows into the project. The borrower should therefore be required to establish this account and have all payments made to it transit via these accounts as a condition precedent to the loan agreement • Capital expenditures: Similar to investments, the project company is prohibited from making capital expenditures for the project, unless approval is granted by the lenders. This is to avoid any siphoning or diverting of funds earmarked for the project • Transactions with affiliates: Because the lender places restrictions on when profits can be distributed to the project sponsors, indirect distributions (for example, transactions with affiliates) are similarly disallowed. • Construction cost overruns: In the event of cost overruns, the loan documentation should oblige the project company to apply those funds in a 190 CU IDOL SELF LEARNING MATERIAL (SLM)
specific order, often reserving for the last application the most expensive options for the project. • Other covenants: The loan agreement may contain other covenants, such as compliance with pension laws; limits on lease agreements; limits on sale and leaseback transactions, property disposals and transfers, etc. 8.7 EXPORT CREDIT AGENCIES AND MULTILATERAL AGENCIES The Role of Export Credit Agencies in Project Finance Export credit agencies (ECAs) have typically been established by governments to assist in the export of goods or services which are sourced from that country. ECAs can also be used by a government to provide aid or assistance to developing countries by helping to finance the export of goods or services to those countries. In addition they can also satisfy local political needs. ECA assistance is typically provided by way of: • Political risk insurance • Commercial risk insurance (this can have the same commercial effect as a guarantee) • Interest rate support • Direct lending by the ECA (usually to the importer/buyer). An introduction to The G7 ECAs The oldest ECA is the Export Credits Guarantee Department (ECGD) of the UK which was established in 1919 to aid UK exports which had been badly affected by the First World War. The war caused many potential importers of goods from the UK to look elsewhere for goods. ECGD was originally established under the Overseas Trade (Credits and Insurance) Act 1920. The Act gave the Board of Trade powers “for the purpose of re- establishing trade ... between the UK and any country” to grant credits to UK persons where it appeared “advisable to do so by reason of circumstances arising out of the war” in connection with the export to specified countries of goods produced or manufactured in the UK. The ECA of the US is the Export-Import Bank of the United States (known as “USExim”) and was established in 1934 at the time of the Great Depression to improve domestic employment prospects by assisting the financing of US exports. For example, USExim has always supported and continues to support Boeing aircraft sales around the world. This is an example of an ECA satisfying domestic political policies. 191 CU IDOL SELF LEARNING MATERIAL (SLM)
An example of an ECA satisfying a diplomatic/political function is the cover provided by USExim to Russia throughout 1993. This was largely a product of the US Government’s policy to assist Russia’s move towards democracy. The ECAs of the other G-7 nations are HERMES (Germany), COFACE (France), SACE (Italy), JBIC (Japan) and EDC (Canada). Advantages of Involving ECAs in a Project The advantages of involving an ECA in a project include: • An ECA can usually provide political risk insurance which may not be available from the insurance market, or only available at a cost which makes the project uneconomic. This can be the key to whether the project proceeds, especially where the project is situated in a politically or economically “troubled” country • The repayment periods of ECAs are normally longer than those which commercial banks would be prepared to make available. ECA repayment periods are often in excess of ten years. The long repayment periods can increase the debt capacity of a project resulting in an increase in the return on equity • Where a loan is supported or guaranteed by an ECA, the lending bank can book that loan as a sovereign credit risk. The credit risk will be that of the host government of the ECA. This offers several advantages. The interest rate charged by the bank will be substantially reduced to reflect the lower risk. It will be easier for the bank to obtain internal credit approvals and results in lower costs for the bank in complying with capital adequacy requirements. The credit risk on an ECA based in an OECD country would currently be zero-rated if the ECA was government owned or backed. Further advantages can be derived by involving a number of ECAs in the financing. This can be achieved by a multinational consortium sourcing its goods and services from a number of countries. This may qualify the financing of the relevant goods and services for support from the ECA of each country which is involved. It is important to note that some ECAs will finance goods and services which are sourced partly outside the country of the ECA. 8.7.1 The OECD Consensus ECAs are not unrestricted in the manner in which they provide support to assist the export of goods and services. Clearly the offer by an ECA of excessively generous terms to assist exports from its country could create unfair competition. Exporters would be able to offer advantageous terms when compared with terms offered by exporters from another country. All OECD member countries are subject to the restrictions set out in the “Consensus”. In addition the Berne Union (the International Union of Credit and Investment Insurers) 192 CU IDOL SELF LEARNING MATERIAL (SLM)
regulates credit terms for certain goods. The Consensus resulted from negotiations on Guidelines for Officially Supported Export Credits which were led by the OECD in 1973. It has been updated over the years. Changes which came into effect on 1 September 1998 for an initial three-year trial period were a direct attempt to try to mitigate criticisms faced by ECAs in respect of their inflexible and time consuming procedural requirements. The Consensus seeks to establish a “level playing field” as between its members. It is important to remember that the Consensus rules (the “Rules”) were not originally formulated with project finance in mind and so some of the Rules may seem inappropriate in the context of a project financing. The 1998 changes go some way towards correcting this. The Rules which are relevant to a project financing are summarised below. • The maximum term of the financing is subject to a maximum average weighted life of 5.25 years from the starting point of the credit. This has superseded the previous Rule requiring a maximum term of credit of 10 years for poorer countries, less for more wealthy countries. The project company can have total flexibility in both the repayment profile and maximum repayment term for an ECA loan. This has superseded the previous requirements that: ▪ the loan should be repaid on a regular basis in equal instalments and ▪ repayments should be made at least every six months, with the first instalment to be made no later than six months after the starting point of credit. • The project company can have total flexibility in nominating the first principal repayment date for an ECA loan. • However, the average weighted life of an export loan may be extended to a maximum 7.25 years, provided that: • the first repayment of principal due is within two years of the starting point of credit for the project and • the final repayment is due within 14 years of the starting point of credit • The starting point will vary according to the nature of the contract which is being financed. The start date for a contract for the supply of completed goods will be the date the buyer takes physical possession of those goods. In a contract for the supply of capital equipment (for complete plant or a factory) where the supplier/contractor has no responsibility for commissioning, it is the date on which the buyer is to take physical possession of the equipment. In a construction contract where the supplier/contractor has no responsibility for commissioning, the start date is the date on which construction is completed. Where the supplier/contractor is responsible for commissioning, it is the date on which construction is completed and the equipment has been tested to ensure that it is 193 CU IDOL SELF LEARNING MATERIAL (SLM)
ready for operation. This last test is likely to be the most relevant in the context of a project financing where the project assets are to be built under a turnkey construction contract which provides that the turnkey contractor is responsible for commissioning • It should also be noted that the opportunity to extend the average weighted life of the export credit loan to 7.25 years is not available for project finance cases in high-income OECD countries. High-income OECD countries have been defined by the World Bank as those countries with a GNI per capita above US$9,076 (for 2002). Projects in these countries are only entitled to the benefits available under the Rules if the export credit represents less than 50 per cent of the financing plan and ranks equally with the other debt in the project • It should be noted that no single repayment of principal should exceed 25 per cent of the total principal sum repayable over the life of the ECA backed loan • Where the ECAs are providing official financing support: ▪ For repayment terms of up to and including 12 years, the normal contractual interest rate (“CIRR”) shall apply and ▪ For repayment terms in excess of 12 years and up to 14 years in project finance cases where it is permitted under the Rules that the weighted life of the credit loan may be extended to 7.25 years, a surcharge of 20 basis points on the CIRR shall apply for all currencies. • Interest may not be capitalised during the repayment term. • The purchaser of the exported goods and services must pay at least 15 per cent of the export contract value in cash on or before the starting point of credit • Any increase in the average repayment life of the project will have an impact on the ECA premium payable, in line with the minimum premium fees arrangement (known as the Knaepen Package) which came into effect on 1 April 1999 and has been incorporated into the Rules • ECAs are obliged to notify the other participant ECAs, within 20 calendar days of issuing any commitment of support, of the key financing features of the relevant project, including an explanation as to why the sponsors/ exporters have requested more flexible financing terms. • The Consensus also contains special rules which apply to certain sectors (e.g., ships, aircraft, nuclear power stations). All OECD ECAs must comply with the Rules set out above. In addition each ECA will apply its own rules. Set out in the table at the end of this section is a summary of certain additional requirements of the project financing programmes of the G7 ECAs. Departing from Consensus 194 CU IDOL SELF LEARNING MATERIAL (SLM)
It is possible for an ECA to offer support on terms which do not conform to the normal Rules. This is known as “departing from Consensus”. However, if an ECA wishes to offer terms which are more favourable than the normal Rules it must give prior notice to the other ECAs and give them an opportunity to match or improve terms. An ECA may also propose a “common line”; that is a common position in relation to a particular country or class of transaction. If an ECA proposes a common line it must give notice to all other ECAs prior to the closing date for receipt of bids (where relevant). A common line proposal can be more or less onerous than the Rules. If a common line is agreed it will override the Rules for the relevant project and will remain in force for two years and can be renewed thereafter. Any offer of finance on more favourable terms than the common line will be treated as a departure from the Rules and must comply with the above procedure. 8.7.2 Categories of ECA Support in The Context of a Project Financing Political Risk Insurance A typical political risk insurance policy will provide that if as a result of a “political event” the project company defaults on the payment of principal or interest on a project loan, the ECA will make good the default. ECGD provides two levels of political risk cover. In a “standard” policy the risks covered would include expropriation, war, transfer of foreign exchange and restrictions on remittances. Additional political risk cover can also be provided. This provides cover against the risk of the host government breaking specific undertakings which prejudice the viability of the project. For example, the breach by the host government of its undertaking to connect a power station to the national grid, thereby depriving a project company of any means to generate revenue. Commercial Risk Insurance This type of cover is sometimes phrased as “insurance” or as a “guarantee” and can be structured in a variety of ways. However, the commercial effect is usually that the ECA “guarantees” the whole or a portion of the repayment of principal and payment of interest on a loan made available by the banks to the project company. This type of cover will result in the ECA taking project risk. The ECA providing the cover will therefore need to analyse carefully all elements of project risk before agreeing to provide it. This type of cover is typically based on a buyer credit or a supplier credit type facility Under the ECGD buyer credit facility a supplier/exporter of goods agrees to supply goods to a buyer/importer: a bank agrees to make a loan available to the buyer/importer to allow it to pay the supplier/exporter for the goods. ECGD guarantees up to 100 per cent of the principal and interest due to the bank under the loan together with interest on the due amount under the terms of a support agreement. ECGD will pay any amounts which remain unpaid 90 days after the due date. Drawdowns can operate on a disbursement 195 CU IDOL SELF LEARNING MATERIAL (SLM)
and/or on a reimbursement basis. Drawdowns under the loan agreement on a disbursement basis are made directly to the supplier/exporter on receipt of: • Evidence of delivery of the goods or services (e.g. bills of lading or delivery notes) • Qualifying Certificates, where the supplier/exporter certifies that the goods or services are eligible (under ECGD’s rules) and that they have been delivered or performed. Alternatively, drawdown can also be made on the reimbursement basis. This is where the buyer/importer receives funds from the banks to reimburse cash payments made by it to the supplier/exporter. The buyer/importer must submit a reimbursement certificate supported by a receipt from the supplier/exporter. ECGD will normally enter into a premium agreement with the supplier/exporter which provides ECGD with recourse against the supplier/exporter if ECGD pays claims to the banks under the support agreement at any time when the supplier/exporter is in default under the supply contract. The amount of recourse is usually limited to 10 per cent of ECGD’s maximum liability under its guarantee to the banks. In addition the proceeds of any performance bond provided by the supplier/exporter to the buyer/importer must be paid to the lending banks Fig 8.1 ECGD Buyer Credit Facility 196 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 8.2 ECGD Buyer Supplier Facility Due to the significant administration costs involved, only projects with ECGD-supported loans in excess of £20 million will normally be considered in the context of a project financing. The buyer credit facility is typically linked to the ECGD’s Fixed Rate Export Finance Scheme (see Interest Rate Support below) if the buyer/importer wants the benefit of a fixed rate. The supplier/exporter is normally responsible for paying the premium to ECGD (although costs are usually passed on to the buyer/importer under the terms of the supply contract). However, for project finance cases it is more usual to see premium paid by the borrower as a financed amount and sense ECGD is willing to agree that 85 per cent of premium can be financed from the ECGD-supported loan. The premium is calculated as a percentage of the loan value. ECGD accepts that in considering the eligibility of any project for support there are no precise criteria. However ECGD will expect international commercial banks to be involved and to receive the same security as ECGD. In addition, where ECGD is providing commercial risk cover, ECGD will usually only support loans representing not more than 40 per cent of the total project capital requirement (both debt and equity) and 197 CU IDOL SELF LEARNING MATERIAL (SLM)
support from all ECAs (including ECGD) should not exceed 60 per cent of this amount. ECGD will normally expect at least 25 per cent of the project capital requirements to be financed from equity (or subordinated loans). In addition the involvement of a regional development bank or an international financing institution such as the International Finance Corporation will be regarded favourably. Fig 8.3 Company Participation Agreement A supplier credit has the same advantages for both exporters and importers; however, the structure is different. Rather than making a loan available to the buyer/importer, a supplier credit operates facility by the issue and discounting of bills of exchange or promissory notes. • The supply contract provides for deferred payment terms and the issue of bills of exchange or promissory notes by the buyer/importer upon delivery of the goods or services. • The bills of exchange or promissory notes are guaranteed by a surety satisfactory to ECGD (for example a creditworthy parent company, or the buyer’s/importer’s government). • The bills of exchange or promissory notes are purchased by the supplier’s/exporter’s bank and are guaranteed by ECGD under the terms of a Master Guarantee Agreement. The bank 198 CU IDOL SELF LEARNING MATERIAL (SLM)
will also have obtained a Certificate of Approval. ECGD will guarantee up to 100 per cent of the principal and interest payable on the bills of exchange or promissory notes upon a payment default. Interest rate support is also usually available. ECGD can also guarantee supplier credits where the bank enters into a loan contract with the buyer/importer. Such loan contracts may or may not be secured by bills of exchange or promissory notes. Another major difference between the buyer credit and the supplier credit facilities is that ECGD rarely seeks recourse against the supplier/exporter under a supplier credit facility. This is generally because supplies under a supplier credit facility are relatively standard items. However, recourse may be sought where the supplier/exporter has a high degree of contractual responsibility. This may well be likely in the context of a project financing. It is important to note that ECGD will normally guarantee the financing bank 100 per cent of the loan value. Many other ECAs will only provide either guarantees or insurance cover for up to 95 per cent of the loan value. This may be problematic in the context of a project financing as the financing bank will be required to take the risk on the unguaranteed balance of 5 per cent unless another party is prepared to guarantee the residual amount. A guarantee of less than 100 per cent of the loan value will almost certainly lead to increased costs for the project company and/or the exporter/supplier. Interest Rate Support Interest rate support is typically provided by the ECA (or an institution related to it) agreeing to pay to the lending banks the difference between the relevant CIRR (see section 10.4 above) and the rate at which the banks fund themselves (typically LIBOR) plus a margin. This results in the project company/borrower paying an effective interest rate equal to the relevant CIRR while the banks receive a commercial return on their loan. Direct Lending (and Equity Stakes) Some ECAs, for example USExim and JBIC, will lend directly to the project company. For example in 2002 JBIC lent ¥60 million to the Simhadri Thermal Power Station Project in India. EDC (the Canadian ECA) has made a number of direct loans and has also taken equity stakes in projects. 8.7.3 The Changing Role of The ECA in Project Finance The approach of ECAs to project finance has changed significantly in recent years. The main reason for this has been the move towards infrastructure projects which are both sponsored by and financed by the private sector rather than relying on sovereign debt support. There has been a significant growth in the requirement for private sector project finance. Key features of these financings have been the increasingly complex contractual and debt 199 CU IDOL SELF LEARNING MATERIAL (SLM)
financing structures often involving commercial banks, ECAs, multilateral agencies (such as the World Bank) and regional development banks (such as Asian Development Bank or European Bank for Reconstruction and Development). The resulting increase both in deal flow and in complexity has resulted in ECAs devoting more resources to analysing project risk and allocation and the economics of the projects. In the past this was less of a problem because projects were often supported by the host government. All of the G7 ECAs now have a specialist project finance department (ECGD’s project finance scheme was relaunched in 1994 whilst USExim’s was formed in 1994). USExim has a designated project finance business development team whose job it is to examine and evaluate an application made to USExim. USExim have committed themselves to carrying out this preliminary evaluation within 45 days of receiving an application. In contrast ECGD has left the responsibility for processing project finance applications to its country’s underwriters. However, ECGD may appoint a specialist adviser to report on specific aspects of a project. This change in the ECAs’ approach to project finance has resulted in their being prepared to assume a wider range of risks. For example, many ECAs are now prepared to cover both political and commercial risk during the construction phase. ECAs have traditionally only covered political risk. Coverage of commercial risk, especially during the construction phase, clearly requires an understanding by the ECAs of the various project risks and their allocation. ECAs are also willing to finance a proportion of supplies from other countries. JBIC/NEXI will finance up to 70 per cent of supplies from another country as a proportion of the total supplies financed. USExim will finance up to 50 per cent of supplies from another country. Most of the European ECAs will only finance up to 15 per cent (or 30 per cent in the case of supplies sourced from other EU member states). ECGD will finance up to 15 per cent of supplies sourced from another country, but only instead of covering local costs. 8.7.4 ECAs and Credit Documentation ECAs have differing attitudes towards their credit documentation. Some ECAs require rigid adherence to their standard forms (sometimes requiring that documentation be governed by the laws of the jurisdiction of the ECA). However, ECAs are becoming more flexible, especially with regard to large project financings, where a degree of standardisation of documentation is required in order to simplify the increasingly complex documents. The detailed terms of an ECA guarantee will obviously differ according to the ECA involved and the governing law of the contract. However, some common principles apply to commercial risk guarantees. They usually provide that the guaranteed banks must 200 CU IDOL SELF LEARNING MATERIAL (SLM)
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