CAIIB Super Notes: Corporate Banking: Module C: Project and Infrastructure Finance: Disbursement, Monitoring, Supervision and Follow up of Project Finance Loans

CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Disbursement, Monitoring, Supervision and
Follow up of Project Finance Loans
Module C: Project and Infrastructure Finance

CAIIB – SUPER NOTES
Corporate Banking: Disbursement, Monitoring, Supervision and Follow
up of Project Finance Loans

Contents
Coverage:
1. Introduction
2. Capturing Cash Flows
3. Project Documentation
4. Disbursement of Project Loans and
Monitoring in Construction Phase
5. Network Techniques Used in Project
Implementation
6. Monitoring, Supervision and Follow up
of Project Finance Loans

INTRODUCTION
1.

Ensuring Safety of Bank’s Funds
• System for capture of cash flows of the project
• Documents to be executed
• Disbursement of the loan
• Monitoring the execution of the project
• Network Techniques for Project Implementation
• Follow up and Monitoring of the project in the operational
phase

CAPTURING CASH FLOWS
2.

TRA
• Strict control is required over utilization of revenues as they
are the only source of repayment
• Trust and Retention Account:
– Every rupee earned is routed through TRA account
– Appropriation is decided beforehand in pre-determined sequence
– Utilization is allowed in a preferential manner as per a ‘waterfall
arrangement’

Waterfall Arrangement
Fuel, raw
material, wages
and salaries etc.
Fuel, raw
material, wages
and salaries etc.
Operations and
Maintenance
Costs
Operations and
Maintenance
Costs
Govt. Taxes,
Excise and other
duties
Govt. Taxes,
Excise and other
duties
Debt ServiceDebt Service
•Interest and
Repayment
Installment
Remaining is
available for use
without lender’s
control
Remaining is
available for use
without lender’s
control

DSRA
• Equal to interest and repayment obligations of one or two
quarters.
• The reserve is utilized when due to unforeseen circumstances
there is a shortfall of revenues to take care of current
repayment obligations
• Filled up by subsequent flows of revenue
• May be in the form of Standby LC or Bank Guarantee

Cash Sweep
• Excess cash flows are not allowed to accrue to the SPV.
• Instead they are swept back towards accelerated repayment,
by applying it to the installments from the rear end

PROJECT DOCUMENTATION
3.

Documents
Concession/License
Agreement
Concession/License
Agreement
Shareholder’s
Agreement (SHA)
Shareholder’s
Agreement (SHA)
Engineering,
Procurement and
Construction (EPC)
Contract
Engineering,
Procurement and
Construction (EPC)
Contract
Operations and
Maintenance
Contract
Operations and
Maintenance
Contract
Financing
Documents
Financing
Documents
Common Loan
Agreement
Common Loan
Agreement
Inter-Creditor
Agreement
Inter-Creditor
Agreement
Security DocumentsSecurity Documents
Transaction
Documents
Transaction
Documents

Concession/License Agreement
• Agreement with the govt. granting the right to the project
vehicle to develop the project
• It delivers the project site to the private developer
• Govt./Public body agrees to meet the Rehabilitation and
Resettlement (R&R) Expenses
• It specifies various terms like – Period, Termination Clause,
Technical specifications, State support agreement etc

Concession/License Agreement
Type of Project Name of Agreement
Road Concession Agreement
Telecom Licensing Agreement
Airport Operations, Maintenance and Development Agreement (OMDA)

Shareholder’s Agreement
• Between all shareholders of SPV including Project sponsors
• Establishes
– Shareholding Pattern
– Decision Making Process
• Defines
– Cash calls and remedies available against funding defaults
– Shareholder Exit Process
– Right of First Refusal (ROFR)
• Ensures equity funding is fully tied up and available
• Lays down a simple process for a shareholder to monetize his shareholding

EPC Contract
• Between SPV and EPC Contractor
• Establishes EPC contractor’s sole responsibility in designing,
procuring, constructing, testing and finally commissioning the plant
facility
• Lays down
– Guaranteed and minimum performance parameters
– Liquidated Damages
– Defects Liability
• Protects the project against time and cost escalations

Operations and Maintenance Contract
• Between SPV and O&M Contractor
• Establishes responsibility of the O&M contractor to operate
the plant/facility to ensure the availability of project/facility.
• Defines Maintenance Obligations
• Specifies Bonus Payments
• Ensures a certain level of mitigation of operating and
performance risks

Operations and Maintenance Contract
Other Sector Specific Project Documents:
- Power Purchase Agreement
- Fuel Supply Agreement
- Fuel Transport Agreement
- Default Escrow Account

Financing Documents
• Between SPV and Project Lenders
• Govern the financing of the project

Common Loan Agreement
• Also known as Loan Agreement, Facility Agreement, Rupee Facility
Agreement, Senior Loan Agreement etc
• Defines
– Amount and purpose of loan
– Term of the Loan
– Repayment Schedule including Moratorium Period
– Interest Rates, reset clause
– Pre-Commitment and Pre-disbursement conditions
– Drawdown/Disbursement Schedule
– Debt Fees/Service, representation and warranties
– EODs (Events of Default) and Dispute Resolution Procedure

Inter-Creditor Agreement
• Amongst the creditors in the syndication
• Ensures Coordinated Action/Prevents unilateral action
• Provides for the right of each individual lender against the
borrowers

Security Documents
• Protect lenders in event of default by the borrower
• Allows lenders to presume control over the assets
• Assets maybe movable, immovable, fixed or current

Types of Security Documents
•Over land, building, plant and equipment, book debts and receivables
Mortgage Document/Deed of HypothecationMortgage Document/Deed of Hypothecation
•Pledging of equity of sponsors
•Sometimes satisfied with negative lien/non disposal undertakings
Share Pledge AgreementShare Pledge Agreement
•Concession Agreement, Licensing Agreement, insurance contracts, Off Take Agreements,
Construction Contracts etc. are assigned to the banker.
•To capture all the benefits accruing to the borrower
•Included as a part of English mortgage
Assignment of Key ContractsAssignment of Key Contracts
•Construction Guarantee, Performance Guarantee, Cost Inflation and FE Risk Protection.
GuaranteesGuarantees

Transaction Documents
• Project Documents and Financing Documents along with the key contracts
• Critical Transaction documents are as follows:
Sector Critical Transaction Documents
Power Fuel Supply/Transport Agreement, Power Purchase Agreement
(Escrowability of off taker), Technology, Equipment suppliers,
Evacuation Arrangements and Distribution losses
Roads Concession Agreement, Traffic Study, Land Availability, EPC Contract
Ports Concession Agreement, Traffic Study, Hinterland Connectivity,
Rationale and Inland Linkages, Container Freight Stations and
Container depots, Level of Containerisation, Dredging Requirements
Telecom Licensing and Technology obsolescence, ARPU, MOU and VAS charges

DISBURSEMENT OF PROJECT LOANS AND
MONITORING IN CONSTRUCTION PHASE
4.

Disbursements
• Vital to ensure ‘End use of Funds’
• Debt disbursements in the form of progress payments to minimize
possibilities of diversion of funds
• Services of LIE are outsourced
• Borrower submits detailed drawdown schedule which is vetted by
the LIE
• Developers generally spend significant chunk of funds through their
equity before first disbursement. This also takes care of “upfront’
equity infusion

Disbursements
• Compliance report in r/o pre-disbursement conditions is
prepared
– In case of consortium it is sent by lead bank to other banks/Fis

Monitoring
• End use certificate obtained from statutory auditors
• Confirmation sought from LIE also
• LIE also submits monthly/quarterly report

NETWORK TECHNIQUES USED IN
PROJECT IMPLEMENTATION
5.

Network Techniques
• Completion of a project in shortest time depends on right
selection of sequence of these activities.
• Techniques:
– Critical Path Method (CPM)
– Program Evaluation Review Technique (PERT)

MONITORING, SUPERVISION AND FOLLOW
UP OF PROJECT FINANCE LOANS
6.

Monitoring Measures
• LIE Services
• O&M Activity
• Monitoring of revenue inflows through TRA arrangement
• Causes for revenue shortfall should be assessed and corrected
• Interest reset should be done timely
• Regular Consortium Meetings
• Control should be exercised to ensure time submission of
statements
• Insurance Policies to be kept current and monitored

Do you have any questions or queries or some feedback to give?
Just mark an email to super.msahluwalia@yahoo.com

For more Super-Notes: Click Here
M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida

CAIIB Super Notes: Corporate Banking: Module C: Project and Infrastructure Finance: Disbursement, Monitoring, Supervision and Follow up of Project Finance Loans

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CAIIB Super Notes: Corporate Banking: Module C: Project and Infrastructure Finance: Disbursement, Monitoring, Supervision and Follow up of Project Finance Loans