International Financeran-s3.s3.amazonaws.com/.../international-finance-presentation.pdf · International Finance . The information presented in this presentation is for information

The information presented in this presentation is for information and discussion purposes only, no reliance for any other reason should be placed on the

information presented. The information reflects the views of the presenter and does not constitute any type of advice by Citi or any of its subsidiaries or affiliates.

Presented by: Eva Lewis

January 22, 2013

International Finance



Agenda

Overview – The Jamaica Logistics Hub Opportunity

Significant Issues and Opportunities in Infrastructure Financing

Public Sector Debt & Need for Infrastructure Investment

Current Trends: Infrastructure Finance

Overview of Forms and Sources of Funding for Infrastructure

Project Finance

Overview of Official Agency Financing

− Advantages & Limitations of Agency Solutions

Public-Private Partnerships (PPPs) and Benefits

− Types of PPP Contracts

Forms and Sources of Funding for International Trade Finance

Supply Chain Financing and Benefits

Questions and Answers

1



Overview – The Jamaica Logistics Hub Opportunity

Citi welcomes the opportunity to discuss international financing regarding the logistics hub. We

believe there are significant opportunities for funding infrastructure development projects and

other financing requirements relating to the logistics hub in Jamaica over the upcoming years.

Why is the proposed logistics hub critical?

Expansion of the Panama Canal expected to

be completed by June 2015

Increased economic activity

Increased competition, products and services

Access to foreign capital and investment

Expansion, modernisation and privatisation of

the Kingston Container Terminal

A logistics hub is a specified area responsible for the coordination,

transportation, organisation, sorting and delivery of goods for both local and

international transit.

2



Significant Issues and Opportunities in Infrastructure Financing

Public Sector Debt but

Massive Need for

Infrastructure Investment

Public sector debt crisis changes dynamics of what governments can do alone

Governments significantly underinvested

– Squeezed public finances will see a turn towards private investment

– Vital that investment continues for future social and economic security

Massive new investment needs

– New projects for growth (Greenfield)

– Backlog of maintenance, renewal and extension (Brownfield)

Investment in

Infrastructure

Local and Regional Governments

Sovereign Wealth Funds

Policy Banks

Pension Funds

Public Private Partnerships

– Contracting the private sector for needs often fulfilled by public sector

– Forms and source of funding

Diminishing Liquidity from

the Bank Market

European crisis

– Impacting European bank capital and ability to continue project finance activities

– Impacting cost of funding of periphery ECAs

Bank Regulatory Changes

– Basel lll negatively impacting bank’s EM risk capital

– Basel lll penalizing project finance

Development of LCY Debt Capital Markets

3



Public Sector Debt & Need for Infrastructure Investment

Government debt and social issues

Demand for infrastructure is set to continue to expand significantly in the decades ahead

– Driven by major factors of change such as global economic growth, technological progress, climate change, urbanisation and growing congestion

– As global population continues to grow, emerging markets become industrialised, and developed markets need to replace ageing infrastructure, the need for project finance (primarily senior secured), will continue to grow

Significant Forward Investment Need

– It is estimated that over US$50 trillion in capital investment will be required for roads, water, energy, airports, telecommunications and rail between 2010 and 2030 in OECD countries alone(1)

– India’s 2012 – 2017 five-year plan embeds US$1 trillion equivalent for infrastructure and power needs

– Estimated investment in alternative energy power generation sources in the U.S. of up to $800 billion over the next 5 – 10 years

Government debt creates challenges to infrastructure development

– Necessary development of ageing infrastructure systems is difficult to meet due to squeezed public finances

– Requirement for private sector involvement as well as sustainable, efficient infrastructure solutions

Infrastructure development necessary despite government debt constraints

– Infrastructure ensures service and good delivery, promoting growth and prosperity, ultimately providing significant social and economic benefits, and enhancing public finances

– A 60% improvement in infrastructure productivity could provide US$1 trillion in annual savings(2)

Port capacity could expand by 30% by maximizing the efficiency of current operations

– Failure to progress would cost in terms of congestion, environmental problems, unreliable supply lines and blunted competitiveness

1. OECD. Infrastructure to 2030: Telecom, Land Transport, Water and Electricity

2. McKinsey Global Institute, “Infrastructure Productivity: How to Save $1 Trillion a Year”, January 2013

4



Current Trends: Infrastructure Finance

Significant Forward Investment Need

As the world’s population continues to grow, emerging markets become industrialized, and developed markets need to replace aging

infrastructure, the need for project finance (primarily senior secured), will continue to grow

– It is estimated that over US$50 trillion in capital investment1 will be required for roads, water, energy, airports, telecommunications, and

rail between 2010 and 2030 in OECD countries alone

– The European Commission estimates €1.5 – 2 trillion of investment needs in infrastructure / power across the E.U. over the next 10 years

– India’s 2012 – 2017 five-year plan embeds US$1 trillion equivalent for infrastructure and power needs

– Estimated investment in alternative energy power generation sources in the U.S. of up to $800 billion over the next 5 – 10 years

Historically Bank Market Funded

Historically, 90 – 95% of all project finance debt globally has been funded by bank and ECA lenders

– Percentage of project finance in the U.S. that is bond funded is meaningfully higher: 20 – 25% (mostly power / pipelines)

– In the U.S., “core” infrastructure is mostly financed in the tax-exempt market

Non-recourse nature of project / infrastructure financings engenders need for a specialized skill set in this space, the bulk of which is

concentrated in the banking sector

Institutional Investors Will be Needed to Fill the Void

The scaling back of bank lending to this sector translates into an important opportunity for meaningful institutional investor involvement,

particularly given the long duration nature of project / infrastructure assets

Significant depth of potential capacity, particularly in the U.S. credit markets

Standing precedents of power, oil and gas, mining, and infrastructure projects having all been financed via project bonds, on both a

greenfield and brownfield basis

Ratings infrastructure exists: each of Moody's, S&P, and Fitch have published ratings criteria specifically for project finance

Secured nature of financings, together with stable cash flow profiles and comparatively high recoveries in default comprise the building

blocks for a compelling relative value proposition

Significant investments from pension funds and insurance companies for long-dated assets

Given global investment needs across power, transport, and social infrastructure, as well as

natural resources, the demand for project finance going forward will remain significant.

1. Source: OECD. Infrastructure to 2030: Telecom, Land Transport, Water and Electricity

5



Overview of Forms and Sources of Funding for Infrastructure Project Finance

▲ Strong track record in

limited recourse bank

financing

▲ Flexible source of finance

(drawdowns,

prepayments)

▼ Smaller market for

long tenors

Bank Debt

▲ $ denominated project

bond market liquid

▲ Longer average life

▲ Index-linking to hedge

inflation risk and lower

initial financing costs

▼ Market risk

(availability, price)

▼ Rating requirement

Buy and hold

institutional investors

▲ Terms can be very

flexible

▲ Avoids some of the

disadvantages of a public

issue

▼ Suitable for small

amounts

▼ Small investors’ universe

Shareholder loans to

achieve cash efficiency

Bridge loans allow back-

ending of actual

disbursement to

maximise return

▲ Long tenors may be

available maturities and

very attractive pricing

▲ No rating required

▼ Bank/Monoline guarantee

usually required

▼ Limited to a percentage

of

project cost

Monoline insurers

wrapping bond financing

▲ Increased certainty of

financing (availability,

price)

▲ Improved pricing and

tenors

▲ Increased flexibility

▼ Investment grade rating

required

Tranching of debt to

match risks may be

efficient (and allow, for

example, investment

grade rating on senior

tranches)

Junior debt could allow

optimised utilisation of

concession length

Specialised funds –

typically higher return

requirements than

“industry” shareholders

Regional banks and

companies may provide

local edge

Debt Capital Markets Private Placements Shareholder Equity

Third Party Equity Junior Debt Credit Enhancement EAF Financing

The required infrastructure development projects can be financed through a combination of

several sources of financing.

6



What are Official Agencies?

Export Credit Agencies (“ECAs”), such as The National Export-Import Bank of Jamaica (EXIM Bank), are

government agencies with a mandate to support exports from their home country, stimulating the home

country economy and creating jobs

What Types of Loans Are Supported by Official Agencies?

Borrowers are typically in the developing markets, with some exceptions

Types of loans include short term trade finance, long term corporate financing, aircraft and ship financing,

complex project financing and financing of capital goods for trade purposes

With the exception of short term trade finance transactions, tenors are typically between 7-15 years and

fixed and floating rate financings are supported

Investment Highlights of Official Agency-Guaranteed loans:

Typically highly structured with multiple sources of repayment (borrower, Official Agency) and often with

additional asset security

Provide low risk exposure to the emerging markets and project finance

Allow investors to diversify from traditional sovereign investments

Overview of Official Agency Financing

Export and Agency Finance (EAF) arranges and offers advice on structured financings that

manage risk and funding through various forms of support provided by official agencies

7



Agency Type

Description / Characteristics of

Financing

Advantages / Limitations

Multilateral ● Institution owned by more than one country

● Supports social and economic progress in their

member countries

● Focus on financing developmental projects

● Financing is NOT linked to procurement of goods

and/or services

● Solutions includes guarantees and insurance, as well

as direct lending

▲ Main source of long term capital in high volatile

environments

▲ Relatively flexible eligibility requirements (untied)

▲ Withholding tax exemption

▲ Open for refinancing solutions (IFC)

▼ Needs to adhere to certain statutory requirement such as

environmental

▼ Fairly extensive execution timeframe

Bilateral ● Government institution that supports overseas

investments into the - emerging markets

● Financing is NOT linked to procurement of goods

and/or services

● Focus on financing of developmental projects related

to own government objectives

● Solutions includes rating enhancement, political

guarantees, partial guarantees and direct loans

▲ Main source of long term capital in high volatile

environments

▲ Relatively flexible eligibility requirements (untied)

▲ Withholding tax exemption

▲ Open for refinancing solutions (FMO)

▲ Continuous innovative solutions

▼ Needs to adhere to certain statutory requirement such as

environmental risk assessment

Export Credit Agencies

● Government institution that supports trade and

investment from

● OECD countries to emerging markets

● Financing is linked to procurement of goods and/or

services

● Provides comprehensive guaranteed loans for up to

85% of the contract value

▲ Low subsidized pricing

▲ Very predictable terms and conditions

▲ Comprehensive guarantees increase financing appetite

from financial institutions

▼ Rigid eligibility criteria

▼ Strict funding requirements

Advantages & Limitations of Agency Solutions

Agencies can be divided into 2 categories depending on whether their support is “tied” (Export

Credit Agencies) or “untied” (Multilateral and Bilateral Agencies) to exports.

8

http://www.caf.com/view/index.asp?ms=11

http://www.worldbank.org/



Public-Private Partnerships (PPPs) and Benefits

Benefits Development of infrastructure

Effective Risk Management

Innovation and best practice

Quicker implementation

Alignment of interests

On going maintenance

Price certainty

Local

examples

Jamaica Public Service Company Limited – divestment of the GOJs 80%

interest in the entity

Sangster International Airport’s privatization

PPPs are a means of contracting the private sector for the delivery of services traditionally

provided by the public sector; PPPs seek to leverage the private sector’s expertise in project

management.

In an environment of budget austerity and increased demands for infrastructure improvement

to support GDP growth, Latin American governments have looked to innovate PPP structures

in order to access a broader array of financing alternatives for infrastructure projects.

1. Source: Development Bank of Jamaica. Shaping new partnerships for national development

9



Types of PPP Contracts

Types of PPPs Acronym Mode of

Entry

Operation and

Maintenance

Investment Ultimate

Ownership

Market Risk Duration

(Years)

Management Contract Contract Private Public Public Public 3 – 5

Leasing Contract Private Public Public Semi-private 8 – 15

Rehabilitate, Operate

and Transfer

ROT Concession Private Private Public Semi-Private 20 – 30

Rehabilitate, Lease /

Rent and Transfer

RLRT Concession Private Private Public More-

Private

20 – 30

Merchant Greenfield Private Private Public More-

Private

20 – 30

Build, Rehabilitate,

Operate and Transfer

BROT Concession Private Private Public Private 20 – 30

Build, Own and

Transfer

BOT Greenfield Private Private Semi-private Private 20 – 30

Build, Own, Operate

and Transfer

BOOT Greenfield Private Private Semi-private Private 30+

Build, Lease, Own BLO Greenfield Private Private Private Private 30+

Build, Own, Operate BOO Greenfield Private Private Private Private 30+

Partial Privatization Divestiture Private Private Private Private 30+

Full Privatization Divestiture Private Private Private Private Indefinite

Reference: Thomsen (2005), Hammami and others (2006)

10



Forms and Sources of Funding for International Trade Finance

• ECAs shift the risk and uncertainty of payments from exporters to themselves in exchange for a premium

Export Credit

Agencies

• Short, medium and long tenors are available

• Can offer financing with lower margins than corresponding lending and capital markets alternatives

EAF Financing

• Gives support to the commercial relationship between borrowers and their suppliers and customers

• Discounting of receivables / payables

Supply Chain

Financing

• Flexible source of finance (drawdowns, prepayments)

• Relationship pricing

• Flexible collateral / clean structure

Working Capital

Financing

There are a number of options available for International Trade Finance.

11



What are the Benefits of Citi Supplier Finance?

Supply Chain Financing and Benefits

Benefits

Borrower / Buyer Supplier

1 Improves the commercial

relationship with the supplier and

facilitates competitive payment

terms.

The supplier transfers all the payment and collection

risk to the lender.

2 Potentially reduces operational

costs and provides efficiency with

electronic payments and remittance

information. Payment discrepancies

and errors can be identified faster.

The Borrower / Buyer allows its suppliers to utilize

its credit rating to convert their Account Receivables

(AR) into cash at a non-recourse basis. This will

free-up the supplier’s lines of credit and reduce

financing costs.

3 The program allows the Borrower /

Buyer to improve Days Payables

Outstanding (DPO) and achieve

better competitive bidding/pricing.

The supplier will reduce Days Sales Outstanding

(DSO) releasing working capital from AR by

accelerating AR to cash, helping them to power

more sales and support job growth.

Supply Chain Financing is a transaction structure consisting of:

• A disbursement service in which the lender acts as the Buyer’s paying agent.

• A separate receivables purchase service that enables the early financing of the payment

beneficiaries.

12



Presenter details:

Eva Lewis

Director

Tel: 1 (876) 936-3245

Email: [email protected]

Questions and Answers

13

mailto:[email protected]

Documents

International Financeran-s3.s3.amazonaws.com/.../international-finance-presentation.pdf · International Finance . The information presented in this presentation is for information