Navigating Success in Project Finance: Insights from Global Experts

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Christy: Hello, everyone, and welcome to today's webinar, "Navigating Success in Project Finance: Insights from Global Experts." My name is Christy DeMaio Ziegler, and I will be your webinar host from the CSC Webinar team.

Today we are very fortunate to have some amazing speakers who will be sharing their insights and expertise with us today. We have Mike Morcom, David Bell, and Bryan Gartenberg. So without further ado, I'd like to pass this along to our speakers and have them introduce themselves, starting with Mike.

Mike: Yes. Hello, everyone. My name is Mike Morcom. I'm a managing director at CSC and lead our trust and agency business in Latin America.

David: Good day, all. My name is David Bell. I'm a commercial director representing CSC Global Capital Markets. I am based in London, and during my career I have worked on various different project finance transactions on a global basis.

Bryan: So thank you, Mike, and thank you, David. Welcome, everyone. My name is Bryan Gartenberg. I'll be your moderator today. I am the managing director of Project Finance Origination in the U.S. I work alongside my colleagues, Mike and David. And in addition to heading up our origination effort in the U.S., I also support the global growth of our project finance platform across the world.

So I'm just going to jump right in. We talk about the term "project finance," and it has quite a few applications for different types of transactions. And it really can take on many different types of structures, support many different types of asset classes, and also really can be applied appropriately across just about every geographical market that exists where the development of capital-intensive projects and infrastructure is required.

So why don't we just jump right in, and, Mike, maybe you can talk a little bit more about the topic in terms of just giving the audience a baseline about what project finance actually is.

Mike: Sure, absolutely, and thanks, Bryan. So project finance is a financing structure used across the globe that provides for the financing of capital-intensive projects in a manner that allocates the various risks that you see in the financing to the parties that are best suited to assume those risks. So let's look at a couple of examples to illustrate that.

First, project finance structures are typically limited or more commonly non-recourse to the project sponsors, which insulates the developers from catastrophic financial loss in the event of a failed project. We also see the assets and future cash flows of a project are pledged to lenders and thereby insulating the lenders from the risk of nonperformance under the financing.

Developers typically hire EPC contractors or engineering, procurement, and construction contractors on a turnkey basis. This is done to ensure the borrower and the lenders are removed from construction risks. We have financial institutions that provide currency and commodity hedging to insulate parties from various risks. And finally, we have DFIs…insurance as examples.

When you look at all this, there's one thing in common that all of these features have, and they require an agent or a trustee to make sure that all these noted components work as the parties intend. And the most important thing for everyone to recognize is that while project financings have certain commonalities, like we just discussed, every deal is unique and must be treated as such.

Bryan: Great. Well, thanks a lot, Mike. David, can you explain how you see the role of trust and agency services in project finance, and why exactly are they critical to large-scale projects? Given that you're based in the U.K., it's always interesting to see the subtle differences how we might do something in the U.S. or in LATAM. So as you talk about it, if you could weave in some of the unique natures of what you see in EMEA, that would be helpful.

David: Sure, absolutely, Bryan. One of the things to highlight on that particular point I think is the subtleties around the terminology that is sometimes used in terms of collateral agent, security agent, trustee, etc. There are different terms used across the globe. But certainly one of the biggest challenges, when there are such large financings, is affording the developer the independence and latitude to develop and operate their project while concurrently providing comfort to the lender that their loans are being spent responsibly, prudently, and within the terms that have been agreed to by both the borrower, lenders, and other stakeholders.

That's where a highly competent and knowledgeable agent and trustee comes into play. Our role is to play that critical function for the success of all the projects we support. And by deploying the various products and services on our platform, we in fact act as an intermediary between the parties to provide exactly what comfort to all the parties and that everyone is complying with the agreed terms and conditions. And it can effect remedies in the unlikely event something occurs that deviates from what would be considered normative under the terms of a project finance facility.

Bryan: Thanks a lot, David. I think what's really interesting is we're all very experienced practitioners here, and one of the things I often like to say is that while there are variations from region to region, a lot of it is more about vocabulary than it is about actual functionality. Case in point, we may call something a collateral agent in the U.S., and I suppose in the U.K. you may refer to it as a security agent, correct?

David: Correct.

Bryan: And I think Mike could add some very interesting observations on this as well. For example, there is no such thing as a collateral agent or a security agent in most countries in LATAM, and it's more likely going to be a fideicomiso, and that's just really about us accommodating the construct and the principles of project finance to the local laws of that country. So we all are speaking the same language in terms of what project finance is, but we're also speaking to the unique language of how each of these transactions are conducted within the context of different markets. Mike, any thoughts in general or specific to LATAM?

Mike: Sure. No, and the nomenclature, if you would, is quite unique and interesting. And we do see sponsors in Latin America that might work in different countries. So we will have certain concepts that need to be achieved, but you will get there going down a different path based on local laws, regulations, and the like.

I think the other interesting aspect is the mix of clients that we will work with. We will have large and experienced sponsors who have worked across the regions and are quite well versed, while we see others that maybe this is the first time doing a project financing, either first-time first time or first time in a particular country. So we know there's going to be a lot of questions, and it's going to require a little more effort from our side to work with that type of sponsor.

And it's also worth noting we've seen a continuing evolution in the project finance market. Just like in other geographies, we continue to see the market evolve from what had been historically financed through the syndicated loan market, and we've seen the use of project bonds, especially for larger transactions. And we've seen multi-source facilities. And more recently I think we've been seeing the increasing use of private placements. And as more of a trust provider, we've had to be able to accommodate incorporating delayed draw mechanics as an example. So we need to be familiar not only with this different nomenclature, but all these other tools in the global financial markets as they get put together to provide innovative financing structures.

Bryan: Great. So it sounds like what you're saying is not only does a really good provider in this space need to be able to accommodate the various evolving and changing structures, you also need to be able to accommodate to the legal context of the environment you're working with, the geography, and in fact the cultural norms of negotiating in a specific geography, which, to be honest, that's what really makes this work interesting for us because we get to encounter all these different challenges. And quite frankly, I, for one, find it fun to be able to meet those challenges and drive solutions for our clients. I think that's really interesting, and it brings us back every day doing this.

Now, David, any observations on your side with respect to say cultural, geographical, and just transactional variations that you see within your market? And also, I think it would be helpful if you could talk about it a little bit within the context of what we're doing. And ultimately, what we're doing is clearly our job is to get our clients across the finish line. But one of the things that we do to effect that is we're, in fact, in the various permutations, and this goes back to the vocabulary, we're playing different roles as an intermediary ultimately, whether we're a security agent, a paying agent, holding cash as a custodian, or a depositary agent, so on and so forth. So interested in your thoughts along those lines.

David: Yes, certainly, Bryan. Just kind of summarize at this particular point, from an intermediary perspective, because effectively that's what we are or would be acting as, CSC, just to summarize, provides agency and trust services that just do that. We work as an intermediary.

The various different terms from mark-to-market is indeed a good point that both Bryan and Mike raise, and it's just having the familiarity with the terminology that we use in maybe EMEA versus APAC versus the U.S. and LATAM and just understanding specifically what those roles are. Theoretically, they're all very similar. It's just sometimes we like to use different monikers.

So in terms of an actual transaction, from a functionality perspective, we will secure the collateral of the project, administer and monitor the various types of loans, and perform the various transactional requirements of the financing. Typical roles would include collateral agent, trustee, administration agent, facility agent, paying agent, intercreditor agent, as well as bespoke agency services, such as a cash manager, a quasi-custodian that may be required on unique structures. So we talked earlier on about the practitioners that we have at CSC on a global basis. They're all familiar with those different types of functionality.

Bryan: Great. And along those lines, when we're looking at some of these transactions, I expect that whether it's a conscious effort or something that you intuitively do, you may change your approach depending on whether it's a first-time borrower in the project finance space or somebody that's done their 15th project. And similarly, again, there may be some deviation between how you approach it when you're dealing with a project say in France versus a project in Kazakhstan either because of their familiarity with certain concepts or cultural norms.

Have you encountered the need to really adjust your game plan for those sorts of things? So David, what I'm getting at is it's not one-size-fits-all. It's more of a customization. Do you have any experiences where you sort of had to adjust your approach to getting to the finish line depending on either geography or the location, the cultural norms, that sort of thing?

David: Yeah, most definitely, Bryan. As you've mentioned, each transaction is very bespoke. And we also have to consider effectively the gestation period for a project finance transaction. It can last anything from one month up to two or three years, particularly if we're dealing with the likes of government agencies and specific governments as well. So those subtleties are very prevalent for us in understanding the pace of a transaction. And it could be that it's a cookie-cutter renewable transaction for a wind farm or a solar panel farm. They're pretty straightforward. But if you start dealing with toll roads and infrastructure projects, they will have multiple participants involved or sponsors or stakeholders, and as such having the awareness and understanding of a specific party and how they operate is an important consideration.

Bryan: Yeah. What's really interesting is you can have the exact same construct and the exact same market, virtually the same exact deal, but if you're dealing with a first-time borrower, the way you're going to conduct yourself and support them is going to be significantly different, I would imagine, than if you're working with somebody that this is the sixth deal you've done with them.

David: Yeah, absolutely.

Mike: Bryan, if I can add to that, I think there's also, going back to my prior point of the evolution of this market, when there is a new financing structure being used by the first time, even with market participants that are very experienced, it almost goes back to that first-time sponsor analogy. And with the increasing use of private placements, some conversations I've been having recently with sponsors, bankers, lawyers is when you look at a project and if it's being financed through the syndicated loan market, you're going to have an admin agent to take care of paying functions, administrative functions. If you go the project bond route and do a 144A issuance, you're going to have an indenture trustee.

But the traditional private placement, those responsibilities to make payments and coordinate communication and administrative efforts typically default to the sponsor. But a corporate trust provider can help in those instances. So part of what we've been trying to do is increase the education to the market that we do have services that will make the life of the sponsor easier because we basically view the finish line as two distinct finish lines. We have financial close, but then we have the successful execution of the deal through its life. So we want to make sure the clients have both finish lines achieved.

Bryan: Look, I think, at the end of the day, certainly the way we like to look at it, and I'm sure you'll all agree, we do not see ourselves as a vendor. I think we like to see ourselves as a trusted advisor who is invested in our clients' success. I think it's an important observation.

Just going a little further, digging a little deeper into some of the variations, I think LATAM is a really interesting example in that people who don't work in the region on a regular basis and quite often in general I think people tend to look at it as a region in its entirety in that, well, LATAM is LATAM and this is the way they conduct deals in LATAM. And that couldn't be further from the truth because there is a significant difference between doing a deal in Mexico versus doing a deal in Ecuador or Uruguay. And some of it is just the nature of the personalities. And let's be honest, the distance can sometimes be a challenge. But also the legal constructs oddly enough are not universal throughout the region. And understanding those idiosyncrasies and the unique nature of the different constructs, in effect, can really influence the outcome.

Having spent so much time working in the region, really I think the group would really find it interesting to hear about how we adjust our approach and adjust the legal construct and the papering of documents based on some of those variations. So perhaps you can talk a little bit about that.

Mike: Sure. And the observation is very valid. Different countries are going to have very different approaches to accomplishing the same thing. If we take Mexico, Brazil, and Chile as three examples, securing the collateral, as you mentioned before, Bryan, you mentioned in Mexico you typically see the use of a trust or fideicomiso as the legal vehicle to secure the collateral. While in Brazil, there is no fiduciary law, so you take a very different approach. And in Brazil, depending on the type of asset being secured, you're going to have a different approach. And Chile is altogether different, and you will achieve the securing of collateral through the use of their Commercial Code. So three countries, three very distinct approaches.

And you were mentioning earlier those that don't work in the region on a regular basis, we see some interesting scenarios. A lot of times you'll see the attempt to secure collateral in an operating account, for instance, through a springing lien and DACA, something very typical in a New York construct. Well, that doesn't work exactly that way in certain countries. Brazil is an example. You can give a security interest to a third-party agent, but you cannot take away the ability to transact in the account holder's name. So there are different ways to achieve the goals. But it's not exactly the same that you would see in New York going into Brazil.

Bryan: Great. Thanks a lot, Mike. So Dave, I think the concept is really apropos and relevant for both Europe and Asia because if you take from a U.K. perspective, U.K. law, so that's something you're quite familiar with I'm sure. And then you have situations where you're going far afield into Eastern Europe, where perhaps U.K. law doesn't have as much influence in the legal contracts, and you have to accommodate for that. And then, of course, in Asia, there is quite a preponderance of the use of U.K. law, but different sovereigns in Asia have also maybe taken some of the U.K. law and made it their own. So it could be a bit of a hybrid. So I imagine there are some challenges around that as well. It would be interesting if you have any thoughts on, as practitioners in this business, how we meet some of those challenges.

David: Yeah, certainly. First of all, the English law concept, we talk about that extensively. And obviously, one of the drivers behind that use of English law governing documentation is very much about the precedent that's been established over the years. If you take the concept of a trustee, that actual concept originated from the days of the Crusades, believe it or not, where knights were off and they needed to keep their chattel secure, etc. So there's an embedded element to these different jurisdictions and the governing laws as to why we use them and the familiarity particularly not just from us as agent, but also law firms and the various other stakeholders.

So it's a comforting law precedent, if you like, using English law, but the subtleties across the globe are very important. And as an example, big picture, the project finance landscape is very bespoke and is continually evolving. As another minor example, there are currently some subtle changes with regards to security perfection in the Middle East. It's the role and the function of an independent agent to be familiar with those changes and ensure in a scenario where there's an enforcement, for example, that all the parties are advised. So that proactive approach that an independent agent can take is often very useful for these types of transactions.

Bryan: Great, thanks. Thanks a lot, Dave. I want to just get back to something we talked about earlier. One of the things, obviously, look, in project finance, you're looking to get your project financed and get your deal off the ground. But one of the central themes is risk management. Mike, I know you talked about it briefly earlier when you described what project finance is and managing allocating some of the risks. Can you elaborate a little bit on the managing risks on cross-border and how we help do that through the means of, I guess, different parties and participants in a transaction?

Mike: Sure, Bryan. Happy to talk about that. So in a cross-border financing, you will be looking at, in addition to the underlying project risks, a number of unique risks to the cross-border nature of the financing. You will have risks such as transferring the convertibility. You'll have FX risk, depreciation in local currency. And we've been seeing a number of innovative approaches to try to bring in more cross-border funding into local projects in the region addressing those risks. We try to have a part in that by making foreign currency accounts available offshore, thereby helping them mitigate some of the transferring convertibility risks.

And I think some of the more innovative transactions in recent years coming out of the region have been measures to reduce the FX risk and bring in international capital into local currency projects. That's been one of the big challenges for decades when you have a local currency generating asset trying to bring in the capital from the deepest liquidity markets, which tend to be the hard currency markets.

So we've seen a couple of development financial institutions, such as the DFC from the U.S. and SERV from Switzerland, providing guarantees on local currency cross-border bond offerings. And we work with the DFIs in those instances on mechanics to basically allow everything to be put together for the successful offering.

And I think we're going to continue to see innovative approaches to addressing these different risks with cross-border financing. And we'll just need to make sure that we have the agility and understanding to be able to accommodate these new structures.

Bryan: Thanks a lot, Mike. And I think what's really fascinating, having spent a little time in Latin America as well, it's interesting how on a lot of these transactions we employ the use of political risk insurance and expropriation risk, and it's just prudence and good governance.

But I've had the opportunity, and as I'm sure you have as well, to witness that these products actually work. I think in one of the big oil-producing countries in LATAM, we talk about expropriation risk, but there actually was expropriation. And because we had these programs in place with these government agencies, it actually works. Have you seen any of that on some of your transactions?

Mike: No, for sure. The structural mitigants generally do work as intended. So you'll see the political risk insurance in the oil and gas sector, for instance. We have various financial guarantees that have been effective over the years. And I think the key consideration to keep in mind is projects often have a very long tenure or duration to them, and we do go in Latin America through cycles where different elements of political risk may be more evident at certain times than others. And I think parties do need to take that long-term risk, keep in mind what may happen and what has happened, and make sure that structures are designed to accommodate those potential risks that you may face going down the road.

Bryan: Yeah. And one of the things I think what's so fantastic about our team is whenever you go into working on a project, you always hope for the best, but the deals are all papered to assume that something may go sideways. And I think what distinguishes us as a group is that because we've all been doing this a while, the experience we've had with the vast majority of our deals have gone very smoothly. But when something does go sideways, because of our experience, I think we're just a tremendous value to our clients because we've been there before, we know what happens if something hits a speed bump, and we're part of the solution.

And having a group of guys like us, who have gone through this, know how to deal in these kinds of situations and don't panic, I think it's great value to the client and provides them with great comfort. And it's part of our job. So knowing that you've seen it, I've seen it, and I'm sure, David, you've seen it as well, I think that's just part of the skill set that we possess in supporting our clients with some of these things.

David: Just to add to that, Bryan, I think the crucial point is the ability to have a proactive agent as opposed to a reactive, we touched on that earlier, and to understand the mechanics, etc. Look, it's a difficult, challenging space, but experience counts for a tremendous amount. Back to you, Bryan.

Bryan: Absolutely. And David, I want to switch back to you. When we're acting as an intermediary, providing the agency services, in some cases we're the trusted advisor, the party negotiating contracts, and sometimes we're even the game show host. There's a lot of interpersonal and human dynamics that goes into working with the stakeholders. And sometimes what ultimately determines the success of the projects is not only our ability, but everybody's ability on the team to interact productively with the various stakeholders. Can you talk a little bit about what it means to be a stakeholder and dealing with other stakeholders on a transaction?

David: Yeah, certainly. So briefly, to summarize, I think the objective of all the sponsors or stakeholders involved on a project finance transaction is to get across the line as efficiently and quickly as possible. It's not probably the first thought of any investment banker, sponsor, or lawyer when they wake up in the morning to go out and hire a collateral agent for that particular day. But the collaboration, it's like a spider's web in terms of interlinking all these different parties and the way that we will support transactions, which are all very individual.

And I'd summarize by saying there can be multiple parties involved in the process, including the project company, the sponsors, the investors, the banks, the government agencies, the insurers, and many more. And they'll all have a view as to how a transaction should be structured, and they'll all have certain representations of warranties of what will be included. So the understanding of those different components and parties and ensuring that they are moved in the right direction with the help of all of the parties is critical from an agent perspective. Back to you, Bryan.

Bryan: Sorry, I was having a little trouble with my audio there. I think it's a very good point. One of the things that I think we've all seen is that when we get a new matter in, when we get the mandate, we've got the signed proposal, and we're ready to roll, we think about: Okay, who's going to lead the charge on our team? Who's going to support us as legal counsel? And it's sort of one of the things that we do in our head and with our teammates and think about. Well, who is the best person on the team to interact with these clients, and who's the best person to engage as our counsel based on what we know on the deal? And these are all things that we really give a lot of thought to because we recognize that there are various personalities and deal structures, and some of us may have expertise in one area more than another or dealing with a certain country.

So I would argue that we certainly put a lot of thought into putting our best foot forward when dealing with different stakeholders and take into account the variations, whether it's geography, type of deal, timeline on the deal, and, in fact, if we have experience working with those folks in the past. So I definitely see that having those kind of approaches really fits into what you were just suggesting.

Thank you, David. Mike, so I just want to switch back to you. We can really go on about some of this material. But I do want to talk a little bit about technology. Why don't we ask Dave? Dave, why don't you go first, and then, Mike, I'd like to hear your thoughts in terms of where does technology play in all of this? We're talking about we have trust accounting systems. We have loan administration systems. Most of them are global. But how do you see them playing a role, and are there certain subtleties market to market in which we conduct ourselves? So actually I'd love to hear from both Mike and Dave on this, so whoever wants to go first.

David: Yeah. So certainly, Bryan. I'll just quickly summarize. But it goes without saying, from a tech perspective, the number of different platforms that we use that are multiple, how they are connected is the important point. I often look at it from an external party looking in perspective in terms of making sure that contractor reports are available, making sure that any waterfall calculations are available at any given time, be it by a simplistic repository, but also being able to provide account balances on a real-time basis. These are all critical points that, from a maintenance administration perspective, are essential for an agent to provide, which indeed we do. Mike, over to you for any thoughts on your side.

Mike: Sure. No, I would concur 100% on that, and I would add too the technology gives us the ability to gather very useful information. We used technology recently to get some good information on the project finance market and what market participants are thinking. So maybe in a reversal of roles, I'll ask Bryan if he can summarize what we've learned from our recent use of technology to get some information on the market.

Bryan: So there are a couple of things. I'd love to talk first a little bit about just technology in general. Look, the reality is we can't do our job without the systems that we have in place. And what I think is unique about our growing platform is that we are a very far-flung organization, with presence literally around the globe. And this is one area that we continue to invest in. The investments are not in silos. The investments are, in fact, global. We're in the process of actually bringing to closure a couple of really fascinating projects, which would allow a system that allows us to use a trust accounting system that has portals across the world. So our whole practice are going to be using the same system.

The same thing with respect to our loan administration system, which is critical for the admin agent and loan agency functions. That will also be on a global system.

So those things are important, and those systems have tremendous capacity to provide data, either information that we generate or portals that our clients have access to and they can find information on their own and generate their own reports. But the power of our systems is most apparent when our clients come to us with something that is not a commonly asked question. It's an obscure metric that they're trying to understand. And having the systems that can accommodate these bespoke requests and ask us to slice and dice information based on their need is critical and really is one of the things that sets us apart.

The other thing that we use technology for is really to get a better handle on what our clients wanting because at the end of the day, as Henry Ford said, you can have it in any color you want just as long as it's black. And that is really the antithesis of the way CSC thinks about it. We want to make sure that what we're delivering is what the client needs. And really the only way we really truly understand what our clients need is by talking to them, asking them questions, what's important. And from time to time, we also take a more disciplined approach rather than an organic one, and our platforms allow us to get statistical information from our clients using various forms of data collection and really reaching out to the clients with surveys and things like that, that really add value and ensuring that we're delivering what they need and we're anticipating, for example, what asset classes they're most focused on and ensuring that we have the capabilities to support those asset classes.

So I think certainly from the client interface, those are the things we think about. Now in addition to that, we have middle and back office people who rely heavily on technology. And really when we have a closing at 10:00 in the morning and the client has their money by 11:30, it looks seamless. But it's seamless because we have people who understand the market, understand these transactions, and understand how to make our technology work optimally to deliver the very best for our clients. So there's a lot on the client interface that clients understand when we're talking to them about what they need. But there's also a lot going on behind the scenes with the folks that are actually making sure that money goes from A to B when it's supposed to, and calculations are done right, so on and so forth.

So speaking of which, we recently have just conducted a survey. I think you're really in a good spot when what you intuitively think will be the respondents verified by what we see by hard data in a disciplined survey approach. So we, of course, have always been very high on project finance, and we were certainly gratified to see that 85% of respondents believe that project finance is here to stay. It's going to grow a lot more there, and we're very excited about that.

Some of the other things that we identified was North America is going to be important. Latin America is going to be important. The U.K. and, while it's not on the image on the screen, we certainly expect Asia to be following along right on the heels of the U.K. as well. I would encourage you to simply copy it off of the link that is listed on the screen.

So with that, thank you all for your time. I hope if you do have any questions, by all means we will be available to speak with you one-on-one if you'd like.