They're looking for financial returns, generally. Sometimes they're looking for franchise benefits or production and consumption benefits. The project may be part of the value chain of an entity, and they may be looking for the project purely to provide input or output to their value chain. So we could take an aluminum company that wants to have an aluminum refinery. They make aluminum metal by mining bauxite, putting it through an aluminum refinery, turning the bauxite into alumina, which is a white powder, and then taking that white powder to an aluminum smelter, and then smelting that metal electrically into metal. The alumina refinery is only part of the value chain. There are companies that own the bauxite and they want the aluminum metal, and they will project finance the aluminum refinery. The aluminum refinery doesn't need to make any money in its own right, because it's really part of the value chain. And the project financings will be designed to be able to pay debt service and meet its obligations, but not necessarily provide a significant financial return to both either the sponsors or the investors because really the gains are being made in the overall value chain. And there are many, many project financings for instance, people whom some of the chemical manufacturers make PET bottles for bottled water and they will finance the PET Chemical Plant in Riddle. They've got the inputs from their oil refinery, and they'll going to make the bottle or the raw material to make the bottles at the other end. Their value chain, they really just want that to change one chemical product to another, and that's really part of their value chain is not a necessarily a financial proposition in its own right. So project finance system sponsors don't always look for financial return but sometimes they look for an operational or just a contribution to their value chain. Generally as a concept, sponsors would like the flexibility to run the project as they wish and not be controlled by the financing. And we as project financiers would see that as a reasonably important basis there. The project sponsors are the people who know the best about this and they should be given the flexibility to run the project as they wish. On the other hand, the financiers would like to control the cash flow because they like to be able to know that they're going to get repaid and all get their returns. And in that case, the project financiers, the people who are providing the capital of the project sponsors, are going to put controls on that. And there's a certain amount of friction there because they will put some controls on the project, which often won't inhibit the operation in the project but they are imposs on the project. So that those imposs\g are there really to ensure that the sponsors do what they say they're going to do, they're going to clearly the obvious one is the project is going to only produce whatever the expected output is. And that was the use, the sole use of the project, it can't go off and do something else. But on the other hand, there will be operating standards and operating covenants put in place too. So there's a certain matter of friction and flexibility there, but the premise is that project sponsors want as much flexibility as possible. The project sponsor issues, one of cost timing and this intrusion, it's quite expensive to put a project financing in place, there's a lot of people involved, there's a lot of due diligence involved, there's a lot of contracts involved. So one of the reasons that project finance works because these are all in place but they don't come for free. There's a cost that goes with these and the cost of project financing is sometimes quite expensive because these projects are very complicated and take a long period of time. So project sponsors want to see as little cost as possible, and they keep trying to find ways of reducing the costs and [INAUDIBLE] there. The project documents are often long and determine the basic business deal. Good project sponsors recognize that good documents are good for good projects. But sometimes just the volume of documents has just become omnipresent and oppressive, and project sponsors don't want to see huge amounts of documents. They want to be able to operate the projects, not be thinking that they've got to manage all of this different documentation requirements. Projects sponsor issues of the timing and the equity commitments. It would be just the same as making the equity commitments just the same as taxes, least and latest. And project sponsors would like to see the finances, typically put their money in and then the project sponsors put their equity in later on, that gives them a better return on their equity. On the other hand, project financiers, the debt and the equity, the debt and the institutional investors, would like to see the equity in earlier because they like to see that they're absolutely sure it's there and they don't have to wait for it. Clearly, project sponsors want to see the earliest release on dividends and the financiers would like to see the latest release on dividends. They would like to see as much cash in the project as possible. And they are going to set dividend covenants on their project that says you can only pay dividends and you can only pay them when certain thresholds are being met, and you can only pay them up to a certain amount, depending on how much cash flow is there. And of course, project sponsors would like to be able to take all the cash out as soon as possible. When you put a project financing together, it's all about cash flow and it's all about controlling and managing that cash flow. A project is going to have a waterfall of cash flow. This is when the cash flow comes into the project and contractually it pays different parties at different times. So a typical project will have a revenue stream that comes into a project and the first parties to get paid are the direct expenses, the operating expenses. And then the second party will be the senior debt, the interest, and then the principal. And then the next party will be paid will be the capital expenditure that requires to be paid. And then the last part will be the dividends for the sponsors at a very simple waterfall. Inside the waterfall, to be able to give the projects some flexibility, to be able to make sure that they can deal with cash flows that might not be always contractual and always predictable, it's quite often there are reserves, cash reserves held in that waterfall. So for instance, the senior debt holders would expect the project to always have cash on hand in a reserve account sufficient to pay three months or six months, the next three months or next six months of principal plus interest. The benefit of this and going back to a third tenant of project finances term risk versus principal risk, is we don't want the project to fall over for non payment of principal interest at a moment's notice. The debt holders and the equity holders need to have enough flexibility in the project for the project to continue even when a problem has happened. So if you can pay your principal and your interest out of a reserve account, you haven't actually had a payment default yet, and that allows the lenders and the sponsors to sit down and work out how the project can perhaps be adjusted so that in future there won't be a payment default. So putting these sorts of reserves into the project structure, are very important aspect of being able to structure project finance. So for instance, capital expenditures may be episodic. They may be once every three years or once every five years, and they may be significant, so significant that you couldn't actually pay it out of the free cash flow in the project in the single year and you may have to accumulate in a reserve account if it's a three year period, one third for every year for three years, so that at the end of a third year when you got this expenditure you've actually already accrued and held in your reserve account the expectations for that capital expenditure. Project financiers when they are structuring these projects, the debt holders are going to want to see those reserves to be reasonable, to be robust. And of course the equity holders because these cash is retained within the project, are going to want to see it released as soon as possible. So negotiating those sorts of reserves within the cash flow waterfall are an important part of that project financing. And something when your sponsor, or your lender, or one of the other stakeholders, you have to think about the timing of those. And just going back to the first point, that the sponsors would like to have the full flexibility, there will be certain aspects of approval rights that the financiers are going to insist on. And there will be certain approval rights of certain events that if a project wants to do, expand, or they want to do something else, they want to change their organizations on formal passion. There is a specific approval rise and often lenders will have quite large ideas about what their approval rights should be and the project sponsors would like that to be as small as possible. And every project financing has a certain amount of financial covenants, events of default in them, and of course the financiers would like to see those as tight as possible, and the sponsors would like to see them as loose as possible. So a breach of a covenant may cause an event of default, and the project, the banks and the institutional investors are going to want to see an event of default, even before a project has reached the point of total calamity. And therefore they will ask for these really, really early on in the process whereas, the sponsors really feel that they only want to have an event to default if the financiers haven't been paid. So negotiating that is a key component of this fan negotiations a project financiers should look forward at the end of the day.
