Banks of Mainland China Make Jack Ma Lose Sleep. Banks of Taiwan Make Offshore Windpower…?

Green Mentor's Fireside Chat

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  A little while ago, Jack Ma talked about things that frustrated him during a public occasion. He noted that people who make one or two million dollars each month is quite enjoyable, while people who make one or two billion dollars each month, like him, is quite troubling, and he has hard time to sleep at night. This comment led to heated reactions from netizens. They sarcastically commented: “Hey, watch it. You are so filthy rich! So don’t piss on my boots and tell me it is raining.”

  Nowadays, when we hear about Wall Street, big companies and rich people, our immediate reaction might be negative impressions such as greedy and irresponsible. Likewise, terms such as “local,” “small farmers,” and “fair and justice” all seem to have positive connotations. For people working in the green industry, they often say that “the reason why I’m doing this is not for money,” as if repeating this mantra will somehow set them apart from the mundane world while basking them in holy light.

  Yet, in real life, almost all decisions have to do with money. Your knowledge about finance and the priority of how you spend your money all have profound effects on your life.

  You say: “Hey, aren’t you talking about investments? I know that! Stocks, mutual funds, insurance, and real estate property - I have all of these. Why do I need to learn from you?”

  Investment is only a smart part of the financial world. Also, your role can also change depending on your surroundings. For example, when you set out to start your own business, you will need capital - in other words, equity financing. You might try to contact banks which offer loans, securities companies that arrange to issue bonds, angel investors, VCs, or private equities. While both financing and investments deal with funds, they are a world apart.

  Some of these entities will provide you with loans, while others might arrange loan programs. Of course, some even might invest in your project directly. The decisions these people working in the financial sector make are shaping our jobs, companies, industries, and nation. They also have a profound influence on your life.

  Therefore, based on this argument, it is vital for us to boost our knowledge about the financial world and implement financial concepts into our life, work, and career decisions by understanding finance under broader framework.

  However, you will quickly realize the difficulties, because the people who deals with finance are usually from what we call the “elite” class. They often talk in jargon, so if you are not from this field, you will not have any idea what the financial game is all about.

  Therefore, from now on, a number of Green Mentors and I will take on the roles of Interpreter, trying to explain Green Finance in simple words, and thereby allowing layman to easily understand it. We will focus on financial tools employed in the green industry, such as green investment, green energy financing, green bond, green investment bank, green energy mutual fund, green insurance, and even green Fintech. We hope that this will enrich you with financial knowledge and aid people, workers, and entrepreneurs to seek their opportunities in the green industry.

  Today, I will begin by discussing the key phrase from the article “The Financing Dilemma of Taiwan Offshore Wind Power” - Project Finance - to you on the mandatory financial tool for OWP industry players.

  Another word for financing is borrowing money. Whether we are talking about the average Joe borrowing money or a company borrowing money, the bank usually refers to such arrangement as a “loan”. In the case of the company, if it borrows money, it will be booked in Liability account of the balance sheet. If the money comes from shareholders, it will be listed under Equity account of the balance sheet. The term “project finance” - which seems similar to regular loans taken from banks. Normally we would presume that as long as a company maintains close relations with bank management, provides collaterals based on the bank’s assessed value for the project, raises loan spread and handling fees by additional 20-30 basis point, finds a couple of banks to form loan syndication and secures a good law firm to draft and review loan documents, it would then be so easy to get the money from banks. Right?

Fighting Goliath – Project Finance Is David’s Sling That Transforms Future Cash Flow into Today’s Needed Funds

  Also known as project financing, project finance is the financing provided by banks to special purpose vehicle (SPV) company. The mechanism operates based on the expected cash flow generated from the project as the main source and primary protection for future debt repayment. The assets and rights under the project are used as collateral.

  Here is an example: I am an OWP developer and established a green startup A. I want to borrow money in A’s name from the bank to build offshore wind turbines in the Taiwan Strait. This is no small sum of cash! So the bank conducts due diligence on this startup. It also evaluates the potentials of OWP industry, and whether the OWP system of my company can compete with other competitors. They also have to assess relevant risk factors and judge if the company’s cash flows are sufficient to repay the principal and interest during the life of project financing.

  At the end, the bank guy calls me saying, “There is too much risks involved in the project and the debt ratio appears too high. And furthermore, your company has never built wind turbines before. But I will lend you some money if you provide sufficient chattel and real estate properties under company A as the collateral.” This is so-called “normal corporate financing”.

  The price tag for a typical 5MW offshore wind turbine can cost as high as 800 million in NTD. There are a lot of areas such as maritime constructions would need to spend money as well. Given such a huge capital outlay, how could I afford to provide sufficient chattel and real estate properties as collaterals? The most I could invest is in the range of 25% to 30%, so there’s no way for me to secure the loan if I choose the aforementioned approach.

  So I skillfully negotiate with the bank guy, “How about this? I will raise my equity investment to 40% and you lend me the rest. While I do not have any valuable asset at the moment to serve as collateral, for the remaining 60%, I can ask foreign credit agencies (note 1) to lend half of the money to company A, and you finance the rest. Once the wind turbines are in place and start commercial running, your bank can use the facilities as the collateral and the turbines will generate sufficient cash flow and make profit on daily basis to service debt payment. Assuming anything goes wrong during the process, you know that I will lose my 40% equity investment and you should not have any recourse to get extra money from me (since you have sufficient collaterals coverage). That should be a fair arrangement, right?” Well, this is so-called “project finance”. The scenario outlined above is also known as “non-recourse project financing.”

  Earlier, I mentioned that the people working for banks are usually elites - really smart people. The bank guy might think that the proposal sounds viable, but when he goes home and sleeps that night, he noticed a flaw in the argument. “If I just lend you money as a regular corporate loan, I have full recourse rights. But if I lend you the cash to construct wind turbines, I have to wait for a few years before the turbines start commercial running and serve as the collateral. What happen if your company goes bust in the middle of construction period?”

  So the bank guy calls back the next day. “Hey, I realize that wind power is environment friendly - it does not emit CO2 or PM2.5, unlike thermal power through burning coal. Look, the reason why I am willing to do business with you is not completely for money. But if you make me lose money, how can I explain to customers that I lose their money deposited in the bank? How about this? Since your initial 40% equity investment will be insufficient in case there is any problem incurred during the construction period, I will lend you the money on the condition that you commit to further inject new capital so as to make sure the project be completed and the bank does not lose money.” This is what we call “limited recourse project financing”.

Project Finance Is A Key Financial Tool for The OWP Industry.

  From the example, you can see most companies looking at building factories or buying new equipment will probably not need project finance. However, for the green industry - especially those infrastructure projects, project finance is a key financial tool. This usually happened in capital-intensive energy industry such as wind power or solar power plants. So at times when we talk about financing for green energy, what we meant is “project finance”.

  Here are some of characteristics for project finance:  

  1. The borrower in most situation is a newly startup company
  2. The loan tenor is usually very long, may be 20 years or more
  3. Heavily relies on forecasted cash flow as future source of repayment and serves as primary collateral
  4. Lack of local assessment standards for new industries. For example, the OWP industry is new for Taiwan  

  While there is no local assessment standard for the OWP industry, Taiwan is not completely a stranger to project finance. In 1990s, I was actively involved in the establishment of first round individual power producer (IPP) when the government opened the door, and participated in the negotiations with Taipower on power purchase agreement (PPA) clauses, discussed and resolved those issues related to loan agreements, sorted out discrepancies regarding vague regulations with government agencies, etc. The process is very similar to that in OWP industry, except that the latter‘s framework is much larger and more parties involved under more complex environment.

  We can learn from IPP experiences, by flexibly utilize global financial products suitable for project finance, and find a way to solve the problems and apply it to the brand new green industry.

  In the next article, we will talk about the risks which project finance normally encountered and what kind of proper strategies local banks or international banks should adopt.

  (Note 1) Export credit agencies (ECA) are specialized agencies established by national governments to support the export of the country’s capital goods. ECA normally offers guarantee in support of foreign importers’ deferred payments or commercial banks’ loans to foreign importers. Occasionally, ECA also provide direct lending to support the project in the importing country. When foreign debtors fails to pay on schedule, ECA will reimburse per guaranteed amount. Examples include The Export-Import Bank of ROC, US Eximbank, EKF, KFW, EIB, etc.

Project Financing Offshore Wind Power

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