One stop advisory shop: PwC’s new ECA offering
PricewaterhouseCoopers (PwC) recently launched a new advisory practice – the ECA Advisory Practice for Capital Projects – aimed at helping export credit agencies deal with increasingly complex capital projects. Co-heads of the new team – Heiko Lentge and Alexander Wuermeling – outline the benefit to ECAs of their new approach.
“Before we hit 2020, the world will spend over $4.5 trillion on infrastructure every year,” says PwC Global ECA Advisory Practice leader Heiko Lentge. “That figure will likely increase in the following decade, with demand for long-term financings, especially project financings, surging as a result. Export credit agencies will play a key role in enabling those financings.”
To meet the new and growing demands of an increasingly complex ECA market, PwC has established a new advisory group focusing on the feasibility of capital projects covered by export credit agencies (ECAs). The newly formed team is designed to help ECAs in the decision-making processes involved in providing export credit guarantees for capital-intensive projects. Lentge and PwC co-head ECA Advisory Alexander Wuermeling, each boasting over 15 years’ experience working with ECAs across the globe, are heading up the new ECA Advisory Practice for Capital Projects.
“We have seen that projects are becoming more and more complex,” says Wuermeling. “This is true for all sorts of projects: power plants, refineries, gas pipelines, LNG plants, mining projects, wind farms, to name just a few.
“It takes time to agree all the commercial and documentation-related issues and get the financing in place. We have noticed an increasing demand for feasibility, coordination and due diligence support from ECAs, as well as a more general need for support across the whole financing process for large-scale projects.”
PwC’s ECA advisory team is thus looking to support ECAs in their analysis of these increasingly sprawling capital projects. The service is a three-part offering. Through PwC Feasibility Reports, the team will provide ECAs with third-party analysis on the risk profile of complex project and structured financings. The team will also provide financial modelling and model review services, and finally serve as financial advisor to ECAs and ECA coordinator for large scale projects.
The three pillars of consultation:
1: ECA feasibility practice for capital projects
PwC’s feasibility reports will provide ECAs independent advice on the feasibility of capital-intensive projects across the full spectrum of industries and geographies. The reports will proffer ECAs confidence in their decisions on whether to provide export credit, untied loan guarantees or direct financing.
The team will serve the unique needs of ECAs that are looking to provide limited recourse debt for large-scale infrastructure projects, assisting them not only during the due diligence but also throughout the commercial negotiations of project and financing documents.
The aim is to optimise the risk analysis of capital-intensive projects for ECAs by supporting them with an advisory team consisting of ECA, financial, market, technical, and finance and project documentation experts.
The scope of the assignments will vary: at times, providing specific advice on narrowly-defined financing issues; at others, entailing a complete viability analysis of the project from economic, financial, documentation, market and technical-related perspectives. Whatever the task, the project will be benchmarked against industry and market standards.
Based on the firm’s economic feasibility reports, some of the most important, innovative and complex projects around the world have received ECA cover.
2: ECA financial advisory and ECA coordination practice
In today’s project finance market, large or complex projects will usually require a sponsor that can combine financing from a number of different funding sources and ECAs. PwC’s team can assume the role of ECA financial advisor or ECA coordinator, advising a group of ECAs and coordinating their underwriting requirements.
PwC will accompany the group of ECAs from the start of the project up until they obtain their underwriting approvals. The team’s experience enables it to strike the appropriate balance between recognising the individual concerns and approval requirements of each ECA as well as facilitating discussion amongst all ECAs to find a common denominator regarding key risks. Throughout the due diligence and negotiations phase, the team will support the ECAs with concise analysis and supporting information relevant to their individual needs.
The team will coordinate with ECAs, sponsors, banks and consultants to allocate risks appropriately; analysing the risk profile from the viewpoint of the ECAs and reaching agreements on issues based on a fair burden of risk sharing. The team members are well aware of idiosyncratic tension points of each ECA and equipped to execute and coordinate both commercial and documentation-related work streams.
3: Financial modelling and model review
For a complex project to go smoothly, a clear view is needed of the bigger picture as well as specific data on important details. This is also true for assessing the economic feasibility and expediency of a project. Robust financial models are the indispensable basis for nearly any major transaction. They are integral when it comes to in-depth analysis and investment decisions. Whether tailored to a specific project or as a template model serving standard purposes, the financial model is a tool of paramount importance. It translates the reality into numbers, metrics and data; it provides the basis to depict the one-off assessment as well as illustrate the development over time.
PwC has been successfully supporting its clients with financial models for many years, combining leading financial modelling guidelines with the firm’s global modelling standards. The firm creates financial models from scratch, enhances existing models or provides model review services.
“We looked at the situation from the perspective of ECAs and asked ourselves what kind of support we can offer as a global organisation with more than 240,000 employees,” says Lentge.
“ECAs need to evaluate market, financial, technical, and documentation-related risk elements of capital projects. With our ECA advisory practice, we offer a team combining PwC’s best practice professionals in each of these categories.”
Five reasons why ECAs choose PwC:
As one of the world’s leading audit and consulting companies, PwC has more than 30 years of experience advising ECAs on the economic viability of project and structured financings. Having started as independent expert to German ECA Euler Hermes in 1985, the business has since become a truly global ECA advisor, consulting on over 200 projects across manifold industries.
PwC can help ECAs shorten the process of financial negotiations significantly; it is familiar with the ECAs’ individual focus points and knows how to address them. The team does not need long introductory periods, but is readily available for in-depth discussions from the get go.
“Projects take place all over the world and in various industries. This is why regional experience and industry knowledge is key for the feasibility analysis of ECA-covered projects,” comments Lentge. “With our new practice, we are in a position to give clear recommendations and precise analysis to ECAs.”
Before an ECA takes a decision on a project, it has to evaluate what can go wrong along the way. Market risks are the most important dangers to watch out for, particularly those relating to pricing and volume. PwC can help ECAs identify such risks, assessing them and developing tailor-made financial solutions to mitigate their impact on the respective project.
The firm’s market experts use proprietary instruments to validate forecasts and economic assumptions. They apply scenario analysis to simulate the uncertainty of prices and demand forecasts. For instance, by using Monte Carlo simulations, PwC’s experts are able to significantly increase the reliability of pricing forecasts. They find specific financial solutions for term sheets and financing documentation that protects the project from market risks.
According to a PwC analysis of the world’s mega projects (those exceeding $1 billion), over three quarters of projects exceed their budget by at least 25%. More than half go over budget by 50% or more.
Whether financing a wind farm in Canada, the satellite launch of an Ariane 5 carrier from the spaceport in French Guiana, an LNG processing plant in icy Northern Siberia or a pipeline in the Baltic Sea, the key success factors are the same: accuracy of the overall technical concept, quality of the technical components, management of interfaces, and knowledge and experience of all the construction contractors involved.
Technical concepts are getting increasingly complex and risks need to be quantified. In this environment, ECAs regularly seek support from independent advisors to evaluate the technical feasibility of a project. PwC assists ECAs during the whole project evaluation process to make sure they are always aware of the adequacy of the technical concept and hidden technical risks, which could lead to delays and cost overruns. The sizing of contingencies, liquidity reserves and minimum cash balances is crucial to the viability of large-scale projects.
Financial model expertise
Financial models are the basis of nearly any major project. They are integral to properly analysing any investment and lending decision.
PwC offers a team of financial modelling specialists who are both experts on ECAs and IT specialists. They apply best-practice techniques while analysing complex financial models: from sensitivity analysis to stand-alone tools applicable for complex Monte Carlo simulations and solid stress-testing methods estimating project risks.
The team uses methods that go beyond standard data analysis in order to simulate and forecast crucial financial model parameters. The goal is to provide ECAs with reliable results and an expert opinion on the commercial risks of a project. Identifying key model triggers such as price, cost, volume and demand forecast assumptions are crucial success factors for any large-scale international project. They also form the basis for calculating the sizing of cash sweeps, liquidity reserves or contingency levels.
The team has worldwide experience in cross-border financings throughout Africa, Asia, Australia, Europe, and Latin and North America under both common law and civil law systems. It has supported clients in some of the world’s most complex project financing transactions, including numerous ‘deals of the year’.
During the due diligence phase, the team focuses on identifying project-specific documentation-related risks relevant to ECAs. They review the specific project and finance documents and provide the ECA with a comprehensive analysis of the security package, financial covenants or ratios, completion test and inter-creditor arrangements.
Leading the ECA advisory field
What differentiates PwC from other advisors is its fully-integrated team: it has experts on ECAs and financial modelling, as well as specialists for technical, documentation and market-specific issues all under one roof.
“It all comes down to having the right people,” says Wuermeling. “This is why we bring together the most experienced ECA experts, the most talented financial modelling specialists, highly specialised commercial and market consultants from PwC's Strategy & Consulting team, technical experts for capital projects from PwC’s Capital Projects & Infrastructure team, as well as specialised project finance lawyers.”
The firm holds considerable experience in analysing projects that combine different forms of financing involving multilateral, developmental and export credit institutions, as well as Islamic funding, project bonds and borrowing base structures.
The team is familiar with ECAs’ key concerns and knows how to address them. Engaging PwC puts ECAs in a strong position for lending and credit insurance decisions – the worldwide reputation of the PwC brand distinguishes it from smaller financial advisory boutiques. The firm’s advisory experience for ECAs is demonstrated in its track record of advising on some of the largest multi-billion dollar deals that have ever been financed.
Just in the last few months, the firm has facilitated the ECA financing of the $577 million 450MW Beer Tuvia combined-cycle gas-fired (CCGT) power project in Israel, the €500 million ($618 million) financing of the 650MW Markbygden ETT wind farm in Northern Sweden, and is currently supporting German and Italian ECAs Euler Hermes and Sace on the debt package to fund the €19 billion Amur gas processing plant in Eastern Russia.
Wuermeling concludes: “ECAs will have to look at many large projects over the coming years. In order to provide cover, those ECAs need to demonstrate to their respective boards that the project is feasible and viable from a commercial and documentation-related perspective. This results in an extensive due diligence process. Coming to a conclusion on the project’s feasibility is not an easy task for the decision-making bodies of ECAs. That’s where we can help.”
For further information on PwC’s ECA advisory capability please go to www.pwc.de/eca-advisory