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Review of Capital Markets and Energy Financing Presenters: James Guidera, Credit Agricole -CIB Evan Levy, Credit Agricole -CIB Emeka Ngwube, Credit Agriole Securities. Update on the Financing Markets. February 2013. February 2012. 1. Looking Back on 2012.

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slide1

Review of Capital Markets and Energy Financing

Presenters:

James Guidera, Credit Agricole-CIB

Evan Levy, Credit Agricole-CIB

Emeka Ngwube, Credit Agriole Securities

slide2

Update on the Financing Markets

February 2013

February 2012

1

slide3

Looking Back on 2012

Update on the European Crisis

Basel III Implementation and Consequences

2

2011 from relative calm to tumult to relative calm again
2011… From Relative Calm to Tumult to relative Calm Again

A Greek debt crisis….. but thought to be contained to Greece……

Early 2011

Early 2012

Early 2013

  • European Central Bank has stepped-up to fund banks and indirectly sovereigns restoring a degree of market confidence in most sovereign debt
  • Greece in a box
  • A full blown European Debt crisis, resulting in downgrades of banks and sovereigns

Sovereign

Debt

European

And US

Economies

  • Recession fears in Europe
  • Mixed economic signals in US but mostly positive
  • Recession spreading from weaker to stronger economies
  • Some signs of improvement…
  • Continued growth in Europe, albeit at a slower pace
  • Hopes for renewed growth in the US

Financial

Markets

  • Improved liquidity
  • Nervous and volatile markets
  • Continued historical low rates
  • Relatively Bullish Markets, even in view of expected weaker growth
slide5

The ECB Liquidity Program: Providing some relief

  • In December 2011, the European Central Bank (ECB), began a program of providing cheap loans to banks, with the funds used principally to buy sovereign bonds.
  • More than €1 Trillion of 3-year loans were provided under this program, at a reduced spread (-50 bps) in December 2011 and February 2012. Repayments of €137 Billion have already occurred.
  • Yields on sovereign debt fell, debt issuances have gone well, and the markets have stabilized
    • Two Year Italian Debt: 1.7% from 7.8% peak
    • Two Year Spanish Debt: 2.6% from 6.2% peak
slide6

CDS Spreads for European Banks

January 2012

January 2013

slide7

Issues remain…

  • Floods of liquidity may provide some relief, but don't directly combat the fundamental problems
  • Greek Solution not yet achieved – is there any solution?
  • Continued weak economies and high debt burdens
  • New governments with austerity plans prevail
  • Recessionary signals for selected countries
consequences for european banks
Consequences for European Banks

Early 2012

Early 2011

Early 2013

  • Much higher costs of Liquidity, particularly in US$, for European Banks
  • Funding cost differences favor Japanese, Canadian banks
  • Financial impact of plans to reduce funding needs (De-leveraging)

Bank

Liquidity

  • Liquidity costs generally lower
  • Moderate funding cost differentiation among banks
  • Deleveraging targets achieved for the most part
  • Resources still abundant and relatively inexpensive
  • Moderate funding cost differences between banks
  • 9% benchmark in 2013 required by French regulators
  • More restrictive definition of capital
  • More severe weighting of markets activities
  • Liquidity ratio added to capital ratios
  • Compliance will limit overall loan growth
  • Should result in greater loan-pricing differentiation
  • Tier One Capital Requirement: 7% in 2018
  • Wide range of capital instruments available to satisfy requirement

BASEL III

slide9

Update on Basel III Implementation

  • Headquarted in Basel, Switzerland the Bank for International Settlements (BIS) has been promoting minimum capital adequacy requirements for participants in the international banking system since the late 1980’s.
  • Original regime responded to credit bubble driven by over-leveraged Japanese banks, BIS promoted a minimum capital ratio.
  • Weighted Assets: Bank loans, LOC’s and commitments in the denominator “Cooke-weighting” rules were fairly simplistic, weighting at 100% all funded loans without differentiating among most counterparty risks, and providing lower weightings for unfunded commitments, performance LOC’s, commitments of less than a year.

Bank Capital

≥ 8%

Weighted Assets

slide10

What was Basel II?

  • Basel II: New capital adequacy targets reported during 2003-4 and phased in through 2008.
  • Credit risks for loans were weighted based on credit quality, expected loss given default, and duration.  The risk-weighted-asset (RWA) regime provides for a much wider range of financial asset weightings based on the credit rating, loan structure (e.g. collateral quality), and duration.

Bank Capital

= 8%

(Credit + Market + Operations) Risk

PF examples:  RWA/Commitment

Construction mini perm for PPA-hedged generator                                8-25%

Miniperm for merchant power plant                                                       50-70%

Term loan for project portfolio holdco                                       80%

Unsecured corporate revolver (BBB- equivalent)                                  100%

Capital consumption follows the RWA/commitment ratio which is in higher ranges for looser structures, higher counterparty risks, and longer term loans.

basel iii the regulatory answer to the financial crisis of 2008
Basel III: the regulatory answer to the financial crisis of 2008
  • mEconomic cycles are taken into account :
  • capital buffers to be constituted during expansion phases
  • Level: up to 2.5%

lSystemic Important Financial institutions :

Additional level

from 1 to 2.5%

  • kImprovement of the quality of capital :
  • Close to common equity

Regulatory capital

Total of risk weighted assets

  • nTighten levels of regulatory capital :
  • Common equity 4.5%
  • Capital conservation 2.5%
  • p Regulation of excessive leverage :
  • Introduction of a simpler, transparent
  • leverage ratio
  • Higher risk-weighting for:
  • Securitisation
  • Market risk
  • Trading Counterparty credit risk *

o Introduction of liquidity

standards:

  • Liquidity Coverage Ratio (1 month)
  • Net Stable Funding Ratio (1 year)

* Project Finance Loan Risk-Weightings unchanged from Basel II

overview of basel iii capital adequacy calculation
Overview of Basel III Capital Adequacy Calculation

Tighten levels of regulatory capital :3 main ratios enhanced by 3 « buffers » with a full implementation starting January 1st 2013

Prior situation

As of 2018 for BIS, sooner for certain

countries

  • 3 « Buffer » levels added
  • l Systemic Buffer :
    • An additional level from 1% up to 2,5% for systemically important financial institutions
  • m Countercyclical Buffer :
    • Core Tier 1 buffer from 0% to 2,5%
    • To be defined by national supervisors, contingent on macroeconomic indicators, to avoid excess credit growth
  • n Capital Conservation Buffer :
    • Capital buffer at 2,5%
    • If < 2,5%, automatic restriction of dividends and bonus distribution

Total capital

Hybrid Tier 2

New definition

2,0%

≥ 11,5%

Hybrid Tier 1 New definition

Tier 1

1,5%

Theoretical capital ratio (BIS rules)

Systemic Buffer

[1% - 2,5%]

≥ 9,5%

Countercyclical buffer

[0% - 2,5%]

Hybrid Tier 2

– 50% deduction

= 4%

≥ 8%

Capital Conservation Buffer

[2,5%]

Total capital 8%

Core Tier 1

Hybrid Tier 1

- 50% deduction

Core Tier 1

-deduction of 100%

Threshold : 4,5%

Tier 1

4%

Core Tier 1

slide13

Acceleration of the Basel III Compliance Timetable

Timetable for application of the full Basel 3 CET1 ratio (at 31 December of each year)

~ 9%

+ 2 points

7%

Ratio required at

1 January 2019

introduction of liquidity ratios
Introduction of liquidity ratios

Two minimum standard ratios designed as a framework for liquidity risk supervision…

Implementation timeline extended:

Liquidity Coverage Ratio (1 month) shall be disclosed from January 1st 2013 and will be regulatory binding at 60% of target in January 1st 2015 , at 100% in 2019,

Net Stable Funding Ratio (1 year) will enter into force in January 1st 2018.

Ratio designed to ensure that a bank maintains an adequate level of unencumbered, high-quality assets that can be converted into cash to meet its liquidity needs for a 30-day time horizon under an extreme liquidity stress scenario (name and market crisis)

Stock of high-quality liquid assets

Total net cash outflows (under stress) over the next 30 calendar days

Liquidity Coverage Ratio

≥ 100%

Net Stable Funding ratio

Ratio designed to guarantee medium and long-term funding of the assets over a one-year time horizon. Non liquid assets, loans with remaining maturity above 1Y, 50% of loans with maturity under 1Y and 5% of OBS commitments should be covered by long term funding (> 1Y) or stable resources.

Capital + Liabilities>1Year +Stable deposits

Required amount of stable funding

≥ 100%

slide15

Basel III Implications for Energy Lending

  • Regulatory pressure to meet accelerated Basil III ratio targets will limit lending expansion among European banks.  
  • Greater credit pricing differentiation should appear between PPA-hedged and merchant, between opcos secured with hard assets and holdcos secured with shares.
  • Lender appetite will be very limited for long terms: they attract more capital, they lack liquidity in the market.
u s loan market snapshot
U.S. Loan Market Snapshot

16

U.S. Lending Volume

  • Overall lending volume was down in 2012 vs. 2011 as a result of the following
    • Unresolved issues in the Eurozone
    • Looming regulatory concerns for banks
    • Record year in the bond market
  • However amid demand-rich technical conditions the leveraged market flourished.

Source: Thomson Reuters LPC, S&P Capital IQ LCD

project finance around the globe
Project Finance Around the Globe

17

  • Despite decline in 2012, 4th quarter volume was actually up 11% y-o-y
  • Australia led in project finance volume in 2012 with a record $82bn driven by 2 large LNG projects ( $34bn Ichthys and $13bn Curtis Island)
  • North American volume increased for the 3rd consecutive year, reaching $51bn in 2012 driven by merchant power plant financings, wind farm and solar projects, and one LNG project

Source: Dealogic

north american 2012 sector analysis
North American 2012 Sector Analysis

18

2012 Sector Volumes (North America)

  • Energy remains the leading sector within North American PF although declined in 2012
  • Lack of PPA’s and continuing low gas prices lowered financing activity on new development and refinancing of merchant projects
  • Evident increase in wind projects as developers took advantage of subsidies and tax credits
  • Other projects include Petrochemical/Chemical Plants, Processing Plants, and Steel Mills

Source: Dealogic

project finance loan market in review 2012
Project Finance Loan Market in Review – 2012

19

  • PPA-Hedged Projects
  • Increased funding costs and heightened capital considerations  early starting margins were pushed up to 275 – 300 bps
  • However, the margins fell to around 250 bps due to lack of deal flow in 2H012
  • Liquidity is deepest for 7 – 10 year mini-perms.
  • Very select group of sponsors can still push the tenor out, primarily for renewables
  • Deals were syndicated primarily as clubs. Hold levels were generally between $60-80MM at the top tier.
  • A more active secondary market developed for PF loans (asset sales)
  • Merchant Power
  • Around a dozen commercial banks will consider merchant risk in well-structured and priced transactions with strong sponsorship.
  • Most merchant power financings were arranged through TLBs in 2012 (approx. 13)
  • Largest Deal in the market
  • Successful closing of $3.6bn Sabine Pass Liquefaction tested depth of the PF market
overview of high profile deals closed in 2012
Overview of high-profile deals closed in 2012

20

  • Term Loan Bs
  • $985MM Equipower Resources (ECP)
  • $750MM LSP Madison (LS Power)
  • $690MM Panda Sherman/Temple (Panda Power)
  • $175MM Raven Power Holdings (Riverstone)
  • Renewables
  • $650MM Alta Wind VII & IX (TerraGen)
  • $576MM Centinela Solar Facility (LS Power)
  • $476MM CSolar IV South (Tenaska)
  • $467MM Ocotillo Express (Pattern)
  • $177MM Copper Mountain Solar (Sempra)
  • Others
  • $3,626MM Sabine Pass Liquefaction (Cheniere)
  • $470MM Houston Propylene Pant (Petrologistics)
pf market outlook
PF Market Outlook

PF Market Outlook

21

pf energy sector historically power financing
PF Energy Sector Historically – Power Financing

22

Impact on Business

PPA-hedged deals

Predominantly Gas-Fired Plants

Abundance of wind generation

Growth of utility-scale solar

Older coal-unit retirements

Market Drivers

  • Steady Load Growth
  • Natural Gas Outlook - $5-10/MMBtu
  • Renewables – RPS criteria, Government Incentives (PTCs, ITC, Cash Grant)
  • Coal – Emissions playing larger role
pf energy sector going forward driven by gas
PF Energy Sector Going Forward – Driven by Gas

23

Impact on Business

Lack of PPAs – Increased merchant activity

Shale gas & related infrastructure development

Gathering, Storage, Transport

LNG (export)

Petrochemical

Limited wind in U.S. starting in 2014

Larger solar projects with long-term PPAs continue

Retrofits, scrubbers, supercritical heat rates

Clean coal

Contrarian investment opportunities

Market Drivers

  • Low or no load growth
  • Natural Gas Outlook - $3/MMBtu near-term

$5/MMBtu in future

  • Renewables – Expiration of PTCs
  • Wind 2013
  • Solar 2016
  • Coal – Toughening of emissions rules, cheap coal fuel
pf energy sector going forward driven by gas1
PF Energy Sector Going Forward – Driven by Gas

24

Financing Response

More B-loans – Investors are looking for higher yields

5-7 year mini-perms in the bank market

Starting margins in the 350-450 bps range

Refinancings of maturing mini-perms

Margins below 250 bps

Project Bonds for long tenor

Acquisition financing

Impact on Business

  • Lack of PPAs – Increased merchant activity
  • Shale gas development financing
  • Gathering, Storage, Transport
  • LNG (export)
  • Petrochemical
  • Limited wind in U.S. starting in 2014
  • Larger solar projects with long-term PPAs continue
  • Retrofits, scrubbers, supercritical heat rates
  • Clean coal
  • Contrarian investment opportunities
historical global project bonds issuances by region
Historical Global Project Bonds Issuances by Region

North America

Latin America

EMEA

Asia

26

All figures in USD MM Equivalents

Source: PFI Financial League Tables

historical global project bonds issuances by sector
Historical Global Project Bonds Issuances by Sector

Oil and Gas

Power

Infrastructure

Other

27

All figures in USD MM Equivalents

Source: PFI Financial League Tables

2012 transactions
2012 Transactions

28

Over $24 BN in project bonds closed in 2012.

transaction overview oaxaca ii and iv
Transaction Overview – Oaxaca II and IV

30

Investors by Type

August 2012

August 2012

USD 148,469,000

USD 150,231,000

Wind Project

144a Senior Secured Notes

Wind Project

144a Senior Secured Notes

Joint-Bookrunner

Joint-Bookrunner

  • The Transaction
  • In August 2012, CA Securities priced two Capital Markets offerings for two 102 MW wind projects located in Oaxaca, Mexico. The first offering was for USD 148.5 MM and the second offering was for USD 150.2 MM.
  • The projects benefit from one of the best wind regimes in the world.
  • The transactions refinance an existing bank facility provided during construction.
  • The client achieved a number of important milestones.
  • Why Significant?
  • First ever Latin American wind projects to achieve investment grade ratings and to tap the Capital Markets.
  • First ever USD-denominated wind project bonds outside of the United States.
  • First ever international project bonds to significantly tap local Mexican institutional investors.
  • Marketing
  • CA Securities acted as Joint-Ratings Advisor and Joint-Bookrunner for the Notes.
  • The final order book comprised of top US and international institutional investors as well as Mexican investors.
  • Hedge Fund
  • Private Wealth Management
slide32

Crédit Agricole Corporate and Investment Bank (Global Investment Banking)9 quai du President Paul Doumer92400 Courbevoie PARIS FRANCETel. +33 1 4189 8500Crédit Agricole CIB (or Credit Agricole Securities (USA) Inc.)1301 Avenue of the AmericasNew York, NY 10019Tel. (212) 261-7000www.ca-cib.com

Disclaimer

This presentation was prepared exclusively for your benefit and internal use in order to indicate, on a preliminary basis, the feasibility of a possible transaction or transactions.  This presentation is proprietary to Crédit Agricole Securities (USA) Inc. and Crédit Agricole Corporate and Investment Bank (together with any affiliates, “Crédit Agricole”), is confidential and may not be disclosed by you in any manner, including without limitation, any publication of the contents hereof, to any other party.  This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral presentation provided by Crédit Agricole and any additional written materials intended as a supplement hereto or thereto.  Neither this presentation nor any of its contents may be used for any purpose other than the consideration by the employees and professional advisors of your company of the transaction or transactions contemplated herein without the prior written consent of Crédit Agricole.

The information in this presentation is based upon available sources and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change.  In preparing this presentation, we have relied upon and have assumed, without independent verification, the accuracy and completeness of all information available.  In addition, our analyses are not and do not purport to be appraisals or any other valuation of the assets, properties, stock, or business of your company.  The information contained in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which could have significant valuation and other effects. This presentation is furnished for discussion purposes only and does not purport to specify all of the terms and conditions of any transaction proposed herein.  This is not intended to be, and should not be construed as, a commitment to provide financing or buy risks.  Crédit Agricole does not make hereby any representations or warranties as to the outcome, financial or otherwise, of any proposed transaction or strategy.

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