In this session we start analyzing what happens on the liability side of the special purpose vehicle during the construction phase. We have seen all the items on the asset side. It is now time to understand how these items are financed. On the right hand side of the balance sheet of the SPV. In order to understand exactly what happens, let's simplify a lot, and let's assume that even if this exemplification is not far from reality. The project is financed with two basic sources of financing. Debt on one side and equity on the other side. Let's start from the equity. Equity is provided by the shareholders. And typically equity contribution follows the so-called âmilestone timeline,â which basically implies that every time the contractor completes a milestone. Equity shareholders provide a portion of the funds in order to finance the other advancement of the construction phase. On the debt side the situation is a little bit more complex, in the sense that, either banks or other financiers. Typically provide debt, but debt is articulated into different brackets. Or as it is said in technical terms in tranches. Every tranche of the debt is earmarked for financing, a specific portion of the asset side. Let's start from the most important part of the debt side. Which is represented by the base loan, also known as base facility. The base facility is the most important bulk of financing, that typically is earmarked to fill in, to cover the cost of construction, the cost of land, a portion of the interest that has accrued during construction and the fees that accrued during the construction phase. This loan is a typical long term loan and the loan, is a typically amortizing structure. Which basically means that the loan will be reimbursed, on a given timeline of payments. A schedule of repayments. As long as the operational phase, goes on. The second important bulk of financing is in countries where the VAT tax is in action, the value added tax, facility or VAT loan. The VAT loan is the amount of funding that is required to lenders. In order to finance the VAT that has accrued during the construction phase. And this is an important point to be remarked. There is a perfect correspondence between the VAT accrued on the asset side and the VAT loan on the liability side. So lenders finance 100% of the VAT need, that has been determined by the construction, during the construction phase. You can also understand that VAT will be reimbursed, not on a given amortizing schedule. But simply using the cash flow that the SPV will gain during the operational phase, on the VAT that will be charged to customers, once the project is up and running. It is said that the VAT loan will be reimbursed using the compensation scheme. Using then, the VAT that has been cashed with the VAT that has been paid during the construction phase. The third tranche that is typically set up by lenders, in the construction phase, is called standby facility. The name standby is indicative, in the sense that this bulk of funds. Is earmarked to finance a portion of the contingencies that could arise during the construction for whatever unexpected event. So you can understand, if the contingency does not happen, the standby facility will never be used. If on the other side contingency arises, the standby facility will be used. And you can also understand that if creditors and shareholders have agreed on a given Debt to Equity Ratio, if a contingency arises the contingency will be financed with a given portion of debt. And a given portion of additional equity that the shareholder will inject in the SPV, in case the contingency arises. The fourth and final tranche is typically the so called, working capital facility. Working capital facility will be activated only when the SPV enters into the operational phase and you can understand why. When the project is up and running, it is pretty obvious that on a daily basis, working capital needs. Where working capital basically means inventories, accounts receivables, and accounts payables, would be generated by the day by day activity of the SPV. And that's why, banks typically provide additional funds up to a certain maximum amount, in order to finance the fluctuations. Of the working capital, throughout the operational life of the project. You can also understand that the working capital facility compared with the previous tranche is typically a revolving credit. Revolving means that you have a certain amount of money that you can reuse many different times. Whenever you need to finance the fluctuations, of the values, of the working capital needs. Overall then, we have all this financial package, the base facility, the VAT, the standby, and the working capital. One final element that is particularly important to understand is that all this financing on the debt side, is fully collateralized by all the assets that the vehicle has on the asset side. So in project and infrastructure finance, we don't have the typical difference between secured and unsecured creditors. Every senior creditor is always fully collateralized, by all the assets of the SPV of the left hand side, of the balance sheet.