Re-financing can have a dramatic effect on the economics of an investment from the perspective of investors. Whether re-financing should be assumed is an item that can lead to vigorous debates among project finance analysts. I am on the philosophical side of the issue that suggests re-financing is an essential element of analysis in project finance. This is particularly the case when the term of the initial project finance loan is less than the life of the project. I think you can go to the extreme of saying that whenever the term of the loan is less than the economic life, the measurement of equity IRR is distorted.
I have made some power point slides that describe various issues associated with re-financing.
Illustration of Re-financing without Circular References
I have created a file that evaluates re-financing in the context of project financing. This file does not include taxes or DSRA accounts and therefore does not include circular references. But it is a good way to demonstrate the effects of re-financing on the equity IRR. Your can download the file that is explained on this page by pressing the button below.
The first graph below illustrates a case with a short-term tenure and no re-financing. I say short-term tenure because the debt tenure is much shorter than the life of the project. You can find this graph in the file above and you can press the re-set button so that no re-financing is assumed. In this case the equity IRR is 14.36% (very high).
Advantage of long tenure — note the increase in the equity IRR. (Start with project IRR versus debt cost).
Modelling Mechanics for Re-financing
You can even go further and suggest that the re-financing analysis should include terminal value.
Re-financing and Circular References
Files with re-financing analysis that you can find if you request resources and firstname.lastname@example.org
- Multiple Re-Financing Exercise.xlsx
- Cash Sweep and Re-financing.xlsm
- Multiple Re-financings with Sweep.xlsm