Debt Repayment: Repaying Money After Borrowing Money During the Construction Period
The third lesson set deals with a host of issues involving the tenure of debt and pattern of debt repayment. The length of debt repayment can be one of the most important issues in debt analysis as there are both first and second order effects. First order effects involve increased equity IRR from a longer period of high debt to capital ratios. Second order effects involve a lower DSCR which can (but does not always) increases the amount of debt. Therefore, the second order effects can either overwhelm the first order effects or the second order effects may not be very important. Similar issues are associated with sculpting or alternative repayment patterns for debt. In some cases sculpting can influence the size of debt while if the debt to capital constraint is operative, the pattern of repayment is much less of an issue. Sculpting issues can get tricky when the DSRA is used as the final repayment, when debt service includes letter of credit fees for the DSRA, when interest income is included in CFADS, when a balloon payment is a percent of the sculpted payments, and because of taxes with net operating losses and the effects of depreciation on interest during construction. These issues are addressed in the scuplting course (see the A-Z course). Repayment patterns can also involve something I have named synthetic sculpting. This is where debt repayment pattern cannot be changed, but cash flows can be adjusted. Examples of synthetic sculpting include adjusting the timing of outflows for a maintenance contract and PPA contracts that have step-down capacity charges that correspond to the debt tenure. Further hard mini-perms, soft-mini perms or other hair style names can be used with balloon payments and structured repayments that is derived from longer tenures. These issues bring up a fundamental issue of whether re-financing should be an integral part of financing analysis as mini-perm structures require some kind of re-financing assumption.
Videos Associated with Lesson Set 3 – Debt Repayment Analysis
The videos associated with debt repayment and debt tenure include instructions on how to create project finance models that measure the effects of sculpting, length of debt, mini-perm and re-financing as well as adjustment of cash flow to meet a target DSCR. In addition to the long videos that describe how to make the models, a set of shorter videos discuss the nuances of repayment along with when the repayment structure and the repayment tenure really matters and when it does not matter very much. The shorter videos also describe when re-financing dramatically changes the analysis. I am in the process of finishing the shorter videos.
Files associated with Lesson Set 3 – Required Return to Compensate Lenders and Equity Providers for Taking Risk
Files used to make you a thoughtful finance professional are I designed the files for lesson set 3 with exercises that force you to compute the implied probability of default for loans with a high credit spread and/or equity investments with a country risk premium. I desperately want you to see how unfair the high credit spreads and equity risk premiums are to developing countries. When the credit spread and required return on a solar project is high, then prices are high and GDP growth is spent on giving money to foreign investors (including the World Bank). Because this is such an emotional issue for me I have decided to drop any fee for this lesson set. This means that if you go to the files and complete the yellow blanks and see for yourself how much money a 5% credit spread or an 15% equity IRR really mean, you can get your name on the list of completed files and also receive a nice badge and a diploma.
Multiple Re-Financing Exercise.xlsx
Structuring and Risk Analysis with Macro.xlsm