Credit Enhancements to Debt — DSRA, Cash Sweep and DSRA

The two files below address deals with complex issues associated with computing the LLCR with changing interest rates and multiple debt issues with different interest rates. If there are multiple issues, the LLCR can be accumulated for the shortest tenor of the debt. For longer tenor issues, the LLCR can be evaluated by computing forward debt IRR with a user defined function.

The files below address issues associated with reserve accounts, The DSRA account includes detail of how to compute debt service accounts and the DSRA account. Exercise 7 covers a number of issues associated with modelling DSRA’s ranging from structuring the DSRA requirements to dealing with cash sweeps, sculpting and cash flow waterfalls. The exercise demonstrates that there should be no circular references associated with the DSRA. Exercise five deals with the issue of computing contributions to a maintenance reserve for extraordinary expenditures. The calculations are a little complicated where the amount of expenditures is not constant and the time between periods of expenditures changes over time. This exercise walks through how to program switch variables for the expenditures and how to compute the prospective expenditure so that the amount of contribution to the MRA can be established.

Advanced Project Finance Lesson Set 6: Terminal Value in Project Finance

Terminal value is a big issue in corporate finance. But in project finance, the terminal value after an inital contract (e.g. the PPA period) can seem to be worth not much. This occurs especially when the IRR of the project is high. But this terminal value can be deceptive. If the IRR is low the terminal value can be quite important and affect the bid price in a meaningful way. If the terminal value can be financed (which may sound crazy but has occurred) then the terminal value increases in importance. Given that the terminal value may be important, the question arises as to how much is the terminal value for a plant that is quite old and may have lost some efficiency. This is addressed in the videos and the spreadsheet below. One case examines the terminal value as a percent of the capital expenditures from the perspective of a contract renewal. The second case assumes the terminal value comes from volatile spot prices. Given the volatility of prices and the fact that the contract has expired, there are real options associated with operation of the plant. These real options can increase the value of the plant as explained in the videos below.