Debt structuring issues in project finance are introduced on this page. Structuring issues are contrasted to risk analysis in that they involve the theoretical and practical issues associated with structuring the size of project finance debt; the manner in which project finance debt will be funded during construction; how project finance repayment is structured; the appropriate interest rates and fees that should be in the contract; and, the credit protections that are included in the debt structure. The reason I say screw the blah, blah, blah acronyms is that understanding the implications of what you are modelling when you are making a model for evaluating the benefits and costs of different structuring elements is a lot more important than putting colours in a spreadsheet or even making your spreadsheet look artistic with different pages. Financial modelling is not about moving fast around an excel sheet or using a tool to trace formulas. I have included links to the different places where you can find selected advanced structuring subjects.
Instructions for Downloading Files with Macros
Overview of Debt Structuring Issues in Project Finance
A few years ago I received instructions that I had to deliver an advanced project finance course. And, I was told I had to make it interesting. Although the course may have been neither interesting nor advanced, I began thinking about nuanced issues in project finance related to debt size, debt draws, debt repayment (and re-financing), interest rates and covenants. I have put some videos and exercises for what I think are fairly advanced project finance issues and require you to think carefully about the underlying finance theory. In demonstrating nuances associated with how project finance features can affect price bidding for a project, I discuss a variety of more subtle project finance issues on this page ranging from liquidated damages, availability penalties, performance ratio incentives, debt sizing, sculpting, development fees, pre-operational cash flow, DSRA, credit spreads, risk premiums, letter of credit fees, re-financing, mini-perms, Yieldco’s and other items.
The spreadsheet files that you can download on this page are intended to demonstrate implication of many issues including synthetic sculpting through maintenance contracts, measurement of political risk and risk for lenders relative to return for investors of cash sweeps and other credit enhancements. I don’t think you can make a simple checklist evaluating particular features to ask for a bank or to use in project finance that are seemingly optimal. Instead, you need to think about the interrelationships that can affect many different financial issues. For example, development fees and other items that can increase the project cost without increasing equity investment can be instrumental in pushing up the equity IRR when the debt to capital drives the debt size of a project. However, when the prospective DSCR determines the debt constraint, these items have no effect on the profitability of a project from an equity perspective.
The file below may be a good way to introduce the various advanced structuring elements. If you use the file you can evaluate alternative debt sizing options, debt repayment options, interest rate options, funding options and other elements.
Example of Project Finance that Resolving Circular References Using UDF and Parallel Model from Template
Any project financed loan facility can be divided into five elements that include; (1) the size of the loan; (2) the method for borrowing money once the loan size is defined; (3) the length of time and method for repaying the loan; (4) the interest rate and fees charged for the loan; and (5) various items that further protect the loan. In my humble opinion, term sheets, loan contracts, assumptions in financial models and calculations in financial models should be arranged according to these five fundamental parts. However when you look at actual term sheets the specific terms that define debt size, debt funding, debt repayment, interest rates and credit enhancements are not organized nicely, but instead all over the place. For example, the loan size according to debt to capital may be defined at the beginning of the document whilst the loan size defined by prospective debt service coverage may be specified many pages later.
Because some of the pages may be tricky to find with the menus, I have included the links to various subjects that I think are more advanced than the basic building of a model. I have included a model that contains many of the issue below. The workbook attached to the button has many of the subjects discussed below.
Excel File with Comprehensive Project Finance Exercises and Model Mechanics from Basic to Advanced
Working through a Model from A-Z with Funding, Sculpting and Circular References
If you want to see an exercise for working through structuring issues with alternative funding you can go to the link below.
Advanced Issue 1: Structuring a Project with Evaluation of Debt Size from Either P90, P50, or Maximum Debt to Capital
Advanced Subject 2: Inclusion of DSRA changes in the DSCR for Debt Sculpting
Advanced Issue 3: Resolving Circular References without Copy and Paste Macros or the Iteration Button
Advanced Issue 4: Computing Debt Repayment where the Debt Size is Given, and Sculpting is used to Obtain a Minimum DSCR with Varying DSCR’s
Advanced Issue 5: Debt Sculpting of Multiple Debt Issues where cash flow is Affected by Interest Expenses and Income Taxes
Advanced Issue 6: Incorporating options for DSRA funding with an L/C or with Cash Funding
Advanced Issue 7: Modelling Sculpting with Balloon Payment at End of Tenor
Advanced Issue 8: Adding Re-financing to a Model where Debt Size Depends on Taxes which are Affected by Interest on the Re-financing
Advanced Issue 9: Evaluation of NOL Time Limits on the Calculation of Income Tax
Advanced Issue 10: Computation of the LLCR with Different Debt Issues using the Prospective debt IRR
Advanced Issue 11: Modelling Equity Bridge Loans and the Associated Circular References along and Options for IDC
Advanced Issue 12: Modelling the Effect of Financing in Different Currencies with Translation Adjustments
Advanced Issue 13: Modelling Development Fees with Multiple Investors
Advanced Issue 14: Including Actual Data in Models for the Construction Period and Operating Period
Advanced Issue 15: Modelling Mini-perms and Different Re-financing Assumptions
Advanced Issue 16: Developing Alternative ways to Model Working Capital Requirements in the Initial Operating Periods of a Project
Advanced Issue 17: Evaluating Different Structures for Equity Investors including Cash Flow Flips and Incentives to Developers.
Advanced Issue 18: Accumulation of Projects into a Portfolio or a Fund
Advanced Issue 19: Modelling Alternative Cash Sweep Structures
Advanced Issue 20: Valuation of Projects with Changing Buyer Target IRR’s and Computation of Holding Period Returns
Advanced Issue 21: Evaluation of Defaults and the Risks of Senior and Subordinated Debt
Advanced Issue 19: Creating data tables using VBA to resolve problems with data tables
Advanced Issue 20: Time Lines with Different Periods and Required Sums
Advanced Issue 21: Effective control pages where you can Evaluate Changes to Inputs and Properly Include the Inputs in Relevant Input Sheets
Introduction to Nuanced Project Finance Structuring Issues in this Section of the Website
The video and the associated course outline are intended to describe some of the theory associated with the lesson sets included on this page.
The pdf file that is associated with the video and explains the various structuring issues is available for you to download by pressing the button below.
Pdf File that Introduces Advanced Project Finance Structuring Issues with Summary Descriptions
I am in the process of arranging seven lesson sets in this section of the website. The first five lessons are deal with the five elements that define any project finance debt facility that I mentioned in the above paragraph — debt size, debt funding, debt repayment, interest and fees and credit enhancements. The lessons are designed to focus on nuances associated with the debt element where the implications of various strategies are not immediately obvious and are interrelated with different provisions in the debt contract. To address issues that I think are complex, I have attempted to create models that concentrate only on the particular issue and present a graph that displays the issue. I have created some videos that are long and difficult to listen to associated with building these simple models. You can download a set of project finance structuring power point slides that address many of these issues with the button below.
Power Point Slides that Describe Debt Structuring Issues in Project Finance Related to the Five Components of Debt
The last two lessons deal with contract structuring issues and tax issues in project finance. I believe that the contract structure can distort efficient investment decisions when you take a step back and evaluate incentives to build a plant too quickly, pay an EPC contractor too much margin, gold-plate operation and maintenance and many other things. Exercises and videos associated with contract structuring are included in lesson set six. In the last lesson set I discuss the remarkable U.S. tax code that gives away money to large companies with a big tax bill in the name of providing incentives for renewable energy. Some of the contracting issues associated with contracts other than the debt agreement are discussed in the power point slides below.
Power Point Slides that Describe Issues Associated with Contracts in Project Finance including Contract Excerpts
I am in the process of updating the videos and the associated files with shorter videos and conceptual discussion so that you can clearly see the interesting theoretical nuances associated with project finance. Please bear with me as I take my time to complete the structure of this section.
Link to My Youtube Channel Where You Can Look At All of the Different Videos that I have Made