Financial models are the most integral part of any infrastructure finance transaction. For example, in many infrastructure transactions, the maximum debt amounts will be subject to adjustments which reflect the final sizing of a borrower’s debt requirements on the basis of a final financial model run reflecting updates of the underling base rate setting. As such it is apparent that term sheets and financing agreements of debt providers will regularly reference financial models at various points within such documents, e.g.
- Conditions Precedent to Financial Close: It is customary that a financial model must have been audited by a third party financial modelling consultant and must achieve certain cash flow ratios important to debt providers such as DSCRs (debt service coverage ratio), LLCRs (loan life coverage ratio) or PLCRs (project life coverage ratio) before financial close of a transaction can be announced. Further, it is customary that third party technical consultants have confirmed a project’s construction budget and construction schedule and timing and that such information is properly reflected in the financial model.
- Reporting: In many transactions debt providers might require continuous model updates and the calculation of forward looking cash flow ratios (containing reasonable updates of projections, forecasts and assumptions) or variance reports, i.e. comparisons of annual operating budgets to the financial close financial model.