Financial tests, such as the Debt Service Coverage Ratio (DSCR) test not only is used within credit documentation as a warning mechanism to determine and monitor the project performance and the likelihood for debt repayment. It also is a key metric in order to control and restrict dividends and other distributions to project sponsors. Further, […]
A prerequisite for understanding and making business decisions is to understand its financial consequences. For a proper understanding it is necessary to consider alternative options, to analyse various scenarios of key input variables and to perform sensitivity analyses of output data to changes in input data. Financial models are used to explore all such aspects […]
Recently, there has been a rise in the number of infrastructure bonds issued, largely as a result of the low interest rate environment, the lack of suitable (institutional) investment opportunities, lack of banking licenses of some market participants and regulatory challenges of certain banks. The below tables, on a high level, present a general overview […]
The general structure of our project finance model is illustrated in the diagram below: One of the essential elements of our project finance model is that different calculations are made for distinct phases of the respective project – the development phase, the construction phase and the operation phase together. The sources and uses statement is […]
Next to the DSCR, two further key financial ratios are commonly used and tested in project finance transactions, i.e. the Loan Life Cover Ratio (LLCR) and the Project Life Cover Ratio (PLCR). Both ratios are regularily calculated as the ratio of A to B, whereas A = The net present value of the Available Cash […]
Compared to conventional energy technology such as gas, nuclear or coal, the cost of renewable technology historically generally was considered higher because of high capital cost and low capacity factors, which is why, for most places in the world, renewable technologies needed a subsidy over wholesale electricity prices in order to be developed. However, various […]
An Accordion feature is an agreed possibility included at the outset of a financing process allowing the borrower to increase the principal amount under the main facility agreement (e.g. a capex facility) as long as certain market standard provisions are met. It is worth noting that an Accordion feature is not a committed facility by […]
Cash accounts, like the Debt Service Reserve Account (DSRA) or the Maintenance Reserve Account (MRA) are regularly required by banks as an additional means of security within a project finance transaction. The idea is to provide for an additional cash buffer in case either debt service or major maintenance expenses can not be funded due […]
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 […]
In cash-flow based project finance transactions, it is customary that banks require distributions to sponsors to be limited or subjected to certain tests. As such, cash distributions will regularly be permitted only if no event of default or potential event of default has occurred, is continuing or would occur as a result of a distribution […]
The cash flow from infrastructure investments often exceeds the accounting profit of the company. This is principally because infrastructure assets typically have high depreciation charges (due to high upfront capital expenditure requirements) but relatively low ongoing capital expenditure requirements. Since dividends on ordinary shares can only be paid out of retained profits, this creates a […]
The relevant cost of debt should be the current implied interest rate of a company’s debt, based on current market values for the debt or for companies of comparable risk and maturity. However, lack of current market values for many classes of debt might make it hard to obtain and will have to be determined […]
Subordinated debt allows project financings and corporate transactions to gear up more than they would be able otherwise. Typical Project / Infrastructure subordinated (mezzanine) debt characteristics include: Long term, secured debt Often no enforcement rights until senior debt is repaid Generally amortizes fully over term (although is typically interest only whilst senior debt is outstanding) […]
A term sheet will usually include the following commercial items, which are the key subject matter in a debt raising process:
Typical financial modelling mistakes include Forgetting to copy formulae right-across all columns Inserting a constant (hard-plug) in a calculation sheet (for „comfort“ reasons) and forgetting to replace it with a link / formula Sums are wrongly built (esp. after inserting rows at the top or at the bottom of the area to be summed up) […]
With increasing complexity in the infrastructure finance sector, it is now common practice not only for the financial modeller and transaction executives but also for CEOs, CFOs, investment officers and board members to take more of a hands-on role in using financial models. However, a financial model should not only be built for internal purposes […]
Project finance is driven by various dates that determine when various cash flows occur, e.g. cash outflows for development and construction, cash inflows from equity and debt holders, cash outflow for debt service etc. A project finance model for e.g. a renewable energy project will therefore in detail cover the following three critical phases, i.e. […]
The key exercise in any investment decision is to properly assess a project’s risks (and returns). In project finance, usually key risks that are being looked include: Market Risk Will the power station sell enough electricity at a price sufficient to meet expected returns? Will enough cars use the toll road at the right times […]
Typically, for infrastructure projects, the return requirement of investors reduces over time as the risks involved in the project reduces. For example, for a greenfield toll road the risk premium will depend on the stage of the road development. A higher risk premium is required during the early years, recognizing construction and traffic uncertainties. As […]
In project finance, the cash flow cascade regularly is the key basis and determinant for making business decisions. Whilst split in a similar fashion as in typical corporate financial reporting, a much stronger emphasis is put on the financing aspects. The cash flow waterfall usually contains many sub-totals, each of which steering different claims on […]