March 22, 2012
We hope that you got a chance to look at our Real Estate example which we had sent across last week, this week we have one more flavour of Financial Modeling for you!
We are covering Project Finance this week. Loosely speaking the term “Project Finance” is used to describe a range of financing arrangements company undertakes to finance its large projects. Mainly it has gained attention with the growth in privately financed infrastructure projects in the developing world.
It is the long term financing of projects (like infrastructure) based upon the project’s forecasted cash flows rather than the balance sheets of the project sponsors. In a project financing structure there are mainly two types of parties involved, sponsors (equity investors) and a syndicate of banks or other lending institutions that provide loan to the project sponsor company. This loans are secured by the project assets and paid fully from project cash flow and are commonly known as non-recourse loans.
Note: In project finance the loan is repaid from the cash flows earned by the subject project rather than from the general assets or creditworthiness of the project sponsors. This loan is secured by the project assets, including the revenue-producing contracts. Another important point is that the lenders are given a lien on project assets, and can assume control of the subject project if the project company has difficulties in complying with the loan terms.
Capital-intensive: Generally projects tend to be large-scale that require a great deal of equity and debt capital.
Highly leveraged: Relatively debt capital accounts for 65% to 80% of total project cost.
Long term: The tenor can normally reach 15 to 20 years.
Independent entity with a finite life: Example – In a build-operate-transfer (BOT) project the project company ceases to exist after the project assets are transferred to the local company.
Non-recourse or limited recourse financing: The financing is not primarily dependent on the credit/ capital support of the sponsors or the value of the assets involved. That is, the repayment of the loan will be substantially dependent on the performance of the project itself
Many participants: As the projects are large scale, the transaction will frequently demand participation of numerous parturitions.
Costly: Raising capital through project finance is generally more costly than through other means.
This is the theoretical part of Project Finance, but our years of training in Financial Modeling have taught us that experience is the best teacher. To facilitate your learning, we have created a generic infrastructure project finance model which you can tweak as per your liking and get a feel of how factors such as construction period, loan repayment period and depreciation period impact the Project Finance Model. Once again, this is a generic model and can be enriched depending upon the specific case concerned.