Project Finance Modelling

Preliminary Comments

• Review essential elements of project financing structures

• The role of the model within the overall process

• Project Financing risk and its management

Model Design

Financiers focus on sculpted debt serviceability, whilst Sponsors focus on the valuation – the Sponsor IRR that the project generates. Training embraces both perspectives.

• Different analytical purposes = different methods of modelling implementation: Valuation and feasibility models

• Finance structuring models

• Statistical probability models

Data manipulation models

Designing the Analysis Worksheet

Determining the functionality of the model

Structuring how inputs will be accessed and controlled

Importance of model logic flow

Layout of the worksheets within the workbook

Layout of individual worksheets

Modelling Best Practice

There are 8 principles of modelling best practice, and each is addressed progressively throughout training rather than in a formal session. Included are illustrations of the problems if the principles are not respected.

• Consistent timelines – how to protect

• Consistent formulae across rows

• Hard-coding in formulae

• Usability: Organisation and accessibility of model inputs

• Organisation of summary outputs

• Use of flags and masks to simplify formulae

• Naming conventions, formatting conventions

• Status worksheet

NW to SE workflow

Modelling efficiency

Circular references:

• Which are permissible and which are not

• Workarounds if the model needs to be audited

Macros:

• The dangers and precautions that should be taken

• Editing, to minimise complications

• Implementing macros for common purposes

• Looping macros

Practical 1

• The creation and formatting of the worksheets

• Setting up timelines and flags

Construction Phase

A critical worksheet within a project financing financial model. However, there is a high degree of commonality in its structure across all sectors.

• Identifying and explaining the elements the model needs to capture: cost overruns

• delays

• variation orders

• staged payments;

• maintenance and refurbishment cycle

• liquidated damages

• performance bonds

• retentions

• multiple currencies

• the financing structure

• multiple tranche drawdowns

• interest during construction

• standby financings

Practical 2

• Implementing the construction worksheet

Volatility Modelling Explained

From a modelling perspective, there are 4 types of operating costs and 6 characteristics required for capture. In this instance, the Operating Costs worksheet is fundamental to the model as it's the main determinant of cash flow volatility.

• Project dynamics

• Modelling of cost structures

• Quantification of risk

Practical 3

• Modelling of Operating Costs

Generation, Revenue and Operating Costs

Having dealt with operating costs in a generic context, it's proposed to adapt it to a financial model for power generation projects, since power generation is the largest sector to use project financing structures.

• Identifying (and explaining) the elements the model needs to capture: Rated capacity and internal work power

• Plant load factor

• Planned outages

• Unscheduled outages

• The heat rate

• Degradation

• Thermal efficiency of fuel

• The carbon content of fuel

• Various other operating costs

Practical 4

• Implementing the model in the Free Cash Flow stage

Financing

Because the bank is active across all sectors, many different financing worksheets will be encountered. Each is reviewed and implemented in a series of practicals.

• Identifying (and explaining) the elements the model needs to capture: Annuity-style amortisation

• Straight Line amortisation

• Sculpted amortisation

• Cash sweeps

• Loan life cover ratio

• Annual debt service cover ratio

• Cashflow lockups

Practicals 5++

• Implementing several different styles of financing worksheets – annuity, straight line, sculpted to ADSCR (average debt service coverage ratio), sculpted to LLCR (loan life coverage ratio) ,  and cash sweeps.

Procedures Upon Receiving a Model

Any analysis performed on a model is meaningless if the model itself is flawed or contains material errors. There is no shortcut to model audit and to ensure no errors at all; every unique formula in the model has to be checked. Model Review is a procedure that allows the recipient to assess a model's credibility within a maximum time frame of 30-40 minutes.

• The recommended layout and inter-relationship of worksheets for a typical project finance model.

• Shortcuts to determine a received model architecture;

• The use of audit software: Detecting breaches of Excel best practice rules;

• Listing of formulas and cell references that need checking;

Tracing the logic flow

Analysis

Models are built to be subjected to analysis. The precise detail and nature of the analysis will change between transactions. A well-built model has sitting on top, a single worksheet where the analyst spends all of their time, controlling inputs, observing outputs and driving functionality; scenarios, sensitivities or break-evens.  If the analyst ever needs to leave the Analysis worksheet, the model hasn’t been built properly.

• Identifying & explaining the elements the model needs to capture: Sensitivity analysis

• Break-even analysis

• Scenario analysis

Training Objectives

Participants are expected to have at least a basic understanding of financial modelling in Excel. This skill is adapted to the various problem-solving situations encountered in project finance throughout this session. Skill level is participant-tailored, and following registration, delegates are asked to complete a straightforward, one-page questionnaire. This helps identify current proficiency whilst our training expert adapts practical sessions accordingly.

Training is tailored to your bespoke requirements, ensuring you gain everything required. This course's main objectives ensure an enhanced understanding and proficiency in the subject.

Training Course Summary

Training fits perfectly across two days, covering all necessary aspects. From modelling of the project's construction phase to the operations (a power generation project is used as the platform for this, the financing, and the Analysis worksheets). Sessions also cover procedures for investigating receipt of a model prepared by others, to verify its integrity.

Importance of the Modelling

Where financing is carried out with limited recourse to the company behind the project, it’s dependent solely on the cash flows generated by the individual project itself. High standards of modelling are now critical and, in particular, are required to test for the volatility of cash flows. It’s not the base case that kills, but the occurrence of conditions other than the base case over the life of the project.

Modelling of the project is the key part of a 3-stage analytical process:

1. Identification of circumstances in this particular project that could cause cash flow volatility - i.e. risk identification.

2. Quantification of the cash flow impacts if those risks occur.

3. Structuring the transaction to safeguard it from the potential occurrence of those risks.

Sessions highlight the model's importance for other purposes, such as determining the optimal financing structure or the feasibility through project valuation.