Corporate and Project Finance Modeling

Chapter 41Debt Sculpting in a Project Finance Model

Determining the debt size and establishing the structure of debt repayments are often the most time-consuming and important structuring elements of a project finance transaction. When structuring debt, lenders can start with the prospective cash flow and the target level of the debt service coverage. The size of the debt commitment that will make the computed debt service coverage ratio (DSCR) equal the target amount is then determined. For example, the target minimum DSCR to obtain a BBB–rating could be 1.4 using base case cash flow. Alternatively, the debt may be sized by evaluating cash flows in the downside case, and the target DSCR may have a lower value such as 1.2. A financial institution may then choose the lower debt size resulting from the two different debt-sizing techniques. Project finance transactions often also have a debt leverage constraint. If the debt size results in a level of debt leverage above some number like 80 percent, then the debt size is also constrained by the financing ratio.

Debt repayments computed on the basis of annuity payments imply that the debt service is constant over the life of the loan. Alternatively, repayments can be computed on the basis of equal installments where the debt repayments are level over time. In these two situations a Goal Seek process and/or Visual Basic Applications (VBA) can be used to establish the debt size, as discussed in Chapter 42. In the cases of equal installments ...