Principles of Project Finance

If irregular cash flows are projected, the loan repayments can also be structured

on an irregular schedule such that the same level of ADSCRs are maintained

throughout the loan term (this is known as a “sculptured” repayment schedule). This

may be necessary, for example, if after-tax cash flows in later years decrease be-

cause deferred taxes start becoming payable if the Project Company has benefited

from accelerated tax depreciation on its assets in the early years of operation.

These considerations are not only relevant to the investors: the debt repayment

structure clearly affects the cost of the Project Company’s products or services and

may be a crucial factor if Sponsors are in a competitive bidding situation for a pro-

spective project.

§13.1.4 F

LEXIBLE

R

EPAYMENT

To provide the Project Company with some room to maneuver if a tempo-

rary cash flow problem occurs (especially when the project is just beginning

operations), lenders may agree to a “target” repayment structure. Two repay-

ment schedules are agreed to: one is the level that the lenders actually wish to

achieve if the project operates as expected (i.e., the target repayments), and one is

the minimum level of repayment required to avoid a default by the Project Com-

pany. For example, if the target loan repayments for a 1000 10-year loan are 20

equal semiannual installments, the minimum schedule could be calculated as in

Table 13.6.

If the Project Company has cash flow available, it must make a repayment

sufficient to bring the loan outstanding down to the target schedule, but if not, it

must at least achieve the minimum schedule. As can be seen in Table 13.6, the two

schedules differ by one loan repayment (50) to begin with, this loan repayment be-

ing spread over the remaining 19 payments in the minimum schedule. The loan

outstanding in each schedule becomes closer and closer as time goes on so that

final repayment is achieved at the same time on both schedules; thus at the end of

the first 6 months the whole 50 of repayment can be deferred, while only 2.6 of the

penultimate repayment can be deferred. This gives the Project Company 6

months’ room to maneuver at the beginning of the project’s operation, when things

are likely to go wrong because of so-called teething troubles.

§13.3 DRAWDOWN OF DEBT AND EQUITY

§13.3.1 P

RIORITY OF

D

RAWING

Once the debt: equity ratio has been agreed to with the lenders, the question

arises about which is to be spent first, debt or equity? Sponsors often prefer to de-

lay putting their cash equity into the project, since the later they invest their

§13.3 Drawdown of Debt and Equity 293