Project Finance

CHAPTER 6Financial Structuring and Debt Sizing

Project financing constitutes a large and complex set of interdependent and interlocking project contracts and financing documents that must function and operate harmoniously and seamlessly. The quantitative distillation of these contracts and documents is reflected in the project financial model. The financial model is a critical feature of project finance due diligence used to determine the economic feasibility of the project and the mutual basis on which both lenders and sponsors test project assumptions and variables and ultimately agree on the debt financing terms and conditions. As such, the accuracy of the financial model is key—in particular, the input assumptions that form the basis of the economic outputs. These financial model economic outputs are deterministic in defining the ability of project cash flows to comfortably support the pro forma project leverage under all projected circumstances as well as the appropriate loan amortization profile. This is reflected in the relationship between project free cash flows and debt service (annual loan principal and interest payments) captured in the annual debt service coverage ratio (ADSCR) as well as the equity metrics (IRR, NPV, and payback period) for sponsors. In most project finance deals, the sponsors will have initially developed a “sponsor equity” financial model, which will be sponsor-friendly in the sense that it has optimistic/upside equity assumptions and features. ...