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Financial Modeling in Excel
Project Finance
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Agenda
Key Concepts in Project Finance Modeling
Understanding Project Finance
Quarterly to Yearly Revenue Conversion using Date functions
Interest During Construction (IDC)
Cash Flow Waterfall
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Characteristics of Project Finance
Project Finance is the financing of
often long-term, industrial projects
Increasingly those which provide public services or infrastructure
Based upon complex financial and contractual structures commonly involving many legal entities
Project Finance debt is often termed as "non-recourse"
Typically secured by the project assets and the core project contracts
The cash flows from the project
Come only after the project is fully complete (takes more than a single financial year for completion)
are usually the sole means of repayment of the borrowed funds
Separate Entity and SPV Status
Risk of the transaction is generally measured by the creditworthiness of the project itself rather than that
of its owners (Sponsors).
Two main types of Project Financing
Greenfield a fresh start
Brownfield expansion of an existing project
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Characteristics of Project Finance
Multiple parties involved
Sponsors
Contractors
Suppliers
Governments
Global financiers,
From inception of an idea to Financial Close, a Project Finance deal can take years to negotiate
All about identifying risks, allocating them appropriately and ensuring that the responsible parties are
adequately incentivized to manage their risks efficiently
Construction time, costs & specification
Operational cost, reliability
Supply reliability, quality, cost
Off-take volume, price
Politicial environment, war, local hostility, currency inconvertibility
Socio-environmental responsibilities
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Risks & Mitigants
Funding Risk
Identification of sources for equity contribution.
Stipulation for minimum upfront equity contribution.
Disbursement only after financial tie-up for the project.
Regulatory Risk
All major statutory approvals including MoEF and forest clearance stipulated as a pre - disbursement
condition
Concession agreement is reviewed commercially and risks identified
Suitable undertakings/guarantees are obtained from sponsors to negate any adverse affect of concession
provisions
Financing of projects on time-tested concession formats approved by the Planning Commission
Land Acquisition Risk
Minimum land acquisition stipulated as a pre-disbursement clause
Projects in sensitive states avoided
Land acquisition is the responsibility of Concession Authority
Compensation is paid by the authority on account of any adverse delay
Market Risk
Independent consultant appointed by Lenders to conduct market potential/ traffic study
Project funding is structured based on cashflow projections to ensure smooth Debt servicing
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Risks & Mitigants
Execution Risk
Contracts for Civil works/Procurement of equipment on a fixed time fixed price basis.
Contracts to be finalized before any disbursement
Reputation of EPC contractor considered
Suitable provisions for Liquidated damages/ penalty are incorporated in contract documents.
Technology Risk
Projects based on proven technology are financed
Recourse stipulated in case of emerging technologies
Explicit Political Risks
Most concession agreements / licenses have clear provisions classifying political risks into 2 categories:
Direct Political and Indirect Political
Mitigation mechanisms including compensation is specified in the agreement itself
Implicit Political Risk
Policy Risk: Change in policies towards infrastructure like tax sops, concession agreements, grant policies
Revenue/Toll Rate Risk: Change in toll rates
Regime Change Risk
Change in Applicable Laws / Tax Laws
Cross Border Governing Law Enforcement Risk
Concession Agreements / Licenses govern all aspects of projects under a contract based system and
governments honor signed contracts
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Key Stakeholders
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SPV
SPONSORS
HOST
GOVERNMENT
EXPERTS
PROFESSIONALS
GUARANTORS
PURCHASER
SUPPLIER
OPERATOR
EPC CONTRACTOR
LENDERS
INSURERS
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Contractual Arrangements to Mitigate Risk
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Parties Agreements Mitigation mechanisms
Project Sponsors: Shareholders Agreement/Share
Subscription Agreement, Sponsor
Support Undertakings, Corporate
Guarantees.
They bear the risks of project design, construction, completion,
operation, and maintenance and repayment to the lenders. The
cost overrun risk is also borne by the sponsors.
Customers Off-take Agreements When there are only a few potential customers for the projects
output, revenue risk is likely to be transferred to those customers
by means of a long-term sales contract.
Contracts may include: take-or-pay clause, minimum throughput
agreement, tolling contract etc. The risk of payments is mitigated
through a proper payment security mechanism.
Government/
Statutory
Authorities
Concession/Implementation
Agreements
When a government grants a concession to a project company,
there will be a Concession Agreement that gives the company the
right to build and operate the project facility. Concession
agreement may require the government to construct supporting
facilities such as access roads, contains non-compete condition
etc.
Construction
Contractors
EPC Agreement The risk of project construction is mitigated to the construction
contractors by entering into a fixed time fixed price contract with
them and the contract adequately providing for liquidated
damages (penalties) in case of delay in construction.
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Assumptions
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Monthly Statements
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Conditional Formatting
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Assumptions EPC Schedule Monthly & Yearly Statement
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Yearly Statement
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Concept of Interest During Construction (IDC)
When an asset is developed, and there is a considerable period between the start of a project and its
completion, the interest costs related to the construction are generally included in the cost of the
asset, that is, the interest cost is capitalized
The capitalization period ends when the asset is ready for use
While modeling in excel, Interest During Construction (IDC) introduces a circular loop into the sheet
due to the circular references explained below (1-2-3-4)
Equity and Grant commitments can be either a specific amount, or a certain percentage of the total
project funds required (that is, a fixed percentage in the capital structure)
Equity
Grant
Debt
Total Funding
Project Specific
Cost Items
Interest Expense
on Debt Raised
(IDC)
Total Project Cost
Interest Expense is Calculated
on Outstanding Debt
Total Funding is made
equal to Total Project Cost
Total Project Cost
includes Interest During
Construction (IDC)
Debt Amount is
made equal to the
Funding Gap
1
2
3
4
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Incorporating IDC in a Project Financing Worksheet
We begin by inputting the project cost assumptions and the equity and grant commitments during the
period of construction
Next, we put the formula for total project cost (as sum of all project cost elements, including IDC)
Total Funding is made equal to the total project cost, by referencing it to corresponding cell
Debt to be raised is calculated as the funding gap in the project, after factoring equity and grant
commitments
Total Project Cost
includes Interest During
Construction (IDC)
Debt to be Raised is
equal to the Funding Gap
in Project Financing
Total Project Fund is
equal to the Project Cost
Requirement
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Incorporating IDC in a Project Financing Worksheet
We calculate the equity and grant commitments during the years of construction from the assumptions
Then, we calculate the total project cost which is the sum of all project cost elements and the Interest
During Construction (IDC). Note that IDC cells are left blank at this point, as they are yet ot be
calculated
The Total Fund requirement is made equal to the Total Project Cost requirement
Finally, the Debt to be Raised is made equal to the Funding Gap in that particular year
Initially Promoter Equity is deployed in the
debt equity ratio. Grant is infused only
after Promoter Equity is fully deployed.
Total Funding
Requirement is made
equal to Total Project Cost
Each of the Project Cost
Items are calculated from
the cost assumptions
Total Project Cost
includes Interest During
Construction (IDC)
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Incorporating IDC in a Project Financing Worksheet
The Interest During Construction (IDC) is calculated by multiplying interest rate on the outstanding
debt component and fed to corresponding cost element in project cost schedule
The sum of all the IDCs in each of the years of construction is then linked to the total IDC under
Project Cost break-up.
IDC is calculated and fed into
corresponding row under
project cost schedule
Total IDC is made equal to
sum of all IDC in each of the
years of construction
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Escrow Arrangement
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Escrow Arrangement During
Construction / Operation
Waterfall Mechanism
Insurers
Revenue Proceeds
Statutory bodies
O&M Contractor
Lenders
DSRA/MMR
SPV Co.
Escrow Bank
Fuel Supplier
EPC Contractors
Govt. Bodies
Sponsors
Claims
Taxes
O & M Expenses
Debt
Servicing
Shortfall in DSR
Balance Surplus
Fuel Expenses*
Contract Payments
Shortfall
Escrow Mechanism is critical to the
monitoring & enforcement functions of the
lenders.
All Cash Inflows and Outflows are through
the Escrow A/c. Outflows are permitted
under agreed appropriation of cash in the
escrow account.
All Reserves are maintained as sub-
accounts within the escrow account.
*NA for Road projects
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Charting with Excel modeling revenue recognition
Percentage of completion method
Used when projects cost and revenue can be
reliably estimated
Revenue, expense, and therefore profit, are
recognized based on the percentage completed
Case: An Infrastructure company has undertaken
a project of completing a bridge, construction work
for which is going to continue for the 5 years, and
expected revenue earned at the end of five years
is Rs. 1,000,000,000
The co. is expecting to build 10%, 25%, 25%, 25%
and 15% in each of the years
Completed contract method
Revenue is recognized at the completion as a
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Create Excel Models and Graphs to gain expertise in formulas and graphs
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Cash Distribution and Tranches
ABC Investments and PQR Developers enter into a JV to develop and operate a project having the
following characteristics
Initial Investments: INR 50 Mn
ABC Investment: INR 45 Mn
PQR Investment: INR 5 Mn
Project to be sold at the end of 5
th
Year (Net Profit from Sale: INR 75 Mn)
Cash Flow from Operations as shown in table
Terms and Conditions from Tranching of operating income
ABC will receive 5% non-cumulative preferred return on invested equity (Shortfall not carried over)
After that, PQR will receive 5% non-cumulative preferred return on invested equity
Remaining cash flow from operations to be split 50-50
Terms and Conditions from Tranching of Sale of asset
ABC to receive sufficient capital to earn a min IRR of 12%
After that PQR receives its invested capital
Remaining cash to be split 50-50
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Total Cash generated in the project can be calculated
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Cash Flow Tranches
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ABC cash generation is given
a priority over PQR cash
To ensure that ABC gets min IRR
or 12%, goal seek can be used
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Cash Flow Tranches
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Cash is distributed as per the
schedule decided
IRRs are as per the risk
undertaken
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Thank You
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