Financing the Deal

Question 1

What are the 3 key consideration regarding the financing of the project?

Answer 1

• bonds
• loan
• equity

Question 2

Key financial ratio categories

Answer 2

• Liquidity ratio
• Debt ratio: a high ratio of debt is essence of PF
• Profitability ratio
• Covering ratio

Question 3

What is the lenders view on leverage?

Answer 3

• level of debt to be raised is limited if a project has noch project agreement that provides reasonable certainty of revenues and hence cash flow cover for debt service
• level of debt to be raised is limited if a project is in a high-risk country
• infrastructure project with project agreement and no usage risk: 90:10
• infrastructure project with usage risk: 80:20
• merchant power plant project (no off-take contract/ no price hedging): 50:50

Question 4

Sources and uses of cash

Answer 4

Sources: operations/ sale of assets/ refinancing
Uses: repayment of debt, redemption of equity, purchase of fixed assets, net loss from operations, increase WC

Question 5

Other typical ratios:

Answer 5

• EBITDA-to-interest cover ratio: lenders expect 1.5 over loan life
• Annual debt service cover ratio: assesses project company’s ability to service its debt from its annual cash flows (1.2 no usage risk; 1.4 usage risk; 2.0 merchant power plant)
• Loan life cover ratio: dynamic project credit quality indicator to estimate the borrower’s repayment ability

Question 6

What is a Feasibility Study and what is its key part?

Answer 6

• analyzes potential of the project
• analyzes variables
• covers all applicable issues and risks
• has to be independently confirmed
• includes financial projections

key part: financial model
Due Diligence: technical, CF models, Legal, insurances (careful inspection and analysis by external consultants)

Question 7

Describe the uses and structure of the financial model.

Answer 7

• uses: initial evaluation of the project’s financial aspects quantifying critical issues in the finance negotiation
• flexible finance model tool is a key element for any project advisory
• structure: financial statements/ ratios/ summary

Question 8

What is a sensitivity analysis and what is its purpose?

Answer 8

• assess the effect of potential impacts on key variables of the financial model
• purpose: test ability of the project’s cash flows to unexpected developments and identify possible corrective avenues
• typically contain standard and downside scenarios

Question 9

Explain the key Elements of Structured Finance (Tranching; credit enhancements)

Answer 9

S.F. is a sector of Finance to help transfer risk and to avoid laws using complex legal corporate entities.

• S.F. makes use of securitization to create the pools of assets that are used in the creation of the end product financial instruments, often involving:
• Tranching: create different investment classes for securities; divert cfs to various investor groups
• credit enhancement: is needed creating a security that has a higher rating than the issuing company (e.g. credit enhancement of bonds to get a better rating)

Question 10

Debt-Equity Ratio

Answer 10

• high ratio of debt is the essence of pf
• within prudent limits, therefore, sponsors wish to limit the amount of equity they invest in a project, to improve their own return, and thus to raise the maximum level of debt
• the difference btw. the maximum level of debt a project can raise and project costs determines amount of equity required
• debt ceiling: lenders’ CF cover requirements/ lenders’ view on leverage

Question 11

Difference between unsecured and secured senior loan

Answer 11

• unsecured: basically depend on borrower’s creditworthiness; include ratio/ negative and affirmative covenants
• secured: the assets securing the loan have value as collateral; fully secured: value of assets equals or exceeds the amount borrowed