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FNCE 559 > Lenders Perspective > Flashcards

Lenders Perspective Flashcards

1
Q

Lender approach (2)

A
  • probability of cash flow under best, worst, and base case

- identification and mitigation of risk

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2
Q

Lender criteria (4)

A
  • allocation of risk
  • government host support
  • project technology is proven and reliable
  • long term contract from creditworthy entities
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3
Q

Loan facilities (5)

A
  • working capital: usually place for life project
  • stand by: provide in case of cash shortfall
  • VAT: fund VAT credit during construction phase
  • construction loan (base): provide the country bank with sponsor guarantee support
  • permanent project loan: once project has reach all condition precedent
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4
Q

Water fall (8)

A
  • revenue stream from offtakers and users
  • primary recipient account
  • operating account
  • tax account
  • debt service account reserved: debt principal + interest
  • other reserved account: allocated funds
  • amount of available debt repayment
  • shareholder distribution: pay dividend
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5
Q

DSCR (2)

A
  • debt service coverage ratio

- cash flow available for debt/interest + principle

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6
Q

Interest (1)

A
  • change over time and does not depend on SPV
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7
Q

Spread (2)

A
  • adjusted to reflect the specific risk and debt component

- add on to compensate lender for for risk of lending to project/SPV

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8
Q

Project specific element driving higher spread (4)

A
  • more SPV, lower rating
  • less control
  • longer term
  • more loan, less guarantee
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9
Q

Beyond project element driving higher spread (2)

A
  • higher specific spread, higher risk

- more uncertainty

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10
Q

Impact of spread (2)

A
  • longer tenor, higher yield

- lower credit, higher spread

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11
Q

Interest rate swap (2)

A
  • floating rate to fixed rate

- hedge interest rate on long term agreement

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12
Q

Common cause of project failure (3)

A
  • project cost overrun
  • technical failure
  • loss of competitive market position
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13
Q

Lender approach to risk mitigation (3)

A
  • market reputation
  • ability on working with host government
  • manage ongoing project operation and maintenance
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14
Q

Construction and completion risk (2)

A

risk: project not completed on schedule, permitting issue
mitigant: EPC contract, completion guarantee

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15
Q

Technology and operation risk (2)

A

risk: project won’t operate, technology failure
mitigant: experience OM contractor, testing post-completion

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16
Q

Feedstock/input risk (2)

A

risk: quality and cost, supply infrastructure
mitigant: quality assurance, and experience supplier

17
Q

Lender approach to risk mitigation: off take (2)

A
  • legal due diligence

- take or pay or take and pay

18
Q

Political risk cover (2)

A
  • participate in IFC loan program

- loan guarantee on export credit agencies

19
Q

Pricing risk component (4)

A
  • risk allocation
  • project cost
  • technical feasibility
  • financial feasibility
20
Q

Project finance: pricing the risk (9)

A
  • build financial model
  • complete due diligences
  • identify worst case
  • set debt amount to achieve min ADCSR
  • fine tune repayment profit
  • set model assumption to base case
  • determine actual ratio achieve under base base
  • use ratio for debt resizing
  • close
21
Q

Project loan covenant (5)

A
  • reserve account
  • does not pay a dividend
  • lock up: senior lender prevent equity distribution
  • lender control inflow and outflow of SPV
  • cash sweep or debt sweep: excess cash flow to pay down outstanding debt rather than distribution to its shareholder (minimize credit risk)
22
Q

DSCR (debt service coverage ratio) (4)

A
  • < 1 not enough cash to debt service
  • ability to pay debt in particular year
  • EBITDA - Working capital - VAT - TAX - CAPEX + financial withdrawal = cash flow available for debt
  • interest loan - commitment fee - agency fee - capital repayment = debt service
23
Q

DSRA (debt service reserve account) (2)

A
  • usual when DSCR > 1 maintain ongoing target

- distress when DSCR < 1 shortfall

24
Q

LLCR (loan life coverage ratio) (2)

A
  • ability of borrower to repay outstanding loan

- NPV / debt outstanding

25
Q

Coverage ratio (1)

A
  • relate to operating free cash of SPV with its anticipated level of cash disbursement for debt (except net debt/EBITDA)
26
Q

Inter-creditor agreement (3)

A
  • accelerating maturity of loan
  • coordinating priority for loan repayment
  • establishing loss sharing
27
Q

Islamic finance (3)

A
  • Ijara: lease
  • Mudaraba: sale markup
  • Sukuk: bond partial ownership share

FNCE 559 (7 decks)

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