Lenders Perspective Flashcards
Lender approach (2)
- probability of cash flow under best, worst, and base case
- identification and mitigation of risk
Lender criteria (4)
- allocation of risk
- government host support
- project technology is proven and reliable
- long term contract from creditworthy entities
Loan facilities (5)
- 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
Water fall (8)
- 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
DSCR (2)
- debt service coverage ratio
- cash flow available for debt/interest + principle
Interest (1)
- change over time and does not depend on SPV
Spread (2)
- adjusted to reflect the specific risk and debt component
- add on to compensate lender for for risk of lending to project/SPV
Project specific element driving higher spread (4)
- more SPV, lower rating
- less control
- longer term
- more loan, less guarantee
Beyond project element driving higher spread (2)
- higher specific spread, higher risk
- more uncertainty
Impact of spread (2)
- longer tenor, higher yield
- lower credit, higher spread
Interest rate swap (2)
- floating rate to fixed rate
- hedge interest rate on long term agreement
Common cause of project failure (3)
- project cost overrun
- technical failure
- loss of competitive market position
Lender approach to risk mitigation (3)
- market reputation
- ability on working with host government
- manage ongoing project operation and maintenance
Construction and completion risk (2)
risk: project not completed on schedule, permitting issue
mitigant: EPC contract, completion guarantee
Technology and operation risk (2)
risk: project won’t operate, technology failure
mitigant: experience OM contractor, testing post-completion
Feedstock/input risk (2)
risk: quality and cost, supply infrastructure
mitigant: quality assurance, and experience supplier
Lender approach to risk mitigation: off take (2)
- legal due diligence
- take or pay or take and pay
Political risk cover (2)
- participate in IFC loan program
- loan guarantee on export credit agencies
Pricing risk component (4)
- risk allocation
- project cost
- technical feasibility
- financial feasibility
Project finance: pricing the risk (9)
- 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
Project loan covenant (5)
- 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)
DSCR (debt service coverage ratio) (4)
- < 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
DSRA (debt service reserve account) (2)
- usual when DSCR > 1 maintain ongoing target
- distress when DSCR < 1 shortfall
LLCR (loan life coverage ratio) (2)
- ability of borrower to repay outstanding loan
- NPV / debt outstanding
Coverage ratio (1)
- relate to operating free cash of SPV with its anticipated level of cash disbursement for debt (except net debt/EBITDA)
Inter-creditor agreement (3)
- accelerating maturity of loan
- coordinating priority for loan repayment
- establishing loss sharing
Islamic finance (3)
- Ijara: lease
- Mudaraba: sale markup
- Sukuk: bond partial ownership share
