STAGES OF A PROJECT FINANCE TRANSACTION
- BID STAGE:
Objective:
The bid stage involves project sponsors preparing and submitting bids. It’s a complex process where negotiations with contractors, lenders, and equipment testing occur under tight deadlines.
Financial Model’s Role:
Inputs:
- Sponsor IRR is an input, influencing the bid tariff.
- Debt Service Coverage Ratio (DSCR) serves as an input during the evaluation of debt offers.
Outputs:
- Bid tariff is a critical output, representing the project price.
- Leverage is an output, calculated based on DSCR and debt-sizing metrics.
Dynamic Aspect:
- The model assesses changes in costs, debt structures, and variables’ impact on the bid tariff.
- Sponsor IRR is held constant while the model determines its effect on the bid price.
- POST BID:
Objective:
After bid submissions, the preferred bidder is appointed, marking a shift to a more stabilized phase where project details become relatively fixed.
Financial Model’s Role:
Inputs:
- Tariff is an input, and it is fixed post-bid, and the model assesses changes in equity IRR due to variations in project costs and other parameters.
- Debt Service Coverage Ratio (DSCR) serves as an input as debt offers are evaluated.
Outputs:
- Equity IRR is a crucial output, adjusting as project parameters change.
- Leverage remains an output as the debt package is finalized with selected lenders.
- POST FINANCIAL CLOSE:
Objective:
The project reaches financial close, finalizing the debt package, executing interest rate swaps, and settling drawdown profiles.
Financial Model’s Role:
Inputs:
- Tariff is an input and it is fixed.
- With the debt package fixed, project leverage becomes an input.
Outputs:
- Cover ratios become critical outputs, indicating project performance against debt obligations.
- Equity IRR is an output.
Key things to note regarding the Financial Model
- The Project Finance model must be agile, seamlessly transitioning between operational modes.
- Flexibility is essential for accurate and relevant analysis at each transaction stage.
- Clear identification of sensitivity analysis phases (pre-bid, post-bid/pre-financial close, post-financial close) is imperative.
Conclusion:
A dynamic and adaptable financial model is the cornerstone of a successful Project Finance transaction, providing critical insights and analysis at every stage of the project’s financial lifecycle. Click on this link https://school.bfiinsights.com/project-finance-school/ to learn more about project finance
