3 STAGES OF PROJECT FINANCE TRANSACTION

Project finance

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 STAGES OF A PROJECT FINANCE TRANSACTION

  1. 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.
  1. 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.

 

  1. 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

 

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