Project Finance Modelling

The key objective is to take participants with at least a basic understanding of the use of financial modelling in excel, but adapt that skill to the various problem-solving situations encountered in project finance.  It is important to adapt the project finance modelling course to the skill level of the participants on the particular course – so following registration, each participant will be asked to complete a one-page questionnaire which identifies the current level of proficiency in financial modelling, and the practical work is then adapted accordingly.

Preliminary Comments

• A review of the essential elements of a project financing structures;
• The role of the model within the overall process;
• Project Financing risk and its management; 

Model Design

Financiers focus on sculpted debt serviceability whilst Sponsors focus on the valuation – the Sponsor IRR that the project generates.  The course will embrace both perspectives.

different analytical purposes = different methods of modelling implementation

• different analytical purposes = different methods of modelling implementation
  • valuation and feasibility models;
  • finance structuring models;
  • statistical probability models;
  • data manipulation models.
• designing the Analysis Worksheet;
• determining the functionality of the model;
• structuring how inputs will be accessed and controlled;
• the importance of the logic flow through the model;
• the layout of the worksheets within the workbook;
• the layout of the individual worksheets;     

Modelling Best Practice

There are 8 principles of modelling best practice.  The different principles will be addressed progressively throughout the programme as opposed to a formal session, with illustrations of the problems if the principles are not respected.

• consistent timelines – how to protect;
• consistent formulae across rows;
• hard coding in formulae;
• usability
  • organisation and accessibility of model inputs;
  • organisation of summary outputs;
  • the use of flags and masks to simplify formulae;
  • naming conventions, formatting conventions;
  • the Status worksheet;
• NW to SE workflow;
• modelling efficiency
• Circular references:
  • which are permissible and which not;
  • workarounds if the model needs to be audited;
• Macros:
  • the dangers and the precautions that should be taken;
  • editing, to minimise complications;
  • implementing macros for common purposes;
  • looping macros; 

Practical 1

• the creation and formatting of the worksheets;
• setting up timelines and flags; 

Construction Phase

A critical worksheet within a project financing financial model.  However, there is a large commonality in its structure across all sectors.

• identifying (and explaining) the elements the model needs to capture:
  • cost overruns;
  • delays;
  • variation orders;
  • staged payments;
  • maintenance and refurbishment cycle;
  • liquidated damages;
  • performance bonds;
  • retentions;
  • multiple currencies;
  • the financing structure;
  • multiple tranche drawdowns;
  • interest during construction;
  • standby financings 

Practical 2

• implementing the construction worksheet;

Volatility Modelling Explained 

There are 4 types of operating cost from a modelling perspective and 6 characteristics that need to be captured.  The Operating Costs worksheet is the most important in the model because it is the main determinant of cashflow volatility

• Project dynamics;
• Modelling of cost structures;
• Quantification of risk; 

Practical 3

• Modelling of Operating Costs 

Generation, Revenue and Operating Costs

Having dealt with operating costs in a generic context, it is proposed to adapt it to a financial model for power generation project, since power generation is the largest sector to use project financing structures.

• identifying (and explaining) the elements the model needs to capture:
  • rated capacity and internal works power;
  • plant load factor;
  • planned outages
  • unscheduled outages;
  • the heat rate;
  • degradation;
  • thermal efficiency of fuel;
  • carbon content of fuel;
  • various other operating costs 

Practical 4

• implementing the model to Free Cash Flow stage; 

Financing

Because the bank is active across all sectors, a number of different financing worksheets will be encountered.  We review each and then implement them in a series of practicals.

• identifying (and explaining) the elements the model needs to capture:
  • annuity-style amortisation;
  • straightline amortisation;
  • sculpted amortisation;
  • cash sweeps
  • loan life cover ratio
  • annual debt service cover ratio
  • cashflow lockups 

Practicals 5++

• Implementing several different styles of financing worksheet – annuity, straightline, sculpted to ADSCR (average debt service coverage ratio), sculpted to LLCR (loan life coverage ratio), cash sweeps.

Procedures Upon Receiving a Model 

Any analysis performed on a model is nonsense if the model itself is nonsense or if it has material errors.  There is no shortcut to model audit - to ensure that there are no errors at all - every unique formula in the model would have to be checked.  But Model Review is a procedure that allows a recipient to discover if the model has credibility within a maximum time-frame of 30-40 minutes.

• The recommended layout and inter-relationship of worksheets for a typical project finance model;
• shortcuts to determine a received models architecture;
• the use of audit software:
  • detecting breaches of excel best practice rules;
  • listing of formulas and cell references that need checking;
• tracing the logic flow; 

Analysis

Models are built to be subjected to analysis.  The precise detail and nature of the analysis will change from transaction to transaction.  A well-built model has sitting on top of it a single worksheet where the analyst spends all of his/her time, controlling the inputs, observing the outputs and driving the functionality – scenarios, sensitivities or break-evens.  If the analyst ever needs to leave the Analysis worksheet the model hasn’t been built properly.

• identifying (and explaining) the elements the model needs to capture:
  • sensitivity analysis;
  • breakeven analysis;
  • scenario analysis.

The trainer has a unique blend of experience in Law, Corporate Banking, Investment Banking, Corporate Financial Management, General Project Financing Management and Workout.  He has gained a worldwide reputation for the quality and depth of his training courses which have been developed and presented over 20+ years.

• He trained as a lawyer at Cambridge and the Middle Temple and was called to the English bar.
• 5 years with an American bank (Chase), the world’s largest financier of oil & gas projects, as a corporate relationship manager in New York and London. In the 5 years in this role, he was exposed to the development of the North Sea projects and petrochemicals.
• 6 years: investment banking in Hong Kong and London (Wardley – the investment bank subsidiary of HSBC), primarily involved in mergers and acquisitions and corporate restructurings.
• 6 years: CFO of a public group with a joint head office in the United States and Australia. In this role he was engaged in some 35 acquisitions, over 20 equity raisings and a large number of complex financings, many of them structured on a limited recourse basis;
• 18 months: responsible for the ‘workout’ of a company in severe financial difficulties, being appointed as General Manager by KPMG.
• For the past 20 years, he has acted as an independent consultant and financial trainer. On the consulting side, he has been primarily involved in the financial modelling project finance and structuring of power generation, LNG, mining, and petrochemical projects, as well as undertaking project vetting for a number of clients.  On the training side he conducts training courses in Financial Modelling for project finance, Loan Documentation, Project Finance and Corporate Finance, Corporate Valuation and M&A.

The project finance modelling training course is fairly compact, covering all aspects from the modelling of the construction phase of the project, the operations (a power generation project is used as the platform for this, the financing, and the Analysis worksheets. The project finance modelling course also covers the procedures for investigating the receipt of a model prepared by others, to verify its integrity.

The Importance of the Modelling

Where the financing is done with limited recourse to the company behind the project, the financing is dependent solely on the cashflows generated by the individual project itself.  It becomes critical that the modelling is done to a high standard.  In particular, the model will need to test for the volatility of the cashflows.  It is not the base case that kills, but the occurrence of conditions other than the base case over the life of the project.

The modelling of the project is the key part of the 3-stage analytical process:

1. Identification of the circumstances in this particular project that could cause cashflow volatility - i.e risk identification;
2. Quantification of the cashflow impact in the event that those risks would occur;
3. Structuring the transaction to safeguard it from the potential occurrence of those risks.

In addition, the model may be important for other purposes, for example, to determine the optimal financing structure, or to determine the feasibility through valuation of the project;