Project Finance Modelling

Learn how to master the project finance model structure and design

A variety of colorful glass sheets stacked together creating a rainbow effect

A two-day course

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Download: Course Outline

Preliminary Comments

Review essential elements of 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. Training embraces both perspectives.

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
Importance of model logic flow
Layout of the worksheets within the workbook
Layout of individual worksheets

Modelling Best Practice

There are 8 principles of modelling best practice, and each is addressed progressively throughout training rather than in a formal session. Included are 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
- Use of flags and masks to simplify formulae
- Naming conventions, formatting conventions
- Status worksheet
NW to SE workflow
Modelling efficiency
Circular references:
- Which are permissible and which are not
- Workarounds if the model needs to be audited
Macros:
- The dangers and 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 high degree of 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

From a modelling perspective, there are 4 types of operating costs and 6 characteristics required for capture. In this instance, the Operating Costs worksheet is fundamental to the model as it's the main determinant of cash flow 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's proposed to adapt it to a financial model for power generation projects, 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 work power
- Plant load factor
- Planned outages
- Unscheduled outages
- The heat rate
- Degradation
- Thermal efficiency of fuel
- The carbon content of fuel
- Various other operating costs

Practical 4

Implementing the model in the Free Cash Flow stage

Financing

Because the bank is active across all sectors, many different financing worksheets will be encountered. Each is reviewed and implemented in a series of practicals.

Identifying (and explaining) the elements the model needs to capture:
- Annuity-style amortisation
- Straight Line amortisation
- Sculpted amortisation
- Cash sweeps
- Loan life cover ratio
- Annual debt service cover ratio
- Cashflow lockups

Practicals 5++

Implementing several different styles of financing worksheets – annuity, straight line, sculpted to ADSCR (average debt service coverage ratio), sculpted to LLCR (loan life coverage ratio), and cash sweeps.

Procedures Upon Receiving a Model

Any analysis performed on a model is meaningless if the model itself is flawed or contains material errors. There is no shortcut to model audit and to ensure no errors at all; every unique formula in the model has to be checked. Model Review is a procedure that allows the recipient to assess a model's 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 model 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 between transactions. A well-built model has sitting on top, a single worksheet where the analyst spends all of their time, controlling inputs, observing outputs and driving functionality; scenarios, sensitivities or break-evens. If the analyst ever needs to leave the Analysis worksheet, the model hasn’t been built properly.

Identifying & explaining the elements the model needs to capture:
- Sensitivity analysis
- Break-even analysis
- Scenario analysis

Redcliffe’s course leader 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 training developed and presented over 20+ years.

This expert was called to the English bar having trained as a lawyer at Cambridge and the Middle Temple.
He spent 5 years as a corporate relationship manager in New York and London with American Bank Chase, the world’s largest financier of oil & gas projects. Here, he was exposed to the development of the North Sea projects and petrochemicals.
With 6 years of investment banking in Hong Kong and London (Wardley, the investment bank subsidiary of HSBC), he was primarily involved in mergers and acquisitions and corporate restructurings.
Our specialist spent 6 years as CFO of a public group with a joint head office in the USA and Australia. He was engaged in some 35 acquisitions, over 20 equity raisings and a large number of complex financings, many structured on a limited recourse basis.
For 18 months, he was responsible for the ‘workout’ of a company in severe financial difficulties, appointed as General Manager by KPMG.
He has over two decades of experience dedicated to independent consultancy and financial training. From a consulting perspective, he has primarily specialised in financial modelling, project finance and structuring of power generation, LNG, mining, and petrochemical projects. He has also undertaken project vetting and due diligence work for a range of clients.
This expert conducts training in Loan Documentation, Project Finance, Corporate Finance, Corporate Valuation and M&A.

Participants are expected to have at least a basic understanding of financial modelling in Excel. This skill is adapted to the various problem-solving situations encountered in project finance throughout this session. Skill level is participant-tailored, and following registration, delegates are asked to complete a straightforward, one-page questionnaire. This helps identify current proficiency whilst our training expert adapts practical sessions accordingly.

Training is tailored to your bespoke requirements, ensuring you gain everything required. This course's main objectives ensure an enhanced understanding and proficiency in the subject.

Training fits perfectly across two days, covering all necessary aspects. From modelling of the project's construction phase to the operations (a power generation project is used as the platform for this, the financing, and the Analysis worksheets). Sessions also cover procedures for investigating receipt of a model prepared by others, to verify its integrity.

Importance of the Modelling

Where financing is carried out with limited recourse to the company behind the project, it’s dependent solely on the cash flows generated by the individual project itself. High standards of modelling are now critical and, in particular, are required to test for the volatility of cash flows. It’s not the base case that kills, but the occurrence of conditions other than the base case over the life of the project.

Modelling of the project is the key part of a 3-stage analytical process:

Identification of circumstances in this particular project that could cause cash flow volatility - i.e. risk identification.
Quantification of the cash flow impacts if those risks occur.
Structuring the transaction to safeguard it from the potential occurrence of those risks.

Sessions highlight the model's importance for other purposes, such as determining the optimal financing structure or the feasibility through project valuation.

I got some very helpful tips for creating and navigating dashboards for my future financial model.
The training was well handled considering its virtual nature and how hands-on financial modelling can be. I intend to apply the knowledge I gained in my financial modelling engagements as I work in the Valuation & Modelling Team. The knowledge I gained is very applicable to my day-to-day work.

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