project finance analyst

project finance analyst

Advanced Techniques in Project Finance Modelling

1. Introduction to Project Finance Modelling

The full debt project finance model is presented in spreadsheet format. The model has been developed to demonstrate several advanced project finance issues and includes comprehensive corporate tools, debt sizing and sculpting flexibility, project cash flow analysis, and debt service cover and constant amortization financing structures. The model is designed to enable practitioners to illustrate effects and trade-offs of these and other advanced project finance mechanisms. The introduction to this document includes a full table of contents. The topics covered in this document include the following terms: debt service reserve account, DSCR, interest during construction, the application of tail valuation principles to a corporate case, sinking funds and debt, the application of value to the creditor’s perception of risk, and the average interest rate formula.

2. Key Concepts and Principles in Project Finance

A project finance model is a very good example of a financial model. If built correctly and presented in the right way, it is possible to show why a project is being conducted, why it is set up in a certain way, what the critical points are, how it performs over time, and to justify how the project is financed and the risk and return of all the involved agents. It all starts with what is called the Information Memorandum (IM). The IM contains all the necessary information to start and build a project finance model, such as project description, historical operational performance, construction and operations budget, debt sizing and requirements, and the key contracts, such as the EPC and the operations contract. The project description should consider the market conditions and the technical approach. The historical operational performance will help understand project revenues and expenses during project operations. Both the construction and operations budget are relevant for debt sizing and requirements. Lastly, the EPC and operations contract are essential for a comprehensive project risk allocation assessment. With this information, it is possible to understand what the project is, how it has been set up, what its key risks are, and how they are solved or mitigated.

This article will explain some key concepts and principles in project finance and how they are applied in project finance modelling. All these concepts and principles have a direct impact on project finance modelling. It is very important to be aware of their relevance and how, via a financial model, the influence that key project parameters have on the risks and performance of a project finance transaction. With the information that a good financial model provides, further analysis can be done to allow one to further understand and verify the results.

A project finance model is a very good example of a financial model. If built correctly and presented in the right way, it is possible to justify: a) What is the problem that needs to be solved? b) How can it be executed? c) What project parameters are the most valuable and how do they influence risk and performance? d) When the project becomes operational, forecast operational performance.

3. Advanced Financial Modelling Techniques for Project Evaluation

This proposed forecasting model is intended to aid an organization within their structured project cycle and to assist them in their analysis. It has involved a good deal of thought which presents the data into meaningful formats. It is envisaged that some forms may surprise and at times reject the request by the user of the form, but the user would thus consider the implications of this particular form and then once their thought processes have been concluded, they could thus understand all the implications contained within the structure. It, therefore, acts as a generic framework of approach providing various views and outlines of possibilities. It is an educational tool designed to assist those within the organization in their structuring thought processes. Similarly, depending on the type of project and the particular industry the user comes from, some of the information can be deduced and replaced with other in more meaningful and ease of data entry format. The structure will be fairly rigid but also quite able to flex as necessary with the introduction of comments, special entries, and the subsequent restructuring, as the user requests the action.

Following the scrambling not only to quantify the cost overruns but also to try and quantify the implications of the overruns and hence decide upon any adjustment to the risk factors that would normally adjust the hurdle rates situated within the risk premium. In addition, the overruns could result in some other structured implications such as loan covenants and loan documentation problems. Without a fully structured model, the problems compounds. The model proposed here foresees many of the eventualities that can occur in the life of the project. As the Law of Morphy implies, unless one’s hands are prepared in the event of the implementation of the worst-case scenario one is going to be in a lot of trouble. At no stage throughout negotiations with the promote; the syndication stage the monitored stage and even the re-negotiation stage should the planner be nominally unprotected. At every stage losses are likely to be incurred, but a good structured model can at least ameliorate them.

4. Risk Analysis and Sensitivity Testing in Project Finance Modelling

Risk Analysis and Risk Matrix: “Risk analysis” can be interpreted in various ways. According to the Association for the Advancement of Cost Engineering (AACE), “cost engineering is the complete process of cost estimating, value engineering, and risk analysis,” which means that risk analysis is just one part of the cost estimating process. A standard classification of engineering risk is contained in the reference book by R. Taylor. In his book, seven categories of engineering risk are considered: cost estimating risk, cost escalation risk, contractor performance risk, scope of supply risk, contract terms risk, change order risk, and owner construction risk.

Introduction: Project finance models are generally used to evaluate the risks inherent in funding a project. The qualitative and quantitative risk assessment provided by project finance models, as well as the choice of variables in these models, are crucial to project success. A project finance modeling tool can be used to determine the sensitivity, that is, the impact of a number of scenarios and key drivers, as well as project returns and risk pricing. Considering how to assess the impact of project ingredients on the project results in changing selected items to assess the business’ reaction to changes in prices or rates.

5. Case Studies and Real-world Applications

Case studies are frequently updated to reflect the latest versions of MS Excel, the standard spreadsheet. Any case study demonstrates one or more of a project’s contractual future cash flows, the evolving impact of new external parameters, what happens if anything happens differently, model design to reflect complex structural factors, the use of conditional project completion, the importance of properly allocating and defining the required cash injection, an integrated scheduling model – with macro analysis and scheme calculation, and the importance of risk modeling in negotiations.

In this section, we walk through each phase of the project finance modeling process that has been discussed and apply that phase in a relevant or real-world project. The goal is to illustrate a specific aspect of our model that we have talked about and discuss how that treatment might change in general by illustrating our specific model.

This section brings together the various modeling techniques covered in this module and applies them to real-world projects. It contains a series of fully worked case studies based on the modeling techniques presented earlier in the material. The purpose of the case studies is to help reinforce key concepts developed in this module and to help you become familiar with some specific model applications. Real projects are used for this purpose.