project finance model template

project finance model template

Developing a Comprehensive Project Finance Model Template

1. Introduction to Project Finance Models

This makes project finance highly complicated and more sophisticated when compared to corporate finance models. The project finance model is tailor-made and project-specific, and hence the implementation of standards and best practices from modeling tools and techniques is highly necessary. The project finance model enables the sponsor to make informed decisions and determines whether the project is economically viable and financially rewarding under all likely market conditions. The contractual framework would identify the risks, allocate the risks, and include various risk-mitigating factors to achieve the overall financial feasibility. The contractual framework and the project finance model together would significantly enhance the creditworthiness, utmost security to the lenders, and utmost fairness to the sponsors. The risk, return, and structure of project finance, the complexity of the project finance structure, and the project assets are unique makes project finance models, a characteristic that is essential for long-term projects like infrastructure and energy.

Large energy business projects, mining projects, infrastructure, aircraft, telecommunications, and many other projects in emerging markets depended upon the successful development and implementation of project finance, which evolved to be the main corporate finance model for large capital-intensive projects globally over the last 50 years. Unlike the corporate finance models that focus on cash flows from business, project finance models are structured such that the income generated by the project goes straight to pay off the debt, and the debt is non-recourse, which safeguards the risks for both the lenders and the sponsors, as per the terms of the contractual agreements.

1. Introduction to project finance models Project finance is one of the most lucrative and profitable models of corporate finance that involves a higher degree of risk but exceptional upside potential, which is incomparable. Project finance models are a strong assertion of the applicability of the Modigliani-Miller theorem to large capital-intensive projects, where the cost of equity interest and the debt size are both immense. It is under such conditions that the use of project finance becomes essential, which can significantly lower the cost of capital and improve the financial feasibility of the project.

Developing a comprehensive project finance model template

2. Key Components of a Project Finance Model

The model, and all of the settings in the model, are generally represented and evaluated on an annual time period basis (possibly semi-annually). Special accounting rules associated with taxes, depreciation, working capital, construction permitting, financial intermediary fees, and pensions appear on a monthly or sometimes quarterly basis. These are then aggregated into annual cells. There is a difference between using monthly, yearly, and annual periods. Depending upon the cash flows in any given period, certain financial products may respond to changes in default risk, as well as credit risk. The most common example of this is the discounted value of additional contributions to the equity investor by a reduction in the rate of return and the additional amounts committed to be contributed until project commissioning.

The project finance model is the foundation for any financial analysis associated with the development and financing of projects. This model is then used as the basis for making three categories of analysis: the business model itself and the returns for the equity investors and lenders to the project. The term “model” is used in a very specific, highly-functional assemblage of worksheets that assist in structuring and evaluating a model transaction. The big question is, “Can I use the model to make a decision?” Each and every section in the project finance model has to be useful and capable of communicating with the other sections. However, not all sections have to be used in every deal, so the options of placing the lenders in the driver’s seat when it comes to allocation of risks and rewards become more numerous and complex.

3. Best Practices for Building a Robust Project Finance Model

A good model itself is not necessarily the final work, but the effort of building it gets the team to where it really needs to be in their understanding of all the variables that come into play in getting to a successful project outcome. The real benefit of doing the model lies in the collaborative, shared process that comes about while the financial model is being built. Many a project has been saved by the crew that had to build the model and in so doing, ended up doing the figures and working out the commitments free from misinformation that is part of the backbone of most gang-ups.

When building a project finance model, it is vital to avoid these common pitfalls that can erode the margin of safety in a project’s financial plan. The model must be comprehensive and it must include the capabilities for dealing with management’s real business issues. The plan must be credible, and that means it passes the tests of meeting debt terms and North American market standards for financial models that will be used in the process of raising capital. The model must be accurate, and that means it is built to easily incorporate real data as it becomes available. This chapter will help you address these issues.

4. Case Studies and Examples of Successful Project Finance Models

Traditionally, the historical performance and financial projections of the company are made public. These are subjected to numerous biases and a high degree of subjectivity, making forecasting an iterative procedure, albeit one based on accepted accounting principles. Erroneous, well-intended, forecast results for the project’s earnings, cash flows and balance sheet have been known to result in irrational project pricing, putting buyers and investors at unacceptable levels of risk. This is not how project financing is supposed to work. If the use of project finance is to continue to grow, the capacity of the global infrastructure to finance transactions cannot be placed at unacceptable risk. The solution lies in the knowledge and expertise that finance professionals specializing in project finance can bring to the task.

The importance of financial modeling in project finance cannot be overemphasized. It presents, in the form of a spreadsheet, the future prospects and performance of the company in the financial language. It also highlights the key business drivers and how they are influenced by numerous interdependent, and often conflicting, assumptions. Even more intimately involved in conflict is the arithmetic that underlies the fiscal optimization of the returns available to the proponent, his shareholders and lenders, which become critical issues in project finance during both the development and operational phases of the business.

5. Conclusion and Future Trends in Project Finance Modeling

The paper is not saying that there is no standard commercial structure or method of project finance! There are. The project representations, undertakings, commercial structures, and contractual relationships will be peculiar to each project. A good project finance model will cater to the individuality of every single project while providing distinct economic and financial trends characteristic of the particular market condition in which the project is being developed. We provided reasons for building a model from scratch and then introduced the model to the reader with an example of how to build and construct the financial model in Excel software package. Finally, we conclude by looking at future trends and developments which would continue to shape the face of project finance going forward.

In this conference paper, we develop a comprehensive and complete project finance model template. We start by discussing the characteristics of project finance as a mode of infrastructure finance. The significance of power as a key infrastructure in economic development is highlighted. We discuss the structure of a typical project and highlight key risks associated with projects which have to be identified and allocated appropriately. How power projects are structured remains fundamentally the same and the discussion here applies equally to any other public-private partnership (PPP) project or infrastructure concession. Moving around and within the financial model one is able to emphasize how differences in project structure reflect in the overall risk profile of the project. It is these differences which justify variations in commercial structure and debt pricing in finance.