Modeling Project Finance Structures

Modeling Project Finance Structures

When To Use

• Modeling a non-recourse or limited-recourse project financing (power plants, toll roads, LNG terminals, renewables, PPP/PFI concessions)
• Sizing senior debt tranches against projected cash flows and DSCR / LLCR covenants
• Structuring construction-period draws, equity contributions, and IDC capitalization
• Evaluating sculpted vs. level debt repayment profiles
• Running sensitivities for lender presentations, credit committee packages, or investment committee memos
• Assessing refinancing scenarios or mini-perm bullet structures

Inputs To Gather

• Project parameters: capacity/throughput, construction timeline (months), COD target, concession term or asset useful life
• Capital cost budget: EPC contract price, owner's costs, contingency, development fees, financing fees, interest during construction
• Revenue assumptions: offtake/PPA price and escalation, availability/capacity factor, merchant price curves if applicable [VERIFY contracted vs. merchant split]
• Operating cost assumptions: fixed O&M, variable O&M, fuel/feedstock costs, insurance, land lease, management fees, major maintenance reserve schedule
• Tax inputs: depreciation method and schedule (MACRS, straight-line), tax rate, ITC/PTC eligibility [VERIFY jurisdiction-specific incentives], tax equity structure if relevant
• Debt terms: tenor, pricing (margin + base rate), commitment fee, upfront fees, DSCR lock-up and default levels, cash sweep percentage, DSRA sizing (typically 6-month debt service), maintenance capex reserve
• Equity return targets: target levered IRR, minimum cash-on-cash yield, distribution waterfall tiers if multiple equity classes

Workflow

1. Set up the timeline and flags

   • Define semi-annual or quarterly periods from financial close through debt maturity and concession end
   • Create binary flags for construction, ramp-up, operations, and tail periods
   • Map construction draw schedule against EPC milestone payments

2. Build the construction-period waterfall

   • Model equity contributions and debt draws pro rata or equity-first per the term sheet
   • Capitalize interest during construction (IDC) and commitment fees into the loan balance
   • Track cumulative uses and sources; confirm total sources = total uses at COD

3. Model operating revenue

   • Calculate gross revenue from contracted offtake quantities × price × escalation
   • Apply availability/curtailment deductions
   • If merchant exposure exists, layer in price scenarios (base, low, high)

4. Model operating expenses and taxes

   • Project fixed and variable O&M with escalation indices
   • Build depreciation schedule and compute taxable income
   • Apply NOL carryforwards if early-year losses exist; compute cash taxes payable [VERIFY NOL rules per jurisdiction]

5. Calculate Cash Flow Available for Debt Service (CFADS)

   • CFADS = Revenue − Opex − Cash Taxes − Working Capital Changes − Maintenance Capex Reserve Contributions
   • Confirm CFADS excludes financing items (interest, principal, distributions)

6. Size and sculpt debt repayment

   • For sculpted repayment: solve each period's principal so that DSCR = target (e.g., 1.35×) across all periods
   • For level repayment: calculate annuity-based debt service; verify DSCR remains above minimum covenant (e.g., 1.20×)
   • Compute LLCR (NPV of CFADS over remaining debt life ÷ outstanding debt) and confirm ≥ lender threshold (typically 1.20×–1.30×)
   • Size DSRA funding requirement and model periodic top-ups/releases

7. Build the equity distribution waterfall

   • Apply lock-up DSCR test: if trailing/forward DSCR < lock-up level, trap cash
   • Calculate distributions after debt service, reserve funding, and cash sweep (if applicable)
   • Compute levered equity IRR and cash-on-cash multiples (MOIC)

8. Run sensitivities and scenarios

   • Single-variable: construction delay (+3/+6 months), cost overrun (+10%/+20%), revenue shortfall (−10%/−20%), interest rate stress (+100/+200 bps)
   • Breakeven analysis: find the revenue level or cost level where DSCR = 1.00×
   • Downside scenario: combine construction delay + cost overrun + low revenue; confirm covenant compliance or identify cash shortfall

Output

• Summary page: project IRR, equity IRR, MOIC, average DSCR, minimum DSCR, LLCR at COD, maximum gearing, payback period
• Sources & uses table: construction period and permanent capital structure
• Annual/semi-annual cash flow statement: revenue through distributions, with CFADS and DSCR clearly shown per period
• Debt schedule: draws, repayments (sculpted or level), outstanding balance, interest, fees, DSRA balance
• Sensitivity tables: tornado chart inputs with equity IRR and min DSCR as outputs
• Assumptions log: every input with source reference, date, and [VERIFY] flags for unconfirmed items

Quality Checks

• Sources = Uses in construction waterfall (zero variance)
• DSCR never drops below covenant default level in base case; identify periods where DSCR is within 0.10× of lock-up
• LLCR ≥ threshold at every calculation date
• Cash balance never goes negative in any period under base case
• Sum of all debt draws = committed facility amount; no over-draw
• Equity IRR circular reference resolved (use macro iteration or copy-paste values approach)
• Tax depreciation fully absorbed within concession/useful life; no phantom deductions after asset is fully depreciated
• Escalation indices applied consistently across revenue and cost lines [VERIFY index source and base year]
• Model balances: closing cash = opening cash + net cash flow in every period