Project Finance Modelling and the

Corona Virus
 Contents
1. Overview of Corona Virus Issues in Project
Finance
2. Scenario Analysis and Adding Shock Period
to Model with Flags and Use Monthly Timing
3. Use of the PLCR in Credit Analysis Measure
Potential for Restructuring
4. Cash Flow Sweeps in New Transactions and
Incentives in Cash Sweeps
5. Modelling Mechanics and Importance of
Modelling Defaults and Repayment of
Default in Models
2
 General Project Financing Ideas
• Structure the Model According to Financial Theory
• WACC is not Relevant with Changing Risk and
Changing Capital Structure
• Financing is a Big Driver of Value – Like a Stamp of
Approval in Your Passport
• Value Measure is IRR. Do Think of IRR as
Discount Rate that Makes NPV = 0. Think of it as
Growth Rate
• Credit Analysis with DSCR, LLCR and PLCR
• Structuring and Sculpting in Analysis versus Risk
Analysis with Models

3
 Project Finance Concepts and Modelling

• One of the Best Ways to Learn

Project Finance Ideas is Working
Through a Model from A-Z

4
Other Reason for Learning Modelling – Hell Interviews

• You may have an interview from

hell when they lock you in a room
and ask you to make a model

5
 Examples of Potential Issues for Project Finance

• Loss of Revenues from Toll Roads, Railways,

Airports and even hospitals with output-based
cash flow
• Commodity Price Issues (Oil and Gas Prices) and
Reserve Based Loans
• Delay in Construction and Liquidated Damages
with Force Majure
• Problems with Off-taker Credit and Ability to Pay
• General Measurement of Assets (Corporation as
Portfolio of Assets)

6
Illustration of Completed Model

7
 Time Series from 2008 Crisis
• When making scenario analysis, put in
rebound
•

8
 Oil and Natural Gas Prices
• Daily oil and U.S. natural gas prices from
same file as stock prices

9
Oil and Gas Prices in Europe

10
 US and European Gas Prices
• We will provide the commodity price analysis file as well
Natural gas, US ($/mmbtu) Volatility 46.79%
Natural gas, Europe ($/mmbtu) Volatility 21.26%
Correlation 48.13%
Last Value of Natural gas, US 1.79 Last Value of Natural gas, Europe 2.91
18.00 16.00

16.00 14.00

14.00
Natural gas, Europe ($/mmbtu)

12.00

Natural gas, US ($/mmbtu)

12.00
10.00
10.00
8.00
8.00
6.00
6.00
4.00
4.00

2.00 2.00

0.00 0.00
1-Sep-96

1-Sep-11
1-Sep-93

1-Sep-99

1-Sep-02

1-Sep-05

1-Sep-08

1-Sep-14

1-Sep-17
1-Jun-91

1-Jun-94

1-Jun-97

1-Jun-00

1-Jun-03

1-Jun-06

1-Jun-09

1-Jun-12

1-Jun-15

1-Jun-18
1-Dec-92

1-Dec-98

1-Dec-01

1-Dec-16
1-Dec-95

1-Mar-01

1-Dec-04

1-Mar-07
1-Dec-07

1-Mar-10
1-Dec-10

1-Dec-13

1-Mar-16

1-Mar-19
1-Dec-19
1-Mar-92

1-Mar-95

1-Mar-98

1-Mar-04

1-Mar-13
Natural gas, Europe ($/mmbtu) Natural gas, US ($/mmbtu) N/A

11
 Illustration of Impacts
• Use General Project Model (Solar Model) and
Build Model (I know Corona does not really apply
much to solar model, but this is easiest model)
• Understand Loss in Operating Cash Flow with
Effects of Variable Cost and Fixed Cost
• Computation of Default in Model with Cash Flow
Waterfall Concepts
• Illustration that PLCR Measures Re-structuring
Impacts
• Cash Flow Sweeps after Recovery Period and
Problems with Incentives

12
 Section 2
Scenario Analysis in Models

13
 Scenario Principles
• Keep in Separate Page
• Use CHOOSE instead of INDEX
• Add Switch to Compare to Non-Crisis
Scenario
• Retain non-crisis scenario
• Add scenario for non-crisis variables
• Use fixed applied method to re-set spinner
boxes

14
Illustration of Scenarios

15
Illustration of Scenario Analysis

16
 Operating Scenarios (So I Don’t Mess Up)

• Pick a case (e.g. Base Case)

• First, Structure the debt (fix debt switch is off)
• Press the circular debt button
• Press the fix debt button
• Try alternative scenarios

17
Downside Cases

18
 Construction of Sensitivity Factors
• Copy the values from the INDEX function to
the applied series and then put the spinner
boxes and drop-down boxes

19
 Add Monthly Timing into Semi-Annual Model

• You do not want to change the timing of a

semi-annual model
• You can add flags to make the model
monthly
• Create a TRUE/FALSE flag for each month
below the semi-annual period

20
 Section 3:
Credit Analysis of Impacts
 DSCR No Longer Useful
• DSCR measures the probability of default
• When the DSCR = 1 then the default point is reached
• DSCR does not say anything about potential to re-structure after default
• DSCR formula:

•Cash Flow Reduction = (DSCR-1)/DSCR

• Required DSCR for Reduction

•DSCR = 1/(1-Cash Flow Reduction)

• DSCR * CFR = (DSCR-1)
• DSCR * CFR - DSCR = -1
• DSCR-DSCR * CFR = 1
• DSCR * (1-CFR) = 1
• DSCR = 1/(1-CFR)

22
 PLCR for Measuring Potential for Restructuring

• DSCR, LLCR and PLCR

• Traditional measures are DSCR and LLCR
• But the PLCR measures the room from
restructuring debt from the tail
• PLCR = NPV of Cash Flow/NPV of Debt
Service
• But, NPV of Debt Service = Amount of Debt

23
 Using PLCR Ideas
• NPV of Cash Flow (using the interest rate as the
discount rate) is the numerator
• PV of Debt Service or Debt is the denominator
• If PLCR is below 1.0, cannot repay debt over the life
of the loan
• Compute the effect of the Corona Crisis on the NPV
of Cash Flow
• Evaluate whether the PLCR is above 1.0 and you can
still repay your debt
• Percent of decline and still repay debt is like DSCR:
• Percent Decline = (1-PLCR)/PLCR

24
 PLCR Example – Base Case
• In this example, the PLCR is 2.26; this
implies cash flow can decline by
1.26/2.26=.6.

25
 Now Reduce the Cash Flow by 60%
• Use the Merchant Factor 130% * (1-60%) =
70%. First fix the debt and run in fixed debt
mode.

26
 PLCR over Time
• Compute Interest Rate Index
• Use SUMPRODUCT and Divide for CFADS
• Check the PV of Debt Service
• For Future Years, Multiply the PV of CFADS
by the interest rate factor
• PLCR goes up as you pay off the debt

27
 Section 4
Cash Sweeps
 Cash Sweeps and Dividends Before the Crisis

• Bankers hate the following:

• Before the crisis pay dividends
• During the crisis defaults
• Cannot repay debt
• Investors have received some return
• Solution to this is cash sweep
• Repay debt early with cash sweep
• Debt is lower because of the sweep
• Default is less

29
 Problems and Solutions with Cash Sweeps
• Problems with cash sweeps
• False advertising; the tenure is shorter
• IRR Killer
• Big cash sweep removes incentives
• Mitigation of negative cash sweep
• Refinancing
• Refinancing
• Refinancing

30
 Basic Case without Cash Sweep
• Note the cash flow diagram

31
 Cash Sweep Case without Crisis
• Note the effect on the IRR

32
 Crisis and No Sweep
• Note the debt default and length of debt

33
 Crisis and Cash Sweep
• Note the shorter length of debt

34
 Modelling Cash Sweeps
• First, use MIN function for repayment so that
you do not overpay the loan
• Second, add a line in the debt balance to
reduce the balance when the loan is repaid.
Get this from the cash flow statement
• In the cash flow statement, include the MIN
and the MAX function along with the cash
sweep percent

35
 Section 4
Modelling Techniques - Operations
 Modelling Philosophy
• Consulting Firms Have Different Acronyms,
Some Ideas are Good (think about your life)
•Flexibility
•Accuracy
•Structured
•Transparency
•Efficiency
37
 My Irritations
• Multiple Lines and Different Sheets for Flags
• Not Putting Drivers to the Left, but above in
separate rows
• Not Having Consistent Master Timeline
• Getting Crazy with Inflation Indexes
• Putting Scenarios in Input Sheet
• Making any Equation that you Cannot see with F2
• Allowing use of CNTL [ to Find Sources
• Not Structuring Assumptions in the Same Order
as the Model
38
 Constructing Solar Model
• Start with Timeline
• Importance of flexible master timeline
• Application of UDF to measure the period that
applies in semi-annual
• Solar use by month
• Operation Analysis
• Benchmarking Costs
• Fixed and Variable Costs
• Financing Analysis
• Debt Structuring with Sculpting
• Fixed Debt to Evaluate Credit Analysis

39
 Timing Calculations
• Understand the Project Finance Theory is All
About Timing and Risks at Different Phases
• Use Beginning of Month or End of Month
and Be Consistent
• Sheet Set-up in Model
• Master Timeline and Period Counter

40
 Model Structure
• Time Based
• Development Costs, Construction and IDC,
Operations, Repayment of Debt, Cash Flow and
Financial Statements
• Modigliani and Miller
• Physical Operations, Pre-tax Operating Cash Flow
and Project IRR, Financing and Sources and Uses,
Debt Schedule and Cash Waterfall

• Foolish Consistency is the Hobgoblin of a Petty

Mind
41
 The Only Excel Functions You Need
• Three Functions (other than date, min, max)

•LOOKUP (not VLOOKUP or HLOOKUP)

•INDEX

•SUMIF (AVERAGEIF)

42
 Section 4
Financing Calculations
 Structuring Repayment
• If structuring sculpted repayments, start with
debt sizing from sculpting
• Compute summary sources and uses of funds
with flexibility to use different debt sizing
and fixed debt size
• Compute period by period funding
• Compute debt repayment, balance, interest
and fees
• Cash flow waterfall with provision for
default
44
 Fundamental Sculpting Calculation
• Create Flag for Repayment
• Target Debt Service = CFADS/DSCR
• PV of Target Debt Service = Debt
• Use SUMPRODUCT and Divide Interest
Rate index
• Debt Service = Interest + Repayment
• So, Repayment = Debt Service - Interest

45
 Modelling for Structuring or Risk Analysis
• Fix Repayment for Risk Analysis to Evaluate
the Effects of Crisis
• Create Copy and Paste Macro
• Make Flexible for Delay Analysis

46
 Modelling Defaults and Repayment of Defaults

• I rarely see the explicit modelling of defaults

in project finance models
• Set up default balance with opening balance,
add: default, less: repayment of default and
closing balance
• Use the MIN and MAX functions in the cash
flow statement for determining defaults and
repayments of defaults
• Attach the default schedule to items in the
cash flow statement
47