PPP Financial Modelling

The training programme will provide participants with sets of techniques, greater understanding and hands-on practice in: Building financial models for project finance transactions, specifically those related to infrastructure and PPP projects Structuring financial models using best practice, to facilitate ease of change or updating and ease of understanding for other model users Building scenarios for analysis and stress-testing of the model Using the model to analyse forecast cash flows, choose between options and to assess risk Practically using models to support credit reviews and allocations of funding Course introduction The emphasis in this program is on learning skills about best practice in building financial models and the detailed techniques and calculations involved, with particular application to infrastructure project finance. Many techniques taught have use in other applications, such as corporate finance, but the emphasis will remain firmly on project finance modelling. The use of models to understand and analyze a project will be covered briefly, but it is essentially a practical hands-on course in detailed building techniques. It should not be regarded as a general Microsoft Excel training course, although the models built will use Excel software; rather, the emphasis is on applying excel to model and analyze project finance transactions. By the end of the course, participants will have produced the main building blocks of a well-structured integrated financial model for an infrastructure transaction. As a result of this training, participants will be capable of building up a robust model, which can be rapidly changed, is flexible and is consistent in its logic and treatment of components of cash flow. They will be able to use Excel tools to facilitate sensitivity analysis, build cash flow cascades, solve circular references and write simple macros. Who should attend? The course is intended for junior analysts with a few years’ experience in analysis and valuation, with a good (but not necessarily comprehensive) knowledge of Excel. It is therefore expected that participants will be familiar with the fundamental principles of business risk analysis and investment appraisal techniques and the key features of financial instruments. They should be able to navigate around large Microsoft Excel worksheets and be familiar with the core functions of Microsoft Excel, such as copy, paste, sum, round and sumproduct, logic functions such as IF, AND, and OR, simple lookups, and financial functions such as NPV, IRR, PMT and FV. Limited practical experience of corporate and project finance will be assumed. Training methodology To enhance the benefit of the training we suggest that participants are provided with: A core financial model of an infrastructure project that will be used during the training A reference book which includes comprehensive examples of best practice in financial modelling A list of Excel functions to be used during the course, with details of required inputs and explanation of what the function does The course is intensive, and requires focus from the delegates to absorb a large range of material in just three days. We encourage active involvement of the participants, questions and answers, and discussion. Concepts will be presented through formal presentations and demonstrated examples. which can be followed by delegates on their own laptop computers; supervised exercises are then used to practice and reinforce understanding of the topics. Each exercise has a suggested answer for self-review or review in the class. These exercises cumulatively build the basics of a fully-integrated infrastructure model which is used as the core case study throughout the training programme. Case studies and exercises Case studies will focus on putting into practice modelling techniques, and participants will gradually build an infrastructure PPP model themselves using techniques and principles as they are taught and demonstrated. Each exercise is designed to be done either in teams or individually, and is self-contained in terms of putting into practice a limited degree of model-building. The exercises build on one another, until a full-scale, integrated model has been built using best-practice techniques. Model answers are available for each, and are reviewed in the class for participants to check their own work; these models can be used as a reference source later when participants are back in their normal work environments.
Day 1 Overall model structure Best financial modelling practice Overall structure of the model Separation of inputs, calculations and outputs Logic flow within the model Use of switches to allow option selection Use of flags to control timing factors Set-up to ease flexibility Accommodating multiple options at early stages of project Checks and totals, and error reporting Building assumptions off the term sheets Using the assumptions sheets as a sign-off document Building-in ability to change and work changes through the model Restricting ranges of inputs and validation criteria Version control Tracking changes Exercise: Creating an assumptions input sheet with built-in flexibility Turning assumptions into model calculations for PPP Build-up of construction or other capital costs Correct matching of units Build-up of operating expenditure items Use of maintenance reserve accounts Revenue drivers: Volume and pricing assumptions Use of lookup functions to change expenditure timings Building in sensitivities Building from existing operations vs. entirely new project Exercise: Building in flexibility for capital spend timing changes and adding sensitivities to model Forecasting techniques Forecasting Simple linear Exponential growth Regression Seasonality Multiple trends Statistical functions in Excel Day 2 Interest, debt fees and circularity in debt-driven model Circularity, its causes and resulting problems Use of the solver function and other ways to overcome circularity Calculations of interest Debt fee types and their calculation Use of debt service reserve accounts (DSRAs) and modelling them Capitalised fees and interest Exercise: From given term sheet of interest rates and fees, model interest and fee cash flow and P&L effects, without creating circularity in the model Cash flow modelling for PPP Principles of leverage Cost of debt capital and equity capital Weighted average cost of capital calculations and their use Cash flow waterfalls: Structure and logic Use of IF statements and MIN functions Controlling debt drawdowns vs. available facility limits Modelling issues arising Exercise: Creation of simple cash flow waterfall model to reflect debt costs, DSRA, repayment profiles, and returns to equity under constraints Sensitivity analysis in a PPP model Break-even calculations Varying inputs to assess effect on results Stress-testing of model Setting outputs to a pre-determined level by altering inputs Version control to allow comparison of outputs Comparison of different forecast versions against a baseline Tools for performing sensitivity analysis: Dynamic what-if Goal seek Tables Index function Scenario manager Exercise: From a given model of cash flows, P&L and balance sheet, calculate effect of varying inputs to a given degree, and stress-test model to break-even More advanced excel for modelling Consolidation functions and techniques Use of links between workbooks Financial functions in Excel – e.g. PPMT, XIRR, NPV, depreciation functions Logical functions in Excel – IF, OR, AND and using them in combination Pivot tables Creating charts Exercise: For a given model of data, create a set of pivot tables to manage and consolidate data and chart the results Day 3 Brief overview of modelling taxes in PPP Tax treatment of costs Allowing for deductibility and non-deductibility Capital allowances Thin capitalisation Modelling tax losses Cash flow issues Exercise: Review of an example of tax modelling for a PPP investment project Inflation/escalation factors in PPP Use of indices Controlling start time of inflationary pattern Applying multiple rates to different cost & revenue items Varying inflation rates over life of the project Comparing the effect of actual inflation vs modeled Introduce exercise to do outside class – model multiple, variable rates and analyse a separate set of actual rates Exercise: Model multiple, variables rates of inflation in a project Creation of balance sheet in a PPP model Link between modeled cash flow and P&L Key balance sheet items and their calculation Non-cash items: depreciation, deferred tax Assumptions required to be made Use of existing figures or opening balance sheets Creation of check totals Proving each figure in the balance sheet Exercise: From a given set of cash flow data, calculate a dynamic balance sheet which updates as assumptions change, and in which every figure is provable Creating simple macros What is a macro? How macros help in financial modelling Best practice in creating and using macros – range names, documentation Exercise: Creating a macro without using VBA Wrap-up Re-iteration of main points Introduction to further exercises Further reading on the topic Final questions and issues to discuss Course summary and close