Project Finance Modelling

A 4-day course designed to support analysts within an organisation's project finance, business development and treasury divisions to create and analyse financial models on a consistent and focussed basis. Course features: Revision of best practice in model structures Building the cash flow financing section of a model Calculating the cost of different types of debt capital Creation of balance sheet Use of sensitivity analysis - model structures and advanced Excel tools Ratios and risk analysis of PPP deals Review the objectives of PPP, and the implications for model structure Course exercises Time will not permit creation of an entire model from scratch. The outline of a model will be populated with the required factors, including basic assumptions, input data and calculations to calculate results. Delegates will then build on the model to add sensitivities, inflation factors, financial structures, accounting statements, equity returns, ratios and cover factors, and risk assessments. Course methodology The learning methods used are practical, as practice of newly learned techniques enables a deeper and more effective building of skills. Each section will be covered briefly as a module in a traditional class style, but the real learning experience will be found in the exercises within each module. Suggested solutions to each exercise will be provided and discussed, and participants will be encouraged to review their work independently. As the time available is limited, and the needs of the participants will vary, each section will not be covered in depth, but supporting materials will be available for further in-depth learning.
Day 1 Introduction & course objectives Revision of best practice in model structures 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 Use of corkscrews Checks and totals, and error reporting Inputs & assumptions 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 Revenue & cost build-ups Build-up of construction or other capital costs Correct matching of units Treatment of fixed and variable costs Use of Debt Service Reserve Accounts and Maintenance Reserve Accounts Pricing assumptions Use of lookup functions to change expenditure timings Building in sensitivities Exercise – building in flexibility for capital spend timing changes and sensitivities Brief overview of modelling taxes Tax treatment of costs Allowing for deductibility and non-deductibility Capital allowances Cash versus accounting treatment Example - Review of an example of tax modelling for an investment project Interest and fee calculations Circularity and consequences Calculations of interest and fees Timing of payments Cash flow payment vs amortisation in the P&L Capitalised fees and interest Exercise – from a given term sheet of interest rates and fees, model interest and fee cash flow and P&L effects Building the cashflow financing section of a model Cash flow driven Cash positive periods and interest earned Debt service reserve accounts Fees to be included in drawdown amounts Use of multiple facilities for different purposes Day 2 Brief overview of modelling taxes Tax treatment of costs Allowing for deductibility and non-deductibility Capital allowances Cash versus accounting treatment Example - Review of an example of tax modelling for an investment project Interest and fee calculations Circularity and consequences Calculations of interest and fees Timing of payments Cash flow payment vs amortisation in the P&L Capitalised fees and interest Exercise – from a given term sheet of interest rates and fees, model interest and fee cash flow and P&L effects Building the cashflow financing section of a model Cash flow driven Cash positive periods and interest earned Debt service reserve accounts Fees to be included in drawdown amounts Use of multiple facilities for different purposes Financing section Leverage, risk and the debt/equity equation Calculating the cost of different types of debt capital Cost of equity capital Use of Debt Service Reserve Accounts (DSRA) Use of the cash flow waterfall Modelling issues arising: Timing of debt and equity funding Fee costs, upfront and spread Interest costs, capitalised interest Interest rate ratchets Debt repayment profiles Rate switches or refinancings at various stages of deal DSRA interest margin Debt repayment profiles and built-in options Dividend and other equity returns Constraints on dividend payments Overall risk profile Exercise: creation of simple model to reflect debt costs, DSRA, repayment profiles, and returns to equity under constraints Inflation / escalation factors 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: from a given P&L Exercise: from a given P&L Day 3 Creation of balance sheet 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 Exercise from a given P&L and cash flow statement, calculate the balance sheet Derivation of ratios Cash available for distribution and free cash flow Debt service coverage ratio Interest cover ratio Equity returns: IRR & NPV calculations Best practice in calculation & presentation of ratios in the model Exercise – from a given cash flow and balance sheet, calculate the above ratios Comparing different updates & versions of the model Separate runs and variation of inputs Ability to compare results Reviewing future implications of variances Example – creating a comparison worksheet to enable variance analysis of any two versions of a model Sensitivity analysis Break-even calculations Stress-testing of model Varying inputs to assess effect on results Use of goal seek Use of statistical techniques – probabilities and Monte Carlo simulations Version control to allow comparison of outputs Comparison of actual results against forecast as a sensitivity analysis Excercise: 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 Risk reviews Use of risk matrices Relationship to model and sensitivity analysis Probability analysis Risk-adjusted returns – equity view & lender’s view Excercise:For a given model, calculate risk-adjusted returns from potential project risks; Perform a risk assessment applicable to participants’ own projects, and model probability-weighted outcomes. Documenting the model Setting up base case model Recording changes to model structure Recording changes to assumptions User guides Running scenarios: descriptions, comparisons to base, version control Day 4 Overview of PPP What is PPP and how is it different? The objectives of PPP deals The parties to a PPP deal The structure of a typical PPP deal Different forms of service delivery and / or construction delivery: BOT, BOO, BTO, DBFO, BBMT Risk profiles of PPP deals Examples of, and reasons for, PPP failure. Only when the nature of PPP is understood, can modelling of its structure commence. Structure & layout of models Review the objectives of PPP, and the implications for model structure Implications for deal of fixed deal end-dates Tax implications and unused capital allowances Practical tips in building models Financing section Simple financial structures used in PPP deals: Debt finance: - Local Currency - Foreign Currency - Mezzanine Equity finance Preference Capital Convertibles Contingent IPOs/Floats at project start or at exit Government finance: - Credit Guarantees Buy-Back/Put Options Renationalisation Rights Leasing/Leveraged Leasing Monoline Insurers Financing constraints: - use of covenants - restrictive ratios - debt service cover factors - loan cover factors - loan to value calculations Returns to equity – NPV, IRR, other measures Comparators Public sector comparators (PSC) and their role Using comparators to assess overall deal Review of actual PSC example Wrap-up Overall review Key points to re-iterate Brief introduction to further exercises Final questions and issues to discuss Course summary and close