Project Funding and Finance - Level 2 (Ready)

Question 1

Why is mezzanine financing more expensive?

Answer 1

• Because it is paid back after the senior debt and therefore viewed as being higher risk

Question 2

Why are audited accounts required?

Answer 2

• Provides credibility to a set of financial statements

- In the instance of a Public Limited Company, this confidence is important to shareholders

Question 3

What is a DCF?

Answer 3

A discounted cash flow

Question 4

Can you explain to me how to do a discounted cash flow?

Answer 4

• Take the anticipated incomes and costs of a project and cash flow them in Excel
• Input a sale value at the exit date
• Discount each value back to todays value using the discount rate
• The sum of all cash flows is the net present value of the asset

Question 5

What is an IRR? Why is it preferable to other metrics?

Answer 5

Internal rate of return - The discount rate that has to be applied in a DCF to achieve an NPV of zero

Question 6

How did you calculate your IRR?

Answer 6

Automated - If I were to do so manually, it would involve interpolating between a discount rate that achieves a negative NPV and one that achieves a positive NPV

Question 7

Why would adjusting the senior debt assist with meeting your IRR? In what instance would it be detrimental?

Answer 7

A higher % of senior debt means that less equity is required. The subsequent profit is therefore measured against a lower equity requirement and the IRR on equity is improved.

Question 8

What security would a bank require?

Answer 8

• Parent company guaratee

Question 9

Why might a bank ask for audited accounts?

Answer 9

• Gives them certainty that they are credible

Question 10

What is the market rate for interest margin?

Answer 10

• At 60% LTC, typically between 5-6%

Question 11

What did you include in your funding pack?

Answer 11

• Report on title
• Development appraisal
• Comparable evidence
• Details of location
• Competition
• Company background

Question 12

What is a special purpose vehicle?

Answer 12

• A legal entity usually set up for a specific project to isolate the firm from financial risk

Question 13

What is proposed to replace LIBOR at the end of 2021?

Answer 13

SONIA (Sterling Overnight Index Average)

• More robust and less volatile
• Does not incorporate any credit risk/liquidity premium which is inherent in the calcs of LIBOR