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Flashcards in Financing the Deal Deck (11):
1

What are the 3 key consideration regarding the financing of the project?

- bonds
- loan
- equity

2

Key financial ratio categories

- Liquidity ratio
- Debt ratio: a high ratio of debt is essence of PF
- Profitability ratio
- Covering ratio

3

What is the lenders view on leverage?

- level of debt to be raised is limited if a project has noch project agreement that provides reasonable certainty of revenues and hence cash flow cover for debt service
- level of debt to be raised is limited if a project is in a high-risk country
- infrastructure project with project agreement and no usage risk: 90:10
- infrastructure project with usage risk: 80:20
- merchant power plant project (no off-take contract/ no price hedging): 50:50

4

Sources and uses of cash

Sources: operations/ sale of assets/ refinancing
Uses: repayment of debt, redemption of equity, purchase of fixed assets, net loss from operations, increase WC

5

Other typical ratios:

- EBITDA-to-interest cover ratio: lenders expect 1.5 over loan life
- Annual debt service cover ratio: assesses project company's ability to service its debt from its annual cash flows (1.2 no usage risk; 1.4 usage risk; 2.0 merchant power plant)
- Loan life cover ratio: dynamic project credit quality indicator to estimate the borrower's repayment ability

6

What is a Feasibility Study and what is its key part?

- analyzes potential of the project
- analyzes variables
- covers all applicable issues and risks
- has to be independently confirmed
- includes financial projections

key part: financial model
Due Diligence: technical, CF models, Legal, insurances (careful inspection and analysis by external consultants)

7

Describe the uses and structure of the financial model.

- uses: initial evaluation of the project's financial aspects quantifying critical issues in the finance negotiation
- flexible finance model tool is a key element for any project advisory
- structure: financial statements/ ratios/ summary

8

What is a sensitivity analysis and what is its purpose?

- assess the effect of potential impacts on key variables of the financial model
- purpose: test ability of the project's cash flows to unexpected developments and identify possible corrective avenues
- typically contain standard and downside scenarios

9

Explain the key Elements of Structured Finance (Tranching; credit enhancements)

S.F. is a sector of Finance to help transfer risk and to avoid laws using complex legal corporate entities.
- S.F. makes use of securitization to create the pools of assets that are used in the creation of the end product financial instruments, often involving:
- Tranching: create different investment classes for securities; divert cfs to various investor groups
- credit enhancement: is needed creating a security that has a higher rating than the issuing company (e.g. credit enhancement of bonds to get a better rating)

10

Debt-Equity Ratio

- high ratio of debt is the essence of pf
- within prudent limits, therefore, sponsors wish to limit the amount of equity they invest in a project, to improve their own return, and thus to raise the maximum level of debt
- the difference btw. the maximum level of debt a project can raise and project costs determines amount of equity required
- debt ceiling: lenders' CF cover requirements/ lenders' view on leverage

11

Difference between unsecured and secured senior loan

- unsecured: basically depend on borrower's creditworthiness; include ratio/ negative and affirmative covenants
- secured: the assets securing the loan have value as collateral; fully secured: value of assets equals or exceeds the amount borrowed