Week 2&3 Flashcards
Offtake agreements
An agreement entered between a producer and a buyer to buy/sell a certain amount of the future production. It is generally negotiated long before the construction of a facility to guarantee a market for the facility’s future production and improve chances of getting financing for the installation concerned.
These agreements are fairly common in the natural resource sector, where capital costs to extract the resources are important. They usually include several protective clauses and can take months to negotiate.
Subordinate financing
Debt financing that is ranked behind that held by secured lenders in terms of the order in which the debt is repaid. “Subordinate” financing implies that the debt ranks behind the first secured lender, and means that the secured lenders will be paid back before subordinate debt holders.
Mezzanine financing
a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership or equity interest in the company in case of default, after venture capital companies and other senior lenders are paid. Mezzanine financing, usually completed with little due diligence on the part of the lender and little or no collateral on the part of the borrower, is treated like equity on a company’s balance sheet.
Debt providers
Monoline
A business that focuses on operating in one specific financial area. The main advantage of monolines is that these companies have specialized skills and provide expertise beyond what can usually be expected from companies that businesses are spread across many different financial areas.
For example, monoline insurers give investors and issuers the confidence to participate in the market by providing liquidity and financial protection. Without fully understanding the entire system and how it all comes together, a company is unable to provide its customers with quality service. Due to the expertise that monoline companies have in the industry, they are able to reduce operating cost, enhance customer service and evaluate/manage risk much more efficiently.
The Project’s Cycle and Risks
Project cycle visualised
Revenue Models (Funding)
Back-to-back loan
A back-to-back loan is a loan in which two companies in different countries borrow offsetting amounts from one another in each other’s currency. The purpose of this transaction is to hedge against currency fluctuations. They are also called parallel loans.
Companies could accomplish the same hedging strategy by trading in the currency markets, either cash or futures, but back-to-back loans can be more convenient. However, currency swaps and similar instruments have largely replaced back-to-back loans. Regardless, these instruments still facilitate international trade.
Step-Up
a pre-agreed increase in the credit margin triggered at certain points in time that creates an incentive for the borrower (SPV) to prepay/refinance the original project debt
Lock-Up
a pre-agreed restriction on dividend distributions that keeps more cash into the SPV and creates the same incentive as above.
Mini-perm loan
Debt-Service Coverage Ratio
In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.
In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country’s external debts.
In general, the debt-service coverage ratio is calculated as:
DSCR = Net Operating Income / Total Debt Service
Amortization schedule
a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan’s principal. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term.
Cash Available For Debt Service (CADS)
a ratio that measures the amount of cash a company has on hand relative to its debt service obligations due within one year. Debt service obligations include all current interest payments and current principal repayments. Sometimes lease obligations are part of the denominator.
