modeling-project-finance-structures

# Modeling Project Finance Structures

## When To Use

- Modeling a non-recourse or limited-recourse project financing (power plants, toll roads, LNG terminals, renewables, PPP/PFI concessions)
- Sizing senior debt tranches against projected cash flows and DSCR / LLCR covenants
- Structuring construction-period draws, equity contributions, and IDC capitalization
- Evaluating sculpted vs. level debt repayment profiles
- Running sensitivities for lender presentations, credit committee packages, or investment committee memos
- Assessing refinancing scenarios or mini-perm bullet structures

## Inputs To Gather

- **Project parameters**: capacity/throughput, construction timeline (months), COD target, concession term or asset useful life
- **Capital cost budget**: EPC contract price, owner's costs, contingency, development fees, financing fees, interest during construction
- **Revenue assumptions**: offtake/PPA price and escalation, availability/capacity factor, merchant price curves if applicable [VERIFY contracted vs. merchant split]
- **Operating cost assumptions**: fixed O&M, variable O&M, fuel/feedstock costs, insurance, land lease, management fees, major maintenance reserve schedule
- **Tax inputs**: depreciation method and schedule (MACRS, straight-line), tax rate, ITC/PTC eligibility [VERIFY jurisdiction-specific incentives], tax equity structure if relevant
- **Debt terms**: tenor, pricing (margin + base rate), commitment fee, upfront fees, DSCR lock-up and default levels, cash sweep percentage, DSRA sizing (typically 6-month debt service), maintenance capex reserve
- **Equity return targets**: target levered IRR, minimum cash-on-cash yield, distribution waterfall tiers if multiple equity classes

## Workflow

1. **Set up the timeline and flags**
   - Define semi-annual or quarterly periods from financial close through debt maturity and concession end
   - Create binary flags for construction, ramp-up, operations, and tail periods
   - Map construction draw schedule against EPC milestone payments

2. **Build the construction-period waterfall**
   - Model equity contributions and debt draws pro rata or equity-first per the term sheet
   - Capitalize interest during construction (IDC) and commitment fees into the loan balance
   - Track cumulative uses and sources; confirm total sources = total uses at COD

3. **Model operating revenue**
   - Calculate gross revenue from contracted offtake quantities × price × escalation
   - Apply availability/curtailment deductions
   - If merchant exposure exists, layer in price scenarios (base, low, high)

4. **Model operating expenses and taxes**
   - Project fixed and variable O&M with escalation indices
   - Build depreciation schedule and compute taxable income
   - Apply NOL carryforwards if early-year losses exist; compute cash taxes payable [VERIFY NOL rules per jurisdiction]

5. **Calculate Cash Flow Available for Debt Service (CFADS)**
   - CFADS = Revenue − Opex − Cash Taxes − Working Capital Changes − Maintenance Capex Reserve Contributions
   - Confirm CFADS excludes financing items (interest, principal, distributions)

6. **Size and sculpt debt repayment**
   - For sculpted repayment: solve each period's principal so that DSCR = target (e.g., 1.35×) across all periods
   - For level repayment: calculate annuity-based debt service; verify DSCR remains above minimum covenant (e.g., 1.20×)
   - Compute LLCR (NPV of CFADS over remaining debt life ÷ outstanding debt) and confirm ≥ lender threshold (typically 1.20×–1.30×)
   - Size DSRA funding requirement and model periodic top-ups/releases

7. **Build the equity distribution waterfall**
   - Apply lock-up DSCR test: if trailing/forward DSCR < lock-up level, trap cash
   - Calculate distributions after debt service, reserve funding, and cash sweep (if applicable)
   - Compute levered equity IRR and cash-on-cash multiples (MOIC)

8. **Run sensitivities and scenarios**
   - Single-variable: construction delay (+3/+6 months), cost overrun (+10%/+20%), revenue shortfall (−10%/−20%), interest rate stress (+100/+200 bps)
   - Breakeven analysis: find the revenue level or cost level where DSCR = 1.00×
   - Downside scenario: combine construction delay + cost overrun + low revenue; confirm covenant compliance or identify cash shortfall

## Output

- **Summary page**: project IRR, equity IRR, MOIC, average DSCR, minimum DSCR, LLCR at COD, maximum gearing, payback period
- **Sources & uses table**: construction period and permanent capital structure
- **Annual/semi-annual cash flow statement**: revenue through distributions, with CFADS and DSCR clearly shown per period
- **Debt schedule**: draws, repayments (sculpted or level), outstanding balance, interest, fees, DSRA balance
- **Sensitivity tables**: tornado chart inputs with equity IRR and min DSCR as outputs
- **Assumptions log**: every input with source reference, date, and [VERIFY] flags for unconfirmed items

## Quality Checks

- Sources = Uses in construction waterfall (zero variance)
- DSCR never drops below covenant default level in base case; identify periods where DSCR is within 0.10× of lock-up
- LLCR ≥ threshold at every calculation date
- Cash balance never goes negative in any period under base case
- Sum of all debt draws = committed facility amount; no over-draw
- Equity IRR circular reference resolved (use macro iteration or copy-paste values approach)
- Tax depreciation fully absorbed within concession/useful life; no phantom deductions after asset is fully depreciated
- Escalation indices applied consistently across revenue and cost lines [VERIFY index source and base year]
- Model balances: closing cash = opening cash + net cash flow in every period