Knowledge Base: Project Finance

Project Finance refers to acquisitions, debt/equity financings, and new developments of capital-intensive infrastructure projects that provide essential utilities and services.

Sectors within infrastructure include utilities (gas, electric, and water distribution), transportation (airports, roads, bridges, rail, etc.), social infrastructure (hospitals, schools, etc.), energy (power plants and pipelines), and natural resources (mining and oil & gas).

The unique characteristics of these assets and their financial models include:

• Stability and Time Frame: Many of these assets last for decades and have “locked in” revenue via contracts like power purchase agreements (PPAs) that govern rates and price increases. Therefore, cash flows tend to be stable and predictable over extended periods.
• High Debt Levels: Many infrastructure projects use 50 – 60% Debt (or more) for acquisitions and developments, and each project has a special purpose vehicle (SPV) to isolate its assets and debt from everything else. The Debt is non-recourse, so lenders cannot claim collateral from other assets – just the one their specific Debt funded.
• Debt Sizing & Sculpting: Since these assets’ cash flows are so predictable, it’s possible to “sculpt” the Debt principal repayments and interest to match a percentage of the cash flows in each period based on an appropriate starting balance.
• Downside Risk: The potential upside in many projects is capped due to the agreements that govern rates and escalations, but the downside risk is substantial due to possible construction delays, budget overruns, and operational problems. Therefore, most models focus on assessing this risk for lenders and equity investors.
• Unique Metrics: The Debt available for projects is often based on a minimum Debt Service Coverage Ratio (DSCR) or Loan Life Coverage Ratio (LLCR) set by lenders rather than a percentage of the purchase price or a multiple of EBITDA.
• Cash Flow Only: We can create financial statements for infrastructure assets, but we care mostly about the cash flows in models, not the traditional three statements.
• No Terminal Value or Exit Value: For many infrastructure assets, the concept of a “Terminal Value” doesn’t make sense because the asset has a fixed life span, such as 20 or 30 years. But this is not a universal rule – some assets could last longer than this, and if an asset is sold 5 or 10 years after its construction, there could still be an exit value.

Our Project Finance & Infrastructure Modeling course covers these topics comprehensively over multiple case studies.

You can access sample, excerpts, and one-off tutorials below: