What's Project Finance Banking like?
Hi all - work on an IG DCM desk and have been getting more interested in project finance. To the project finance bankers out there, would love to learn more about the modeling side of project finance as its pretty minimal on my desk.
What models do you work with? Do you take operating models then use them to size debt? What does that process look like?
Assuming you never build from a model from scratch - how often are you building up your templates with developer/sponsor input vs. taking their models and tweaking it? Appreciate any input on what the technical side of a mandate looks like from engagement through close.
Work at a PF Bank. We typically don’t make models from scratch. Sponsor will send a model with their CIM and we review their debt quantum and review their assumptions. Then we’ll “resize” if we think their assumptions are off by adjusting them. One example might be they’re sizing using a DSCR of 1.1x for merchant tail as opposed to a 1.4x DSCR. That’s an extreme example, but it’s illustrative of the things we look for. Then we’ll run some different scenarios to stress test the project’s ability to meet debt service…this is all before we get mandated. Once we get mandated, we’ll typically get an updated model from the Sponsor using agreed upon pricing and run a bunch of sensitivities to further stress test the project’s ability to pay debt service. This usually involves adding a few debt tabs to the model, power forward curves provided by a market consultant or other sources, etc. All of this is an effort to manage downside risk for the bank. TLDR: don’t do nearly as much modeling as a Sponsor does, but focus primarily on the debt side and it can still get pretty nuanced depending on the project (or portfolio of projects). Hopefully others with more experience can provide more color though.
Super helpful! Could you share what different scenarios you would model to stress test managements assumptions? Higher leverage, different uptime/production levels I’m assuming?
Idk that we do much with higher leverage, more so:
Essentially anything that impacts CADS (e.g. CFADS) is something that could be used as a sensitivity. Really just depends on the project, technology, location, etc. Intuitively you think about which of those factors may be most variable given the project characteristics. So let’s say for a floating offshore wind deal, you probably wouldn’t worry too much about resource availability since wind speeds are consistently high 200km from the coast, but maybe you increase O&M costs because it’s a new technology and you have to travel a significant distance to conduct maintenance/the technology is unproven.
That’s the sort of things you think about. We typically already have the debt quantum in mind so we’re not trying to solve for it, but seeing whether the resulting debt service from that quantum can be met based on adjusting those levers.
What does the origination work look like? Are you doing a lot of pitching and coverage work, or do a lot of these opportunities (e.g. getting a CIM and model) come across your MD's desks pretty organically from existing relationships?
Would you mind shooting me a PM ? I have a few more questions about PF banking
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