Hi all,
So imagine that the asset is still being built, but it already started generating cash flows. There are still heavy cash outflows, but now they can be cushioned by these positive inflows.
Will the creditors make me use this cash instead of borrowing? I mean why should I borrow if the project can "afford" to pay some of the financing needs?
In this case, how do I account for this cash used for financing? Does it count as Equity? I just add it to equity account?
This causes a little mess with the macros, because the macros will give me an initial amount calculated of the IDC etc and then I will essentially change this amount in-model because I will be using some of the cash generated to reduce the debt load.
How do you go about this?
Or.. can we agree with the creditors that the project will simply draw the debt normally as these cash flows during construction didn't happen and these CFs will flow down to equity returns? (seems awkward to me)
Is there any link you can give me for further reading?
Thanks all :)
Bump :)
Pre completion revenue is a source of funding but whether or not they can be counted towards equity in your leverage ratios, debt sizing or even distribution calcs will depend on the negotiated financing structure.
The reason for why you'd often find different treatment for pre completion revenues vs regular revenue/CF is that you presumably still have construction risks that are not fully derisked and also substantially higher uncertainty on these revenues/CF as compared to post completion equivalents.
Depending on the project type, structure and market there are a many different ways on how to account for this as agreed with lenders.
From a modelling perspective, you could be most conservative and not include pre completion cash flows into uses and sources calcs that drive your debt sizing as you'd want to have enough committed capital to reach project completion without these ramp-up revenues. Alternatively, if you have significant visibility on these cash flows, you can try arguing that this will be equity and either reduce equity commitments upfront or contingent on realizing said cash flows.
Recently worked on a very large renewables project that had significant pre-COD revenues. The above commenter hit the nail on the head.
That, especially the last sentence
Fantastic, thank you for your explanation, makes it much more clear now :)
Totally agree, as a base case it does make sense to just assume these CFs won't come and size the debt normally to ensure there is enough capital to complete the project.
Best!
Likely depends on the nature of the cash flow itself and whether it is partially taxed or treated like debt. Also how the construction debt is being sized and/or refinanced. If the inflow offsets your capex, I would consider it ultimately an offset to equity need. If it’s more of an operating style cash flow that would impact the debt sizing, it may require a sweep against the outstanding debt balance.
Very good points. Will bring this up in the next discussion about the project.
Thanks a lot!
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