Refinancing Year 5 - DSCR method (renewables)
Hey guys,
Currently need to do a refinancing in year 5 for a model whose debt has been sized based on DSCR. How would you actually do a refinancing in this case?
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Use the same DSCR and size with that.
Thanks!
But what is the main objective of this refinancing? Apart from maybe lower rates, ergo, lower interest expense. Is it the plan to do a dividend recap or why would a firm do it with their asset?
Isnt that for you to know with your conversations with the client?
A lot of project finance debt is structured as mini-perms with an amortization schedule of 20-30 years but repayment around year 5. This makes it more bankable as it reduces interest rate risk for both the bank and the sponsor.
Agreed, I was just speaking generally. What are for you the main reasons for a refinancing in this case? Thanks!
Normally I’ve seen a refi after construction on COD. The former acts as a construction bridge. Usually on an operational project I’d see proj fin loans with tenors c.3-5 years than the useful life (so something between a 15-22y tenor).
If your refi is in the 5th year of operations, the answer would be unique to the proj - maybe there’s a specific reason to do so?
If you are assuming a mini perm, then you don’t need to specifically do a “refinancing / re-sizing.” When you sculpt the debt with a DSCR, your amortization schedule would show the balance that you would size to at each point in time assuming you are using the same assumptions. The only thing that might make sense is assuming some level of financing fees and transaction costs that occur every few years, which would impact equity returns, but wouldn’t impact your debt sizing.
For example, let’s assume you are solving for the debt quantum for a project with a 20 year PPA and we’re using a 1.30x DSCR. The debt amortizes over the same 20 years, but the bank requires you to refinance at year 5 (legal maturity / tenor is 5 years). At term conversion/COD, assume you sized to a debt quantum of $100mm, and your amortization schedule shows that at year 5, it would be paid down to $80mm. When you go to refinance in year 5, your sizing would also show $80mm at that time assuming you use the same assumptions.
is what you described more of a soft-refinancing? so its simply just every periodic 5-year mark that you just incur this 're-fi fee' but you don't actually have to resize the debt balance every 5 -year, the quantum is practically done on a 20-25 year basis of the tenor.
Dividend recap and reset debt quantum even if terms are unchanged
is this the 'hard-refinance' - how would you do it such that you pay off dividends early and then draw more debt?
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