Wanting to understand what asset or portfolio management means in terms of loan finance or project financing. Is it similar to a standard portfolio management role? Is it like operations? Is there financial modelling involved? I see "review credit agreements" often mentioned but not sure how front/back facing this type of role is.
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Is the team split up into a Business Devlopment/Originations team and then a Portfolio Management team? Then the Originations team would be involved with the deal sourcing and due diligence process, then once the deal is funded it would be passed off to the Portfolio Management team who would just track the performance of the investment and put forecasts together based on actual performance to make sure the target yield is expected to be achieved at the date it was set at during the underwriting process. Project Finance for a wind turbine for example, if there are blade cracking issues and the wind project isn't expected to sell as much electricity as originally thought, and thus is generating less cash, then that's something the portfolio management team would want to look at.
This is helpful, thank you! It seems to be that way. Do you know if there is much financial modelling involved in this type of work? Trying to see whether this type of experience would be considered transaction advisory/direct project finance exposure. In your example, how might the project finance team work to resolve less cash?
I guess it depends on things that go on with the deal. Maybe your team likes to reforecast the investment annually, that's not exactly financial modeling but it could be depending on how detailed the forecasts are. Or say the Sponsor wants to cancel the offtake contracts and make the project fully merchant, then you may need to update the proforma model to reflect how that would impact the investments forecasted return. Or say you find out a year into operations that the expected production of the project is like 80% of what it was originally thought it was going to be at underwriting, then you'd have to model out how that lower production would impact your return. There are a million scenarios you can think of why you'd need to work in a model.
Thanks! A follow up question - in a renewables company, how does the financing team come in? Does a finance model not go straight from the originations team to whichever bank is used for lending? Who is the team making up the project finance model? Is the financing team like the portfolio management team?
The bank I'm at does a lot of project finance and tax equity deals with energy companies like NextEra. NextEra's finance team creates their own model, however every deal we've done, we've used our (the bank's) model as the Proforma model or the "base case" model. So, when we track actual performance, we're comparing it to the assumptions from our base case model. This model goes back and forth between us and the energy company like a hundred times though before we get to the vFinal version and there are independent engineers who help create the predictions for things like production.
In these models we create multiple performance cases too called P cases. So the P50 case is the case in which we expect the project to perform. The higher the number the worse the prediction. So the P99 case would be the worst the project could hypothetically perform. Within the model we'll usually build out a P50 case, a P75 case, a P99 case and then also a P25 case. We're basically trying to see what our return would like in different scenarios and we'll add in structural protections to protect us against the downside cases, usually something called a Paygo or a two-factor Paygo (mostly in tax equity deals) but instead of providing 100% of the capital upfront, we'll provide some and then over the next couple of years pay the remaining of the capital contributions through Paygos, but depending on production and basis at the project, the amount we contribute can change (for example if the project is performing terribly we won't have to contribute as much money as originally thought which is a protection for us and actually helps our IRR).
Very helpful, thank you!
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