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.
Would you mind shooting me a PM ? I have a few more questions about PF banking
Great explanation here on Project Finance ("PF"). Just a few more pointers to add on from my own experiences with PF.
For context, I am currently an analyst from Asia PF bank that covers primarily APAC transactions (e.g., Indonesia, Vietnam, Singapore, ANZ). Our key workstreams are mainly on (i) PF Lending and (ii) PF Financial Advisory (for Sponsors).
What Energ-yGuy mentioned here covers mainly the workstream for PF Lending transactions. Generally, borrowers (i.e., sponsors) would reach out to banks for project financing (primarily senior debt financing), of which most of the time there will be a Financial Advisor ("FA") appointed to help run the process (especially so if it is a large-scale financing). For such workstream, we normally just take the models from Sponsors / FA and do some crazy stress test on the model because banks are very (very) downside focused.
However, for banks that act as FAs, we are often required to produce models from scratch for Sponsors. On top of that, we help to conduct market sounding from other banks to understand their loan pricing, appetite, risk and other bankability concerns that they might have for the project. During this process, we also help to find out which are the banks that can help offer other banking offerings like Equity Bridge Loans, FX and Interest Rates Hedging, that would help provide Sponsors with a more comprehensive financing package. As a FA, we also help to negotiate terms (eg. PPA terms) with the relevant state authorities involved should there be any. Compared to Lending workstream, FA is considerably much more tiring but it comes with much more learning.
On a side note, I used to pursue the general M&A route and was previously from a Infrastructure PE fund for quite some time. I can say that the way things work in M&A / PE and PF work is very different. One good example would be that PE investors are very upside focused (more so than the downsides) but PF is EXTREMELY downside focused. From my personal experience, I find PF modeling to be relatively more thorough and detailed than the usual M&A / PE modelling (just my two cents).
Thanks for this post. Are you based in Singapore by any chance? I am coming to the end of a 2-year stint at a regional infra PE fund and going into PF banking as a long-term career is one of the moves I've been considering, though it sounds like a relative lack of strong modelling skills would hold me back.
Hey are you still active? Love to dm you to enquire further
infrastructure corporates dcm is similar to conventional dcm
project bonds or private placements can get more neaunced if there is a greenfield or complex brownfield or complex whole-business-securitisation angle
the complexity usally arises from interaction between debt amortisation, construction period, leverage and DSCR covenant testing and maintaining a certain credit rating
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