Main Model - Structuring the Debt
- 03:06
Modeling a large project finance model - debt structuring
Transcript
Let's take a look at how we would structure our debt in the project if we were to do it from scratch. So let's begin by adding another metric to our little summary section here, and that's gonna be the loan maturity. And we can calculate this as the sum of the years over which the syndicated loan is outstanding, and we can get that data from our finance tab. And currently that would be six years. So let's go ahead and take our syndicated loan amount down to 0 to begin with, and let's actually make a small change to our debt service coverage ratio, which at the moment might be a little too high at 1.3. So let's make it 1.25. And let's see what would happen if we start with a syndicated loan size of 1000. Well, what you can see here is that our loan life coverage ratio is 1.6. It's still pretty decent, very high. We're also gonna assume that we want a loan maturity no higher than 10 years. In this case, we're at only four years, so that's very low. So it seems like we have a significant capacity to add debt to this project. So let's go up to 1500 in our loan size. And now you see a few things happening. One of them is that the equity IRR is actually going up as we increase, of course, the amount of debt financing, our loan life coverage ratio is still pretty high at 1.42, and our loan maturity is still well below 10. So let's go up to 2000. And again, our metrics still look good with an equity IRR now of 14.4. Our loan life coverage ratio is at 1.3 and our loan maturity is at six. Now what happens if we go really high to 3000? We hear what you see. Of course, the equity IRR is gonna go up by a significant amount, given that we only have now 3% of the total capital in the form of equity. But what you see here is that now our loan life coverage ratio, it's pretty low if we wanted to keep it above 125. Of course, we failed in the sense that now we're 1.14 and we've sort of reached the maximum loan maturity that we want to have in this loan.
So in this model, if we bring the syndicated loan size to around 2,700, I think we would get the best outcome. We would have a loan life coverage ratio, which is pretty much in line with a debt service coverage ratio assumption of 1.25. We would have a loan maturity that is below 10 years, and our equity IRR is actually very nice at 29.4%. Now keep in mind that all of these metrics are based on our current forecasted operational performance of the project, and we'll definitely need to sensitize those operational forecasts.