Grace Period
- 02:12
Grace Period in renewable energy project finance.
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Glossary
Project finance Renewable EnergyTranscript
It's quite common for project finance loan documents to include a grace period, meaning a period during which no payments are needed to be made. This is typically shortly after operations start. So on the operations commencement date, the project is still ramping up its equipment and starting to get towards full production. There might be a 6, 12 or even 24 month moratorium during which time no debt principle needs to be paid. Sometimes that extends to interest as well, in which case that interest would be added to the loan balance under the interest during construction idea that we were discussing previously. The grace period is there for two reasons. Firstly, the project hasn't ramped up to full production yet, and therefore the amount of cash flow coming in from revenue is not at its full, ramped up total potential. Secondly, it allows for short delays to the project. So if the operations commencement date slips by a few months, it doesn't mean that all the project finance terms and loan contracts then need to be renegotiated. All that happens is it eats into the grace period during which no payments were needed anyway. From a modeling point of view, we work out the first repayment date as being the date on which the grace periods finishes is the operations date plus the grace period. That's when the first repayment is going to occur. The formula we need is the debt repayment flag is if the year is bigger than or equal to the first repayment date, which is operations date plus whatever period of grace is allowed, then give me a one, otherwise give me a zero. So it's a standard flag just picking up at what point do we start.