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Renewable Energy - Financing and Loans

In a project, we spend money on capital assets before any revenue is earned, so we need to secure funding to bridge the gap between when we are investing in capital assets and when the project begins earning revenue. Projects are usually funded by a combination of equity and debt. In this module, we will explore the concepts of interest during construction (or IDC), circular references, debt amortization, refinancing, and Debt Service Reserve Accounts (or DRSA) in the context of renewable energy projects.

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26 Lessons (91m)

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  • Description & Objectives

  • 1. Equity & Debt Financing

    04:32
  • 2. Interest

    03:16
  • 3. Grace Period

    02:12
  • 4. Interest During Construction Workout Part 1

    05:21
  • 5. Interest During Construction Workout Part 2

    04:02
  • 6. Interest During Construction Workout Part 3

    03:55
  • 7. Interest Rate Ratchets

    02:11
  • 8. Circular References

    02:22
  • 9. Circular References Workout Part 1

    03:11
  • 10. Circular References Workout Part 2

    02:12
  • 11. Circular References Workout Part 3

    02:05
  • 12. Circular References Workout Part 4

    03:34
  • 13. Circular References Workout Part 5

    05:02
  • 14. Circular References Macro Workout

    03:43
  • 15. Debt Amortization Schedule

    04:46
  • 16. Debt Amortization Workout Part 1

    03:46
  • 17. Debt Amortization Workout Part 2

    04:55
  • 18. Refinancing

    05:31
  • 19. DSRA

    03:30
  • 20. Case Study Modeling Debt - Flags

    02:59
  • 21. Case Study Modeling Debt - CFADS

    04:35
  • 22. Case Study Modeling Debt - Senior Debt Service

    04:15
  • 23. Case Study Modeling Debt - Junior Debt and Equity

    03:38
  • 24. Case Study Modeling Debt - DSRA

    03:02
  • 25. Case Study Modeling Debt - Dividends and Ending Cash

    05:29
  • 26. Renewable Energy - Financing and Loans Tryout


Prev: Renewable Energy - Capex Next: Renewable Energy - Tax and Dividends

Interest

  • Notes
  • Questions
  • Transcript
  • 03:16

Interest in renewable energy project finance.

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Transcript

Interest is simply the price we pay for borrowing money. To work out the cost of interest, we need an interest rate, which we put into the assumption sheet. We multiply that rate by the balance of the debt that is outstanding in each period of the model. We get that from the debt corkscrew, the base calculation, which calculates the balance of the debt and how much has gone up or down by in any given period. It all seems fairly straightforward until we think about what happens during the construction or investment phase of the project. During that time, we do not have any revenue. We're still building the revenue. We are still building the renewable energy project, so how on earth would one pay the interest that's due on the debt? Given that we've got no cash available. What we need to do and what is very common in most projects is we add the interest onto the debt balance. The agreement with the bank is during the construction period, any interest that becomes due is just added onto the debt balance, and then it is paid later once some revenue is being earned. From a modeling point of view, this is quite straightforward. We add what's called interest during construction, very commonly abbreviated to IDC into the corkscrew of the debt balance, and we continue to do so until such time as the construction period's over and operations start and revenue begins to be earned. The interest that is added in this way will compound. We will pay interest on the debt balance plus interest on any previous interest that was added. The time period when we're able to do this, we'll use a flag to mark that up and once we start to make some repayments of the debt, the amount we pay off will be not just the debt that's been drawn to fund the project, but also the interest that was added on during the construction period. Interest during construction, interest during construction usually continues up to the end of the construction period, simply because there is no other source of cash available. We'll set up a flag to markup when that period is. If the year we are in is less than or equal to the end of the construction period, 1 otherwise zero, and then within the corkscrew of the debt balance, the base calculation, we will have beginning balance plus drawdowns plus interest during construction. How do we work out the interest? It's the interest rate multiplied by the debt balance multiplied by the flag that we've set up. That's either 1 or zero. Those interest costs will automatically compound. We will pay interest on interest. The debt balance and the formula will include any previous year's interest during construction and when we start to make repayments, the amount we need to pay off is all of the debt that's been accumulated to fund the project, plus all the interest that's been added to the debt balance during the construction phase.

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