Debt sizing to own your renewable energy project - Don’t leave it to the banks

Debt sizing for renewable energy projects
Financial modelling for renewable energy projects training course
We all know that it’s important in negotiation to understand the big picture from both ends of a renewable energy deal. Project financiers will rigorously test your project. Why then, would you take unclear analysis to the banks?

Lying in my bed, I hear the clock tick, time after time, project after project, the same horrible story. More often than not, developers will try to achieve an “80%:20% debt: equity ratio” on their renewables project. The poorly run process often goes like this:

  1. Develop a base case financial model (quite often a terrible one)
  2. Decide on 80% (or other, higher percentages) and demand that from the banks
  3. Send that model to the banks (often with corporate finance ratios)
  4. Let the banks do the debt calculations, based on project finance debt methodologies
  5. Negotiate around that figure based on two separate models (or end up using the banks model)
  6. The final result is different to what you expected; which leads you to:
    • Crawl back to the board of directors asking for more money
    • Have some not-so-nice phone calls with your contractors
    • Scale back the project scope

The sponsor has lost control of their project and negotiations. Like lambs to the slaughter.


Ensure clear analysis in your model before you approach the banks

Project finance relies on cash flow. You can’t hide behind a lack of clear analysis, you either have the cash, or you don’t. You aren’t fooling anyone. Make sure you provide the banks with all of the information needed.

At Corality, as consultants and trainers, we pride ourselves in clear analysis using the SMART best practice financial modelling methodology. Proactive, flexible analysis is required In order to accelerate transactions and reduce your time during the process. Developers must properly analyse projects in advance of approaching banks, and use the results to sell their project.

Plainly speaking, you need to know what to include in the analysis. If you are using EBITDA in your debt ratios for a project finance transaction, you are probably off to a bad start. If you don’t have the debt service coverage ratio (DSCR) calculated and presented, you are off to a terrible start. Debt sculpting and sizing is primarily based on DSCR, not EBITDA ratios.


Debt sizing for project finance – it’s easy

With a Corality SMART model (a methodology we provide in our financial modelling for renewable energy projects training course), you can manage the transaction analysis process smoothly. Debt sizing is relatively simple once you know how. It primarily comes down to tenor and DSCR (or other project finance metrics) under a number of different scenarios. This in itself is a big topic, which we will cover in an upcoming tutorial.

Back to a target leverage - with a clear, best practice financial model

It is possible to get 80% debt for your project. It requires concise analysis with a best practice model. More importantly, understand why a bank might push-back on your 80%. Further, understand what the impact of pulling various project levers will have on your economics...and the bank’s as well. For example, if your power purchase agreement (PPA) rate is locked-in with your off-taker, could you move on your operations and maintenance (O&M) costs if it really came down to it?  If so, how much might you need to move to hit the bank’s tolerance levels? What about construction timing?  Development fees?  The more prepared you are to defend your position and press theirs, the better chance of success.

If you want to learn more about the process and how to complete debt sizing for renewable energy projects, please read more about our Financial Modelling for Renewable Energy Projects training course in San Francisco on October 19-21st.

Financial modelling for renewable energy projects training course

As a Chartered Professional Engineer, Haydn is experienced across engineering, management consulting and finance. Originally from New Zealand, Haydn now leads Corality's Americas & European headquarters. He has led multi-billion dollar projects across the infrastructure, power and mining sectors globally. Haydn specialises in strategic consulting and transaction advisory services.

Contact Haydn Palliser

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