In this video I show you different scenarios with debt sizing and debt sculpting.
- I start with the example of a structure in which debt is sized based on a maximum debt to capital ratio and with annuity debt repayment. This is resulting in a high DSCR ratios and therefore the possibility to either raise more debt or sculpt the debt.
- Then I switch to debt sizing using a target DSCR of 1.3x. This will increase the debt amount up to 90% of total project cost which might be too aggressive and risky and not acceptable by lenders.
- Next is to size the debt based on a min of debt resulting from max debt to capital ratio and debt sized based on CFADS and min DSCR. Two tranches of debt are considered in the analysis and are sculpted to maximize equity IRR and satisfy min DSCR required by lenders.
- This example also shows that including the debt sizing method using CFADS will result in a number of circularities in the model. If you are using the copy and paste method to get rid of the circular reference, then it will slow down the model and also you won't be able to use goal seek function.
Just note that in this video, I do not explain how to build the debt sizing mechanics in the model and my aim here is to encourage you to think about the upside of debt sculpting.
If you want to learn more about debt sizing and debt sculpting, I encourage you to check Professor Edward Bodmer's website and go through his videos on this topic:
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Who is the Financial Model Detective?
Hedieh has made financial modelling her profession and passion. She has worked since 2008 as the financial modeler and was the lead modeler for several Mega green field projects in Africa.
She is the author of a book on project finance model audit called:" Financial Model Detective"
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