Commercial & Financial Advisory Role
COMMERCIAL & FINANCIAL ADVISORY
Rand International Capital has developed significant experience in the role of Financial Advisor, particularly on infrastructure-based projects. We see our role as more a “Commercial” advisor, of which financing and sustainability is a key element.
The evaluation of the project’s viability employs the Discounted Cash Flow Model and incorporates composite measures of viability. In the models used, annual cash inflows (operating revenues) of the project, less annual cash outflows (operating costs, corporate taxation and debt redemption), are discounted back to a Present Value (PV) over a twenty-year period. A discount rate equating to the after-tax cost of the project’s funding is used to evaluate the project. The resulting Present Value of the project cash flows are netted off against the capital costs of the project to arrive at a Net Present Value (NPV) for the project. The Internal Rate of Return (IRR) of these cash flows is also calculated as well as the standard operating and financial ratios to indicate viability.
Inherent in such an exercise is the need to test the reasonableness of the assumptions, or thinking, behind the motivation of the project and to this end the assumptions used will be detailed comprehensively.
The specific objectives of the project sponsors will need to be ascertained in order to investigate the various financing options available and determine a suitable financial structure. This process would follow on from the above analysis and could take the following format:
- Commercial Analysis and Evaluation
- Determine sponsor objectives
- Amount and timing of equity
- Return requirements and timing
- Acceptable risks/liabilities
- Identify and develop risk matrix, recommend appropriate mitigants / allocations
- Prepare project specific cash-flow models
- Collate and co-ordinate technical assumptions
- Obtain economic/financial assumptions
- Determine the model output based on the sponsor’s requirements
- Economic and financial analysis
- Develop base cash-flow forecast
- Testing of different funding sources
- Sensitivity analysis of base case
- Equity return estimates
- Provide feedback on financial impact of technical options
- Optimisation of revenue profiles
- Development of hedging strategies (if required)
2) Sourcing the most effective financing
- Develop and advise on the optimal financing plan
- Explore potential funding sources including banks, capital markets and institutional investors
- Investigate Domestic Capital Markets (DCM) appetite
- Prepare information memoranda and term sheets
- Solicit bids from senior and mezzanine debt providers
- Co-ordinate indicative ratings
- Advise (where appropriate) on legal, technical and traffic advisors for the senior debt advisors
3) Tender Process
- Write financial section of tender document
- Solicit support letters from financial institutions
- Liaise with Government entities, as required during the bid
- Liaise with their advisors (if any)
- Advise on the finance-ability of the Concession, Design, Construction and Operations, Maintenance Contracts
- Review, alongside your legal counsel, the concession agreement and develop an optimum position on the concession agreement
- Advise on negotiations with Government
5) Closing the Transaction
- Lead or advise on negotiations with Senior debt providers
- Monitor lender’s due diligence and syndication (if necessary)
- Validate final pricing
- Co-ordinate signing and arrange the closing
All of the above data and assumptions are collated and summarised into a format that can be used to input the results into standardised projected financial statements over a twenty-year period.
The financial statements would comprise of the following:
- Summarised revenue streams and concessions per year, sale or concession prices, cumulative totals, land and infrastructure cost, opening and closing stock, revaluation of concession assets on capitalisation basis due to revenue increases and project sustainability indicators.
- Revenue linked to project throughput, whether by cargo volume, visitor number, transaction structure or any other form of revenue generation.
- Income statement complying with GAAP and indicating operating and profitability ratios.
- Operating expense schedules.
- Balance sheet in standard accounting format.
- Detailed cash-flow statement.
- Comprehensive ratio analysis including discounted cash-flow analysis such as Internal Rate of Return and Net Present Value and project finance indicators.
The above is conceptual and would be a methodology that could be employed dependant upon the client’s requirements.