The deal was done many months ago, the sipping of champagne at financial close and the after deal party feel a very very long time ago. The financial advisors were long ago paid and disappeared off into the sunset.
But for some in the project finance world, that is not the end. It is just the beginning.
As an asset manager, the banks who invested many millions of pounds in the deal will look to you, to give them confidence that the project is performing as planned.
So, what do you do?
In the old days…
In the old days, you would simply take the financial close model and ‘jam in’ actuals data, overwriting the forecast data in the financial close model.
This kind of worked, but was not an ideal solution for a number of reasons:
– It was painful to actually do, as the model was not designed to take actuals data, finding the right place to jam the figures in and doing it consistently period on period was not a fun exercise.
– The person updating the model rarely had much involvement with the model prior to financial close and ran the risk of updating the model incorrectly.
– The model contained all kinds of functionality needed prior to financial close, for debt sculpting etc which was no longer required, meaning the model was much more complex than it needed to be.
The bespoke operational model
It is now established market practice to develop a bespoke operational model for project financed assets following financial close, designed specifically for ongoing monitoring of project performance.
An operational model will be designed to facilitate the easy update of actual performance data and overlay this information onto the financial forecasts for the remaining life of the asset.
The primary purpose of the operational model is to give comfort to senior lenders and shareholders that the asset is performing in line with expectations and is not in breach of any lenders’ covenants.
What makes a good operational model?
Some key features of a good operational model are outlined below.
- Easy to update
As an asset manager, you will need to be updating the model monthly, quarterly or semi-annually.
You may well have a large portfolio of assets and have many models all needing to be updated at the same time.
It is important that the process is as simple as possible. A well designed bespoke operational model will be structured to align its input structure with available sources of input data. i.e. Trial Balance from management accounting systems.
- It needs to be transparent and traceable
There are few things worse than having to spend hours unpicking complex formulae to understand the model logic. Application of a standardised modelling methodology will help to achieve this.
- It should be tailored
This ensures that the models are light, simple to navigate and include no redundant functionality.
- It needs to be flexible for future development
It is rare that over the 20 – 40 year life of an asset that the financial structure remains unchanged. It is likely that an asset will go through multiple re-financings throughout its lifetime. This results in a need to amend the financial model. To accommodate this, models should be developed on a modular basis which enables future development without damaging the integrity of the model
At F1F9 we have experience of developing operational models for hundreds of projects and would be keen to share our experience.Click here to find out more about how we can help you build operational models