Project Finance 101: A Financier’s Encyclopedia

September 11, 2024

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When it comes to project finance, no two deals are exactly alike — or at least, it used to be that way. However, as public- and private-sector financing for renewable energy and sustainable infrastructure projects increases, the need to standardize projects and create a common language for the industry is growing. With billions in deployable capital available, project financiers must rally around a shared terminology and identify the universal metrics that best evaluate a project's viability and performance.

To solidify this common language, Banyan Infrastructure has created a glossary of project finance terms, concepts, and best practices that industry professionals can draw upon as they originate deals and build their businesses. This living glossary will regularly update with new definitions, concepts, and insights. Think of it as a renewable energy financier’s encyclopedia and a jumping-off point for those who want to dive deeper.

Impact Metrics
Cumulative Loss Rates and Loss Rates
Cash Flow Available for Debt Service
Debt Service Coverage Ratio
Cash Flow Waterfall
Internal Rate of Return

Cash Flow Available for Debt Service

Cash flow available for debt service (CFADS) represents the amount of money within a project’s cash flow that is available to utilize for its debt payments. This is a critical metric for evaluating the cash sufficiency of a project after operational expenses and taxes are covered and before any debt payments are made. Financiers use CFADS figures to indicate financial stability and evaluate a project’s loan-servicing capability, assess and manage risk, and boost investor confidence.

Cash Flow Waterfall

A cash flow waterfall dictates how a project’s revenue is allocated to various expenses, debt services, reserves, and equity returns. By sequencing cash distributions, this detailed map of cash flow distribution ensures that critical obligations are met first, safeguarding the financial integrity of the project as it moves along. Cash flow waterfalls are a crucial component of project finance, providing insight into a project’s upcoming cash requirements and enforcing financial discipline.

Read more about cash flow waterfalls here.

Cumulative Loss Rates and Loss Rates

A cumulative loss rate measures the total number of financial losses a project incurs over a specified period, typically from its inception to a particular point in time. This metric is crucial for evaluating a project's long-term viability and risk, helping to provide stakeholders with a clear picture of the project's financial trajectory.

Meanwhile, loss rates, often called default or delinquency rates, measure the percentage of a project's outstanding debt that has defaulted over a specific period. This metric is vital for understanding a project's short-term financial health and risk, which provides a snapshot of the project's near-term ability to manage its debt obligations.

Read more about cumulative loss rates and loss rates here.

Debt Service Coverage Ratio

Debt service coverage ratio (DSCR) is a financial metric that calculates a project's ability to cover its debt obligations with its operating income. This key indicator of the financial health and stability of a project provides a precise measure of the cash flow available to pay its current debt obligations. DSCR is crucial in securing favorable loan terms and approvals, assessing the financial health of a project, managing risk, and maintaining investor confidence.

Internal Rate of Return

Internal rate of return (IRR) is an objective measurement of an investment’s return rate in which the net present value (NPV) of all cash flows from a particular project equals zero. In simpler terms, IRR is the break-even interest rate that equates the cost of the investment with the present value of expected future cash flows. IRR is a universal gauge of profitability, and it’s possible to measure on both a project and a portfolio level.

Impact Metrics

Impact metrics are a series of environmentally focused measurements unique to renewable energy project finance. From public health to energy equity to climate benefits, they track the various improvements a project is intended to make on the surrounding environment and nearby communities. These metrics are crucial for securing specific tax incentives and public funding, particularly with respect to the Inflation Reduction Act and the federal government’s Justice 40 initiative, which seeks to direct 40% of federal clean energy investments toward projects in disadvantaged communities.