Debt Sizing by Singapore Corporate Advisors
First impressions do count, especially when financiers like banks, funds and investors are sizing the quantum of debt your project can support.
If you don’t have a rough sense of the debt size – or even what impacts it – before approaching financiers to market your project, then you will be disappointed with the outcome and worse, may end up with a funding gap which could stall your project entirely.
Once a funding gap appears, financiers would want to see it plugged completely with additional equity or mezzanine financing before they commit their capital and risk to the deal.
We have seen cases of debt sizing falling short at the last minute, causing projects to fail unexpectedly due to hiccups in acquisition financing, project financing and refinancing.
In fact, when it comes to debt sizing, one should even go further by anticipating what financiers do when they first receive loan proposals for projects.
Prevention is better than cure.
Similarly, you should not launch your deal before knowing how much capital you are seeking from the various tranches of financing.
This is because it would be an uphill battle convincing financiers to provide more capital than their initial assessment.
Front loading the debt sizing exercise and getting it right the first time is better. Having to go back, hat in hand, to your equity investors to ask for more capital than originally planned, will cause them to lose confidence in your project.
Debt Sizing Guidelines
How do you go about debt sizing your deal?
We think it is useful to be aware of:
- Cashflow available for debt service (CFADS)
- Debt sizing metrics (DSCR, LLCR, PLCR, Debt/EBITDA)
- Financing tenor
- Base interest rate and likely credit margin
- Interest, FX and commodity swaps / hedging
- Principal repayment profile (straight line, credit foncier, bullet)
- Debt service reserve account (DSRA)
- Cash sweep
- Financial covenants
- Haircuts to revenue, costs and project delays
- Withholding tax on interest
- Upfront fees
- Commitment fees
- Agency fees
- Interest during construction
- Payment-in-kind (PIK) interest
- Benchmarking advance ratios or loan-to-values for similar projects
Downsides for not debt sizing before approaching financiers
What if you went ahead to launch your deal anyway?
Hoping for the best and assuming you will most likely get a “roughly” 80-90% advance ratio is not a good financing strategy.
By the time you realise you have a funding gap, you will be racing against time e.g. a Long-stop date or an exclusivity period end date to plug the financing gap with bridge financing that are expensive and punitive given the lack of senior security cover.
We have seen borrowers go to drastic extents in the commodity sector, such as selling call options to trade future upside above a certain strike price in exchange for option premium just to bridge funding gaps, only to go into insolvency when commodity prices go against them.
By the time you realise you should have been prepared with an idea of debt sizing before approaching financiers, it would have been too late.
Engaging the help of a corporate advisor who has had experience and track record as both lender and borrower is a good way to tackle debt sizing.
One shot, one kill – make your shot count.
Engage us now to assist with debt sizing and other financing related matters to get your project financed.