In project finance, several financial components play a crucial role in determining the feasibility and profitability of a project. Interest During Construction (IDC), Arrangement Fee, and Commitment Fee are among the key elements that impact the financial dynamics of large-scale construction projects.
In this article, we’ll delve into the concepts of IDC, Arrangement Fee, and Commitment Fee, their calculation methods, and their significance in project finance models.
Additionally, we’ll explore how circularity arising from these components can be addressed using VBA (Visual Basic for Applications) in Excel.
Interest During Construction (IDC) | Arrangement Fee | Commitment Fee |
IDC represents the interest accrued on borrowed funds during the construction phase of a project. It is a significant cost component that contributes to the total project capex. IDC is calculated based on the Total Project Capex (TPC) and the Weighted Average Interest Rate (WAIR), adjusted for the construction period. IDC impacts project cash flow, financial viability, and debt service coverage during the construction phase. | Arrangement Fee is a one-time fee charged by lenders for arranging and structuring financing for a project. It is typically calculated as a percentage of the total loan amount and is paid upfront upon closing the financing arrangement. Arrangement Fee compensates lenders for the time, effort, and expertise involved in structuring the financing package and represents an additional cost to the borrower. | Commitment Fee is a recurring fee paid by the borrower to the lender for the unutilized portion of a loan facility. It is designed to compensate lenders for keeping the financing available to the borrower even if it is not fully utilized. Commitment Fee is usually calculated as a percentage of the undrawn portion of the loan facility and is payable periodically, regardless of whether the funds are utilized or not. |
Impact on Project Finance Models
- Total Project Capex: IDC, Arrangement Fee, and Commitment Fee increase the total financing cost of the project, affecting the overall project budget and financial feasibility.
- Cash Flow Management: IDC, Arrangement Fee, and Commitment Fee impact project cash flow during the construction phase and operational phase. These costs need to be incorporated into cash flow projections to ensure adequate funding and debt service coverage.
- Financial Structuring: Arrangement Fee and Commitment Fee are part of the financing structure and influence the choice of financing sources and terms. Balancing the costs and benefits of different financing options is essential to optimize project returns.
- Debt Service Coverage Ratio (DSCR): IDC, Arrangement Fee, and Commitment Fee affect the debt service coverage ratio, a key financial metric used by lenders to assess the project’s ability to meet debt obligations. Higher costs may reduce DSCR, potentially affecting the project’s creditworthiness and lender confidence.
Removing Circularity Using VBA in Excel
Circular references may arise in project finance models when IDC, Arrangement Fee, and Commitment Fee depend on each other or the total project capex. To address circularity, iterative calculations can be performed using VBA in Excel. By setting up iterative calculations with appropriate convergence criteria, circular references can be resolved effectively.
Here’s a simplified example of how VBA can be used to remove circularity in an Excel project finance model:
Sub Copy_Paste_Cons()
‘Copy_Paste_Cons Macro
Application.ScreenUpdating = False
Do While Range(“Consolidated_check”) <> 0
Range(“rng_Paste”).Value = Range(“rng_copy”).Value
Loop
End Sub
This VBA code calculates the Total Project capex iteratively, considering IDC, Arrangement Fee, and Commitment Fee. It adjusts the project capex value until convergence (Consolidated_Check) is achieved within the specified tolerance level.
Here:
rng_copy : Refer to Cell Range which includes calculated IDC, Arrangement Fee and Comittement Fee
rng_Paste : Refer to Cell Range which includes value pasted IDC, Arrangement Fee and Comittement Fee
Consolidated _Check : Refer to Cell Range which includes Convergence check making sure the calculated and paste costs are equal
