Financial models are at the heart of every project finance deal. They have become the lingua franca by which deal characteristics are communicated and deal performance is monitored.
Whether you are a banker, financier, lawyer or commercial bid manager, models are an integral part of what you do. However, the exact use you make of them depends on which of these groups you belong to.
There has previously been little available in the way of model-related training that tailors the skills imparted to suit these different audiences.
Until now, that is.
This is why we have released our eBook examining how modelling fluency is a must-have for professionals in every discipline across the finance industry.
The eBook features contributions from experts in the fields of law, finance and accounting who each provide their own perspectives on the different roles they play in project finance deals. The interviews have been combined with Operis’s 25 years of project finance modelling and training experience to present a useful snapshot of the current pressures facing market participants.
These individuals fulfil their roles well when they have internalised an intuitive understanding of the economic implications of the issues they are deliberating. Our eBook argues that, in the sophisticated modern deals they encounter, many find gaining this level of confidence achievable only at the cost of disheartening demands on time that is already scarce.
But this sensation is not confined to junior professionals with limited experience. It extends to finance veterans whose experience was gained in an era when models played a less central role in concluding transactions.
The following are what we see as the three core financial modelling skills that have become vital for modern finance:
1. Building financial models:
Raymond Campbell, who is a Financial Modelling & Valuation Advisory Partner at KPMG, summed up the importance of financial models perfectly when he said: “Anyone who is running a reasonably complex organisation needs to have a keen grasp on the financial performance of the organisation not only historically but even more so prospectively. This is where models are critical. People, whether internal or external, providing financial advice to the leaders of organisations should know how to build models.”
An Excel spreadsheet that estimates a project and shareholder return, as well as debt coverage ratios across different time frames, can be a substantial piece of work. The best modellers accomplish the calculations in a way that, far from looking complicated, appears effortless and expressive to the reader.
This prowess demands purposeful training at the beginning of a career followed up by a period of working intensively with models.
2. Assessing and interrogating financial models:
For every one or two people who build a model, there are perhaps ten or twenty times as many who will receive that model and have to make sense of what it is saying.
This audience needs to assess the spreadsheet, and then gauge whether it is dependable in its reflection of a deal. The central elements include applying checks, verifying results, and tracing formula logic, as well as understanding subtleties that permeate debt coverage ratios and other metrics.
Once completed, assessing a model gives way to interrogating it, to decide whether the opportunity described by the spreadsheet is attractive. Interrogation involves fathoming out how to get a model someone else has built, possibly in an unfamiliar style, to deliver sensitivity analysis and how to gain high confidence that the analysis is correct.
These skills are imperative for lenders and investors who need to decide whether to participate in transactions on the basis of models that were constructed by external parties.
A background in building models is certainly valuable in assessing and interrogating them, but is neither essential nor sufficient on its own.
3. Aligning contracts and financial models:
Confirming that the ratios defined in the agreements between the parties meaningfully describes the maths performed by the project model is a crucial step in any deal. Knowing the issues in play imparts a deep understanding of the commercial trade-offs involved in covenant definitions.
This context is valuable to bankers who put forward term sheets, and legal advisers who formalise the bankers’ offer in a credit agreement or equivalent.
You can download the full eBook here
If you would like to find out more about our new, industry tailored financial modelling training and book your place on an upcoming course, visit our training page.
If you have any questions regarding financial modelling best practice, it would be great to hear from you.