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Mini-Perm Financing Or Kick The Can Down The Road?

Mar 23, 2023 10:25:05 AM

What would you do?


The investment banker was blunt. "You should have refinanced the project back in 2021. Market conditions are worse today than they were then."

I had to admit, she had a point. "But who could have anticipated the current environment of ramping inflation and high-interest rates?", I replied.

She shrugged. "Hard to predict. But we have to deal with the market as it is now."

We lapsed into a thoughtful silence. There was no clear answer to the question at hand.

"Let's review our options," I suggested.

The dilemma:

1️⃣ Do not refinance the project and wait for better market conditions;

2️⃣ Refinance the project under current market conditions and take the hit.

"There is a third option", she added. "Have you considered a mini-perm facility?"

I was surprised. "A mini-perm? Isn't that just kicking the can down the road?"

"Well, it might seem that way," she said. "But think about it. If we, say, negotiate a mini-perm facility with a 5-year maturity period and a 12-year amortization period, you could still reap the benefits of refinancing the project now and hope that market conditions improve by the time the facility matures."

I could see her point. But I was worried about the risks.

"What about the refinancing risk?" I asked. "What if the lender isn't willing to refinance the principal at maturity? And what if market conditions get worse?"

"Those are valid concerns," she acknowledged.

I pondered the option... for me, a mini-perm facility is kind of a "kick the can down the road" solution. You get the benefits of refinancing now but might be postponing the pain of having to face tough market conditions.

"Okay, let us think about it.", I said.

The next step was to build a solid financial model that would allow us to analyze various scenarios and make the best decision.

Building a solid financial model is critical for the evaluation of different scenarios and risks, testing assumptions, and identifying potential opportunities and pitfalls. It is a crucial tool to gain a deep understanding of the potential outcomes of investment decisions.

What would you do? Let me know by commenting on my original LinkedIn post.

This article was written and published by one of our Full Stack Modeller community members, Ruben Martinez.


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