DSCR and LLCR Debt Capacity for Infrastructure Projects
Project finance lenders size debt using cash flow, DSCR, LLCR, leverage limits, tenor and downside sensitivities rather than relying on project cost alone.
How Project Finance Lenders Size Debt Using DSCR and LLCR
Project finance debt capacity is determined by the amount and timing of cash available to service debt rather than simply by the project's construction cost or asset value.
Lenders typically evaluate several constraints simultaneously. These can include debt service coverage ratios, loan life coverage, leverage or gearing limits, tenor, project life, reserve requirements and downside sensitivities.
The maximum debt facility is generally determined by whichever lender constraint produces the lowest supportable amount.
Preparing a Project for Debt Underwriting
Financely advises eligible project sponsors on bankability, capital structure, debt sizing and institutional financing through paid project finance mandates.
Request a QuoteProject Finance Debt Capacity
A sponsor may ask lenders to finance a fixed percentage of project cost. The lender still needs to determine whether projected cash flow can support the resulting repayment schedule.
This is why a project with US$200 million of capital expenditure does not automatically support a predetermined amount of debt.
Project debt must fit within the cash flow that lenders are willing to recognize under their base case and downside assumptions while maintaining the required coverage ratios and other structural constraints.
Cash Flow Available for Debt Service
Debt sizing begins with the cash flow available for debt service, commonly referred to as CFADS.
CFADS represents the project cash available to pay scheduled principal and interest after the operating, tax and other project-level items recognized by the financing model.
The precise definition depends on the project and financing documents, but lenders need a consistent cash-flow measure before they can calculate coverage ratios.
Debt Service Coverage Ratio
DSCR compares cash available for debt service during a period with scheduled debt service during that same period.
A ratio above 1.00x indicates that modeled cash flow exceeds scheduled debt service for the relevant period. The lender normally requires additional headroom rather than sizing debt exactly to 1.00x.
How DSCR Sizes Debt
Assume a project's lender case produces US$15 million of annual CFADS.
The lender can determine the maximum scheduled debt service that preserves its target coverage requirement. That debt-service capacity is then translated into principal and interest over the proposed tenor.
This process is one reason project-finance amortization is often sculpted around forecast cash flow rather than using equal principal payments.
Loan Life Coverage Ratio
LLCR measures coverage across the remaining life of the loan rather than focusing only on one debt-service period.
It generally compares the present value of projected CFADS during the remaining loan life with outstanding debt.
DSCR shows period-by-period debt-service headroom. LLCR gives the lender a broader view of the cash-flow coverage available over the remaining loan term.
Project Life Coverage Ratio
PLCR uses cash flows over the remaining economic life of the project rather than stopping at the contractual loan maturity.
This can help lenders evaluate the value of the project's cash-flow tail after scheduled debt maturity.
Gearing and Leverage Limits
Cash-flow coverage is not always the only debt-sizing constraint.
A lender can also impose a maximum debt percentage relative to total project cost, eligible project cost or another agreed capital measure.
A project can therefore support more debt under DSCR calculations than the lender is willing to provide under its gearing cap.
The Binding Debt Sizing Constraint
Debt Tenor and Project Tail
A longer debt tenor can increase debt capacity because repayment is spread across more periods.
Lenders still want a meaningful period between final loan maturity and the end of the underlying concession, offtake contract or economic project life.
This tail provides additional protection if operating performance or repayment is delayed.
Debt Service Reserve Accounts
A project-finance structure can require a debt service reserve account to provide additional liquidity for scheduled debt service.
Financely has separate coverage of debt service reserve account mechanics .
Lender Base Case Versus Sponsor Case
Sponsors naturally model the project using assumptions they believe are commercially achievable.
Lenders may use more conservative assumptions for production, availability, prices, operating costs, inflation, degradation, construction timing or other project variables.
Debt capacity should therefore be tested under the lender case rather than relying exclusively on the sponsor's base case.
Downside Sensitivities
Why Strong Contracts Affect Debt Capacity
Project finance lenders place significant weight on the contractual framework supporting projected cash flow.
A long-term offtake agreement with a credible counterparty can create more predictable cash flow than a project exposed entirely to merchant pricing.
Financely covers the broader requirements in its project finance bankability guide .
Information Required for Debt Sizing
- Detailed construction budget
- Construction schedule
- Operating assumptions
- Revenue contracts and pricing terms
- Operating and maintenance costs
- Tax assumptions
- Working-capital assumptions
- Proposed debt tenor
- Interest-rate assumptions
- Reserve requirements
- Sponsor equity
- Base case and downside financial model
How Financely Approaches Project Debt Sizing
Financely reviews the project's capital cost, contracted revenue, operating assumptions, financing timetable and expected cash flow before presenting a debt structure to potential capital providers.
Debt capacity can then be tested against coverage ratios, gearing limits, reserve requirements, tenor constraints and downside scenarios.
Financely provides infrastructure finance advisory and industrial project finance advisory for eligible transactions.
Request a Project Finance Assessment
Submit the project budget, financial model, development status, revenue contracts, equity contribution and required debt amount for an initial mandate assessment.
Request a QuoteImportant. This article provides general commercial information only and does not constitute investment, legal, tax, accounting or credit advice. Project-finance ratios, debt sizing, reserves and lender requirements depend on the project, contracts, jurisdiction, model assumptions and financing institutions. Financely provides corporate finance advisory and arranging services. Financely is not a bank or direct lender and does not guarantee financing approval or transaction completion.
