Debt Ratios

The DSCR indicates, for a given period, the ratio of the amount of cash available to meet interest payment and principal repayment requirements on the senior debt (i.e. banking or capital markets funding) to the amount of senior debt interest and principal repayments required (‘Debt Service’). Therefore, to cover the debt service, the ratio must be over 1.0.

The establishment of a reserve account is a usual condition of the senior lenders when they supply the debt, specified in the contracts. Also stipulated are a ‘lock-up’ value below which the DSCR should not fall (typically 1.10-1.20) and a ‘default’ value (typically 1.05-1.10).

If the project DSCR falls below the lock-up value through insufficient cashflow, distributions to shareholders are prevented until adequate funds are available to allow the DSCR to return above the lock-up threshold.

If default is reached, the senior lender can require its debt to be repaid, or take over control of the project from shareholders.

The LLCR is the ratio of the net present value (NPV)* of cash available for debt service during the term of the senior debt to the outstanding balance of the senior debt. Similarly to the DSCR, the contracts may specify the lock-up and default values for the LLCR.

*The Net Present Value (NPV) is the value of future cashflows at the present point, allowing for the change in value of money over time. A “discount rate” is applied to value the future cashflows in today’s money.

The graph (accessed via link below) shows the typical healthy profiles of the DSCR and LLCR, together with the lock-up and default values. The steep rises towards the end of the concession occurs because most of the debt is repaid by this stage and the debt service (interest plus principal) is significantly lower.

Debt ratios