The aim of this tutorial is to illustrate what the most common project finance debt ratios found in loan documentation and term sheets are and how to set them up correctly in a financial model. The intended audience are those preparing, analysing and reviewing project finance transaction models.
What’s in this tutorial?
The three project finance ratios that are covered here include:
- Debt service coverage ratio (DSCR),
- Loan life coverage ratio (LLCR), and
- Project life coverage ratio (PLCR)
In the tutorial we explain the importance of these project finance ratios in particular, focusing on how lenders interpret and prioritise them. We show you how to build the ratios correctly into a model and critically, also highlight common mistakes that arise in ratio calculation.
Why is it important to get your ratios right?
Given that loans are non-recourse in project finance, lenders can only rely on the projected cashflows of the project rather than balance sheet of its sponsors to repay its debt obligations. Therefore, lenders pay very close attention to project finance ratios in models and it is imperative that these ratios are set up correctly.