October 1, 2012
FOR REVIEW BY P3 EVALUATION TOOLKIT BETA-TESTERS
Three metrics, Annual Debt Service Cover Ratio (ADSCR), Loan Life Cover Ratio (LLCR) and Project Life Cover Ratio (PLCR) are used by the lenders to check project capacity to repay debt.
Annual Debt Service Cover Ratio (ADSCR)
This represents, for any operating year, the ability for the net project revenue to cover the debt. This ratio is determined as follows:
ADSCRi = CFADSi
CFADSi = net cash flow available for debt service at year i (i.e. the amount of cash remaining after operating costs and taxes have been paid)
DSi = debt service required at year i (i.e., principal and interest)
The higher the ADSCR, the more attractive the project will be to lenders. Any ADSCR above 1.0 provides a cushion for adverse circumstances that may occur during the project’s life. This means that if, for whatever reason, the project revenue is below what has been forecasted at year i, the concessionaire should nevertheless be at least able to repay the debt. The minimum required ADSCR is a function of the risk inherent in the project. Generally, the minimum required ADSCR is 1.15 to 1.2 for low-risk P3 projects (e.g., those involving availability payments), and it may be as high as 1.5 to 2.0 if revenue risk is high, such as for toll-based concessions.
The ADSCR is the primary determinant of the maximum loan that can be raised against project revenue, as illustrated in Table 9-1. As the table shows, for a pre-debt cash flow of $1,000, the maximum amount of debt that can be raised is $9,833 for a 25 year debt term when the required ADSCR is 1.30. If the cover ratio is reduced to 1.15, the amount of debt that can be raised increases to $11,116.
Table 9-1. Effect of ADSCR on Loan Amount
|Debt term||25 years||25 years|
|(a) Project cash flow before debt service||$1,000||$1,000|
|(b) ADSCR requirement||1.30||1.15|
|Maximum annual debt service [(a) / (b)]||$769||$870|
|Amount of debt which can be raised (based on annuity repayment)||$9,833||$11,116|
|Source: E.R. Yescombe, Public-Private Partnerships: Principles of Policy and Finance|
During their projections, lenders schedule loan repayments (see discussion in Chapter 5) such that projected ADSCR for each period through the term of the loan does not fall below their required minimum at any time.
Loan Life Cover Ratio (LLCR)
This ratio indicates the capacity for the concessionaire to bear an occasional shortfall of cash due to a change in circumstances (relative to the assumptions) in the model while maintaining its debt service through the end of the term of the debt. This ratio is calculated as follows:
LLCRi = NPV (CFADSi → end)
NPV (DSi → end)
NPV(CFADSi → end) = Net present value of the cash flow available for debt service from year i to the end of the debt repayment period.
NPV (DSi → end) = Net present value of total of debt service remaining at year i (i.e., principal and interest).
The project is considered viable for the lenders when the LLCR exceeds the principal amount of debt outstanding for every year of the project life. This means that the concessionaire should be able to maintain its debt repayments if there is a period of cash shortfall. The higher the LLCR, the more attractive is the project to lenders.
The ADSCR and LLCR are used by the lenders to check project capacity to repay debt in adverse risk scenarios, such as if revenues are below forecasted levels during a recession. The minimum initial LLCR requirement in lenders projections for P3 projects is typically about 10 percent higher than the required ADSCR.
As part of the lenders’ continuing monitoring of the loan, the LLCR may be recalculated throughout the project life to compare the projected operating cash flow for the remainder of the loan term with the remaining loan outstanding.
Project Life Cover Ratio (PLCR)
Another check made by lenders is whether the concessionaire has capacity to make repayments after the original final maturity of the debt, within the "cash flow tail" period (see Chapter 5), if there are difficulties in repaying all of the debt in time.
The value to lenders of the tail can be calculated using the PLCR. To do so, the CFADS for the whole life of the project (not just the term of the debt as for the LLCR) is discounted to its NPV, and this figure is divided by the debt outstanding. The minimum initial PLCR requirement in lenders projections for P3 projects is typically about 15-20 percent higher than the required ADSCR.