Loan Life Cover Ratio (LLCR): a Worked Example

Debt service cover answers a narrow question: did this period's cash meet this period's payments? A project can pass it comfortably today while a heavy maintenance year, the end of a contract or a fall in tariffs waits three years down the schedule. The historic ratio learns about that year when it arrives, and a projected ratio commonly looks only twelve months ahead. The loan life cover ratio brings it forward. By taking every period's forecast cash from now to final maturity, discounting it, and comparing the total with the debt outstanding, it measures how much room the forecast leaves on the whole loan, not on one instalment.

The price of summing is that periods offset each other. A strong final year can lift the ratio even when an earlier year cannot pay on its own. So a lender reads the two ratios together: the life ratio for the size of the cushion, the period ratio for whether cash arrives when it is needed.

Each part is a choice the agreement makes. CFADS is the forecast from the current base case, updated at each calculation date. The discount rate is usually the cost of the senior debt, including margin and the hedged base rate, applied period by period with the same dates and day count as the interest; with a rate that matches the loan, the present value of the scheduled payments equals the balance owed. Where the agreement counts the reserve account, it commonly does so in one of two ways: the balance of the debt service reserve account is added to the present value, or taken off the debt. Either lifts the ratio, by different amounts; some definitions leave the reserve out altogether. And the window is the loan's life; extend it to the end of the asset's contract and the ratio becomes the project life cover ratio.

A toll bridge concession, constructed for this page like every figure in it, owes US$55m with four annual payments left at an interest rate of 8%. Its forecast CFADS includes a deck resurfacing in year three. Figures in US$m:

Today's period cover is 1.26 times and says nothing is wrong. The life ratio of 1.22 times says the loan is covered in total, but it is lower than it would be without the resurfacing, by 0.12 of a turn, and the period column shows why: year three's cash meets only three-quarters of that year's payment. The surplus in year four cannot pay year three unless it is moved backwards, by a reserve, a maintenance account funded in advance, or a schedule that asks less in year three. The last line shows the definition at work. If the agreement lets the reserve come off the debt, the same forecast reads 1.43 times.

The payments here are an ordinary schedule, chosen to show the gap. Had the repayments been sculpted to the forecast, each year's cover would equal the life ratio, as the next section explains.

The debt service cover ratio is one period's cash over one period's payments. The loan life ratio is the present value of all remaining cash over the balance, and the balance is itself the present value of all remaining payments when the discount rate is the loan's rate. So the two coincide when debt is sculpted to a constant cover in every period and discounted at that rate. They part when the repayment profile does not follow the cash, when a cash sweep or prepayment reduces the balance, or when the discount rate differs from the interest rate.

The project life cover ratio uses the same arithmetic over the asset's whole economic or contract life, including the years after the loan is due to be repaid. That tail is the lender's room to extend if things go wrong. A project with a large tail has a project life ratio well above its loan life ratio; one whose contract ends with the loan has almost none.

DEFINED IN ONE PARAGRAPH → · CFADS, WORKED → · DEBT SERVICE COVERAGE RATIO →

At financial close, a target life ratio can set the maximum loan: the present value of the banking case's CFADS divided by the target is the most the lender will advance. Where a life-ratio target is used, lenders commonly test the size against period cover as well and take the lower answer, because the life ratio alone would let strong late years carry debt the early years cannot service. The target is a term of the deal, set by asset, contract and market, and the example's ratios are not offered as norms.

During the loan, where the agreement tests it, the forward-looking ratio sits in the covenant package beside historic and projected period cover, often with a lock-up level that stops distributions and a lower default level. Because it is a present value of a forecast, the argument at each calculation date is about the forecast: who updates the base case, what assumptions the lender may challenge, and what discount rate applies once a hedge has rolled off. Two models of the same project can produce different ratios honestly. The agreement, not the model, decides which one counts.

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