{"id":29903,"date":"2024-08-18T21:00:03","date_gmt":"2024-08-19T02:00:03","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=29903"},"modified":"2025-01-29T23:21:42","modified_gmt":"2025-01-30T04:21:42","slug":"loan-life-coverage-ratio","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/","title":{"rendered":"The Loan Life Coverage Ratio (LLCR): The Most Important Credit Stat in Project Finance?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Loan Life Coverage Ratio (LLCR): The Most Important Credit Stat in Project Finance?<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/#How_to_Calculate_the_Loan_Life_Coverage_Ratio_and_Use_It_In_Real_Life\">How to Calculate the Loan Life Coverage Ratio and Use It In Real Life<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/#Why_the_Loan_Life_Coverage_Ratio_is_Better_Than_the_DSCR_for_Sizing_and_Sculpting_Debt\">Why the Loan Life Coverage Ratio is Better Than the DSCR for Sizing and Sculpting Debt<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/#The_Loan_Life_Coverage_Ratio_with_Variable_Dates_and_Discount_Rates\">The Loan Life Coverage Ratio with Variable Dates and Discount Rates<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/#The_Loan_Life_Coverage_Ratio_with_Multiple_Tranches_of_Debt\">The Loan Life Coverage Ratio with Multiple Tranches of Debt<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/#When_Does_the_Loan_Life_Coverage_Ratio_NOT_Equal_the_Debt_Service_Coverage_Ratio\">When Does the Loan Life Coverage Ratio NOT Equal the Debt Service Coverage Ratio?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/loan-life-coverage-ratio\/#The_Loan_Life_Coverage_Ratio_in_Covenant_Analysis\">The Loan Life Coverage Ratio in Covenant Analysis<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Loan Life Coverage Ratio (LLCR) Definition:<\/strong> The Loan Life Coverage Ratio in Project Finance equals the Present Value of All Cash Flow Available for Debt Service (CFADS) in the Remaining Debt Tenor \/ Current Debt Balance.<\/p><\/blockquote>\n<p>The <strong>Cash Flow Available for Debt Service (CFADS)<\/strong> equals EBITDA \u2013 Maintenance Capex +\/- Change in Working Capital \u2013 Cash Taxes in simple models (but can get more complex in real life).<\/p>\n<p>Before doing anything with the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-sculpting-vs-debt-sizing\/\" target=\"_blank\" rel=\"noopener\">Debt sizing or sculpting<\/a> in a Project Finance model, we must forecast the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/cash-flow-available-for-debt-service-cfads\/\" target=\"_blank\">Cash Flow Available for Debt Service (CFADS)<\/a> in each period.<\/p>\n<p>The <strong>LLCR<\/strong> is the \u201cPresent Value Version\u201d of the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-service-coverage-ratio\/\" target=\"_blank\" rel=\"noopener\">Debt Service Coverage Ratio (DSCR)<\/a>, and the two are equivalent when we size and sculpt the Debt based on one or the other (with a few exceptions).<\/p>\n<p>For example, let\u2019s say that in a simple Project Finance model, the asset\u2019s CFADS grows from $150 to $250 over a 10-year period. The Debt also <strong>matures<\/strong> in Year 10, so its <strong>tenor<\/strong> at the start of the project is 10 years.<\/p>\n<p>This Debt has a 10% interest rate attached, so the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/present-value\/\" target=\"_blank\" rel=\"noopener\">Present Value<\/a> of the CFADS over this 10-year Debt tenor is $1,201.4, based on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/net-present-value\/\" target=\"_blank\" rel=\"noopener\">NPV<\/a> function in Excel:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29904 size-full\" title=\"Present Value of CFADS\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-scaled.jpg\" alt=\"Present Value of CFADS\" width=\"2560\" height=\"559\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-scaled.jpg 2560w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-300x65.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-1024x223.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-768x168.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-1536x335.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205421\/01-Present-Value-of-CFADS-2048x447.jpg 2048w\" sizes=\"(max-width: 2560px) 100vw, 2560px\" \/><\/p>\n<p>If the Loan Life Coverage Ratio is 1.50x, this means that the <strong>starting Debt balance<\/strong> \u2013 how we initially fund the deal \u2013 should be $1,201.4 \/ 1.50x = $800.9:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29905 size-full\" title=\"The Loan Life Coverage Ratio for Debt Sizing\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205443\/02-Loan-Life-Coverage-Ratio-Debt-Sizing.jpg\" alt=\"The Loan Life Coverage Ratio for Debt Sizing\" width=\"1162\" height=\"399\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205443\/02-Loan-Life-Coverage-Ratio-Debt-Sizing.jpg 1162w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205443\/02-Loan-Life-Coverage-Ratio-Debt-Sizing-300x103.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205443\/02-Loan-Life-Coverage-Ratio-Debt-Sizing-1024x352.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205443\/02-Loan-Life-Coverage-Ratio-Debt-Sizing-768x264.jpg 768w\" sizes=\"(max-width: 1162px) 100vw, 1162px\" \/><\/p>\n<p>Since the LLCR and DSCR are <strong>equivalent<\/strong> in this simple example, the DSCR is also 1.50x in each period:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29906 size-full\" title=\"DSCR with LLCR-Based Debt Sizing\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205532\/03-DSCR-with-LLCR-Sizing.jpg\" alt=\"DSCR with LLCR-Based Debt Sizing\" width=\"1755\" height=\"740\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205532\/03-DSCR-with-LLCR-Sizing.jpg 1755w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205532\/03-DSCR-with-LLCR-Sizing-300x126.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205532\/03-DSCR-with-LLCR-Sizing-1024x432.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205532\/03-DSCR-with-LLCR-Sizing-768x324.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205532\/03-DSCR-with-LLCR-Sizing-1536x648.jpg 1536w\" sizes=\"(max-width: 1755px) 100vw, 1755px\" \/><\/p>\n<p>We have <strong>sized<\/strong> the initial Debt balance based on the LLCR, which is one of its main use cases in models.<\/p>\n<p>Its other main use case is to help lenders <strong>evaluate credit risk and test loan covenants<\/strong>.<\/p>\n<p>For example, if the minimum LLCR specified by a loan covenant is 1.30x, does it ever fall below this level in the Downside Case of the model?<\/p>\n<p>What happens if there\u2019s higher expense inflation, a contract cancellation, or a budget overrun in the asset&#8217;s development?<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/PF\/PF-03\/PF-03-DSCR-LLCR-Slides.pdf\" target=\"_blank\" rel=\"noopener\">The DSCR and LLCR in Project Finance &#8211; Presentation Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/PF\/PF-03\/PF-03-LLCR-Debt-Sizing.xlsx\" target=\"_blank\" rel=\"noopener\">Simple Project Finance Model with LLCR-Based Debt Sizing (XL)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/PF\/PF-02\/PF-02-VBA-Debt-Sizing.xlsm\" target=\"_blank\" rel=\"noopener\">Simple Project Finance Model with Debt Sizing, Sculpting, and LLCR (XLSM)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>0:42:<\/strong> The Short Version<\/li>\n<li><strong>4:30:<\/strong> Part 1: Debt Sculpting and Sizing Uses (Quick Review)<\/li>\n<li><strong>6:28:<\/strong> Part 2: Additional Items and Complexities<\/li>\n<li><strong>9:24:<\/strong> Part 3: Variable Dates and Discount Rates<\/li>\n<li><strong>11:22:<\/strong> Part 4: Multiple Debt Tranches<\/li>\n<li><strong>12:51:<\/strong> Part 5: The DSCR and LLCR in Covenant Analysis<\/li>\n<li><strong>14:47:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Calculate_the_Loan_Life_Coverage_Ratio_and_Use_It_In_Real_Life\"><\/span><strong>How to Calculate the Loan Life Coverage Ratio and Use It In Real Life<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In most models, we don\u2019t \u201ccalculate\u201d the LLCR; instead, we already know what it is and use it to back into the starting Debt balance, as in the example above.<\/p>\n<p>Continuing with this example, the next step is to calculate the Interest Expense each year based on the 10% rate * the starting balance.<\/p>\n<p>We can then back into the \u201callowed\u201d Amortization each year based on the 1.50x DSCR (since the LLCR equals the DSCR when the Debt is sculpted\/sized based on one or the other):<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29907 size-full\" title=\"Sculpted Amortization\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205555\/04-Sculpted-Amortization.jpg\" alt=\"Sculpted Amortization\" width=\"1624\" height=\"733\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205555\/04-Sculpted-Amortization.jpg 1624w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205555\/04-Sculpted-Amortization-300x135.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205555\/04-Sculpted-Amortization-1024x462.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205555\/04-Sculpted-Amortization-768x347.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205555\/04-Sculpted-Amortization-1536x693.jpg 1536w\" sizes=\"(max-width: 1624px) 100vw, 1624px\" \/><\/p>\n<p>As stated in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-service-coverage-ratio\/\" target=\"_blank\" rel=\"noopener\">the DSCR article<\/a>, the Debt Service Coverage Ratio includes only <em>scheduled<\/em> Interest Expense and Principal Repayments \u2013 not optional ones or \u201cprepayments.\u201d<\/p>\n<p>The definition of CFADS is also discussed more fully in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-service-coverage-ratio\/\" target=\"_blank\" rel=\"noopener\">the DSCR article<\/a>, so we recommend reviewing that for the details.<\/p>\n<p>Stepping back from this example, if you wanted to <em>calculate<\/em> the LLCR in each year of this model, you could do so with a simple NPV function in Excel divided by the Debt balance in the year:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29908 size-full\" title=\"LLCR Calculation with NPV Function\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-scaled.jpg\" alt=\"LLCR Calculation with NPV Function\" width=\"2560\" height=\"1049\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-scaled.jpg 2560w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-300x123.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-1024x420.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-768x315.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-1536x629.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205618\/05-LLCR-Calculation-NPV-2048x839.jpg 2048w\" sizes=\"(max-width: 2560px) 100vw, 2560px\" \/><\/p>\n<p>Note that we <strong>anchor<\/strong> cell O18 for the Year 10 CFADS because we do not want this to shift around at all \u2013 it should always stay in place because the Debt always matures at the end of Year 10.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_the_Loan_Life_Coverage_Ratio_is_Better_Than_the_DSCR_for_Sizing_and_Sculpting_Debt\"><\/span><strong>Why the Loan Life Coverage Ratio is Better Than the DSCR for Sizing and Sculpting Debt<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When you use the LLCR to <strong>size<\/strong> the initial Debt balance, you do not need to use Goal Seek in Excel \u2013 everything updates when there\u2019s a change in the Interest Rate, the CFADS in the period, or other factors.<\/p>\n<p>However, using the LLCR to size the Debt does <strong>not<\/strong> resolve the issue with <a href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/\" target=\"_blank\" rel=\"noopener\">circular references<\/a>.<\/p>\n<p>Specifically, the Taxes in the CFADS calculation change based on the Interest Expense, but the Interest Expense is affected by the Taxes since the CFADS determines the initial Debt balance.<\/p>\n<p>To resolve that, we need simple VBA code for a copy\/paste macro (see the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-sculpting-vs-debt-sizing\/\" target=\"_blank\" rel=\"noopener\">Debt sizing\/sculpting tutorial<\/a>).<\/p>\n<div class='code-block code-block-11' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/11\/19235107\/building.png\" alt=\"Project Finance & Infrastructure Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Project Finance Modeling for Energy, Transportation, and Mining Assets<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Evaluate infrastructure deals like a pro<\/h4>\n              <p>You\u2019ll evaluate the risks and rewards and make investment recommendations<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Master financial modeling<\/h4>\n            <p>Model solar, wind, gas, nuclear, toll road, airport, and mining assets<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 8 case studies<\/h4>\n            <p>Build 4 shorter \u201ccrash course\u201d models and 4 detailed \u201con the job\u201d ones\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/project-finance-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Project-Finance-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"The_Loan_Life_Coverage_Ratio_with_Variable_Dates_and_Discount_Rates\"><\/span><strong>The Loan Life Coverage Ratio with Variable Dates and Discount Rates<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If we\u2019re building a more complex model with variable issuance and maturity dates for the Debt and a variable Discount Rate (e.g., the Debt Interest Rate equals the Benchmark Rate + 5.0%, and the Benchmark Rate changes over the years), the LLCR calculation gets more complex.<\/p>\n<p>The <strong>easiest approach<\/strong> in this case is to create a \u201cflag\u201d for the Debt Tenor at the top of the schedule and to calculate the PV of CFADS during the Debt Tenor based on this flag, a running cumulative sum, and the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/discount-rate\/\" target=\"_blank\" rel=\"noopener\">Discount Rate<\/a> in each period.<\/p>\n<p>Here\u2019s an example:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29909 size-full\" title=\"PV of CFADS with Variable Dates and Discount Rates\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205643\/06-PV-CFADS-Variable-Dates-Discount-Rate.jpg\" alt=\"PV of CFADS with Variable Dates and Discount Rates\" width=\"1950\" height=\"1013\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205643\/06-PV-CFADS-Variable-Dates-Discount-Rate.jpg 1950w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205643\/06-PV-CFADS-Variable-Dates-Discount-Rate-300x156.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205643\/06-PV-CFADS-Variable-Dates-Discount-Rate-1024x532.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205643\/06-PV-CFADS-Variable-Dates-Discount-Rate-768x399.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205643\/06-PV-CFADS-Variable-Dates-Discount-Rate-1536x798.jpg 1536w\" sizes=\"(max-width: 1950px) 100vw, 1950px\" \/><\/p>\n<p>It \u201cworks\u201d because we <em>start at the end<\/em> and \u201cgo back\u201d to <em>the start of the period<\/em>, so we only have to worry about discounting the CFADS and the running sum at the appropriate Discount Rate for each specific period.<\/p>\n<p>With the PV of CFADS and Debt balance in each period, it\u2019s the standard LLCR calculation:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29910 size-full\" title=\"LLCR Calculation with Variable Dates\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205708\/07-LLCR-Calculation-Variable-Dates.jpg\" alt=\"LLCR Calculation with Variable Dates\" width=\"1957\" height=\"1152\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205708\/07-LLCR-Calculation-Variable-Dates.jpg 1957w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205708\/07-LLCR-Calculation-Variable-Dates-300x177.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205708\/07-LLCR-Calculation-Variable-Dates-1024x603.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205708\/07-LLCR-Calculation-Variable-Dates-768x452.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205708\/07-LLCR-Calculation-Variable-Dates-1536x904.jpg 1536w\" sizes=\"(max-width: 1957px) 100vw, 1957px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Loan_Life_Coverage_Ratio_with_Multiple_Tranches_of_Debt\"><\/span><strong>The Loan Life Coverage Ratio with Multiple Tranches of Debt<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If we\u2019re building a model with multiple tranches of Debt, the approach shown above also works, but we need to calculate the <strong>weighted average interest rate<\/strong> in each period.<\/p>\n<p>To do that, we need to know the split between the initial tranches, such as 70% in the First Lien and 30% in the Second Lien.<\/p>\n<p>If we don\u2019t know this percentage split, there\u2019s no way to calculate the LLCR because we don&#8217;t know the weighted average interest rate.<\/p>\n<p>Here\u2019s an example:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29911 size-full\" title=\"LLCR Calculation with Two Debt Tranches\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205752\/08-LLCR-Two-Debt-Tranches.jpg\" alt=\"LLCR Calculation with Two Debt Tranches\" width=\"1963\" height=\"962\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205752\/08-LLCR-Two-Debt-Tranches.jpg 1963w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205752\/08-LLCR-Two-Debt-Tranches-300x147.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205752\/08-LLCR-Two-Debt-Tranches-1024x502.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205752\/08-LLCR-Two-Debt-Tranches-768x376.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205752\/08-LLCR-Two-Debt-Tranches-1536x753.jpg 1536w\" sizes=\"(max-width: 1963px) 100vw, 1963px\" \/><\/p>\n<p>Sizing and sculpting multiple Debt tranches with this setup gets more complicated and requires us to calculate a \u201clocal\u201d LLCR for each tranche based on its specific interest rate; we may cover this topic in a separate article.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"When_Does_the_Loan_Life_Coverage_Ratio_NOT_Equal_the_Debt_Service_Coverage_Ratio\"><\/span><strong>When Does the Loan Life Coverage Ratio NOT Equal the Debt Service Coverage Ratio?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In more complex models with features such as <strong>grace periods<\/strong> (i.e., no Debt Service or no Interest Expense for a certain period), plenty of factors could cause the LLCR and DSCR to be mismatched, even if the initial Debt is sized and sculpted based on one of them.<\/p>\n<p>But in simple cases, there are two main model issues that might cause a mismatch:<\/p>\n<ol>\n<li><strong>Optional Debt Repayments or the Cash Flow Sweep<\/strong> \u2013 Since the DSCR and LLCR are based on only <em>scheduled<\/em> Debt Service, they don\u2019t work as intended if there are prepayments or optional repayments of the principal; these repayments distort the Debt balance and make it lower than expected.<\/li>\n<li><strong>Insufficient Cash Flow to Service the Debt<\/strong> \u2013 For example, if the Debt is sized and sculpted based on a 1.50x LLCR and DSCR, and the schedule Debt Service in one period is $100, but the CFADS is only $80, the asset cannot possibly meet the 1.50x minimum because the CFADS can\u2019t even pay for the minimum Debt Service.<\/li>\n<\/ol>\n<p>Outcome #2 should not happen with the appropriate assumptions, but it could happen in real life, especially with riskier assets that are more subject to cost overruns (e.g., offshore wind farms).<\/p>\n<p>Outcome #1 is quite common in any models with support for cash flow sweeps (see: our <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/debt-schedule\/\" target=\"_blank\" rel=\"noopener\">Debt Schedule tutorial<\/a>). Here\u2019s an example:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29912 size-full\" title=\"LLCR Calculation with a Cash Flow Sweep\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep.jpg\" alt=\"LLCR Calculation with a Cash Flow Sweep\" width=\"2092\" height=\"1106\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep.jpg 2092w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep-300x159.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep-1024x541.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep-768x406.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep-1536x812.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205817\/09-LLCR-Cash-Flow-Sweep-2048x1083.jpg 2048w\" sizes=\"(max-width: 2092px) 100vw, 2092px\" \/><\/p>\n<p>The interpretation depends on the <strong>context<\/strong> (i.e., <em>why<\/em> this happened).<\/p>\n<p>If lenders want to exit their investment earlier than initially planned because it&#8217;s performing poorly, they might be fine with this faster repayment.<\/p>\n<p>But in general, lenders prefer to be repaid as originally scheduled so they can maximize their returns without having to redeploy the capital elsewhere.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Loan_Life_Coverage_Ratio_in_Covenant_Analysis\"><\/span><strong>The Loan Life Coverage Ratio in Covenant Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Because lenders have extremely limited upside in any deal \u2013 whether for a normal company or in a Project Finance setting \u2013 they are always more concerned with the <strong>downside risk<\/strong>.<\/p>\n<p>They often use metrics like the DSCR and LLCR not only to size and sculpt Debt, but also to determine the <strong>covenants<\/strong> that the asset must comply with.<\/p>\n<p>For example, they might size the Debt based on a <strong>1.50x LLCR target<\/strong>, but there might be <strong>a 1.20x LLCR covenant<\/strong>.<\/p>\n<p>So, if something goes wrong with the asset, the lenders could potentially charge penalty fees, restrict the asset\u2019s activities, or, in the worst case, even seize collateral in dire situations.<\/p>\n<p>One of the most common restrictions is the <strong>Cash Trap<\/strong>, which limits the dividends an asset can distribute if the LLCR, DSCR, or other metrics fall below a certain level.<\/p>\n<p>Sometimes, it also requires <strong>Reserve accounts<\/strong> to be fully funded so that large upcoming spending needs (e.g., for replacement parts or decommissioning) can be funded without reducing the CFADS in a future period (without the Reserves, it would fall due to very high Maintenance CapEx).<\/p>\n<p>Here\u2019s an example taken from our lithium mining development model:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29913 size-full\" title=\"LLCR Test in a Cash Trap to Restrict Dividends\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap.jpg\" alt=\"LLCR Test in a Cash Trap to Restrict Dividends\" width=\"2135\" height=\"519\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap.jpg 2135w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap-300x73.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap-1024x249.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap-768x187.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap-1536x373.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/08\/18205839\/10-LLCR-Test-in-Cash-Trap-2048x498.jpg 2048w\" sizes=\"(max-width: 2135px) 100vw, 2135px\" \/><\/p>\n<p>If this type of Cash Trap forces the asset to postpone dividend payments, the <strong>equity IRR<\/strong> will decrease due to <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/time-value-of-money\/\" target=\"_blank\" rel=\"noopener\">the time value of money<\/a>.<\/p>\n<p>The equity investors might eventually earn their dividends, but they\u2019ll receive them later \u2013 after the asset has come into compliance with the LLCR and DSCR and other requirements.<\/p>\n<p>And since money today is worth more than money tomorrow, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/cash-on-cash-return-vs-irr\/\" target=\"_blank\" rel=\"noopener\">this will reduce their IRR<\/a>, even if the multiple of invested capital stays the same.<\/p>\n<p>But the LLCR can be used in dozens of ways when drafting loan terms and covenants; this is just a simple example that often comes up in Project Finance models.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Loan Life Coverage Ratio (LLCR) in Project Finance equals the Present Value of All Cash Flow Available for Debt Service (CFADS) in the Remaining Debt Tenor \/ Current Debt Balance.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-29903","biws_kb","type-biws_kb","status-publish","hentry","kb_category-project-finance"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/29903","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=29903"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}