The Loan Life Cover Ratio - What Is It and How Is It Calculated
If anyone has looked at a financial model and seen a Debt Service Cover Ratio (DSCR) and a Loan Life Cover Ratio (LLCR), they might ask why does the LLCR even exist? If we want to see if the debt can be serviced in any period, all we need to do is check the min and forecast DSCRs.In a Project Finance Model there are three key ratios that are calculated and assessed:
- The Debt Service Cover Ratio or DSCR
- The Loan Life Cover Ratio or LLCR
- The Project Life Cover Ratio or PLCR
Well, the LLCR provides a forward-looking metric in one go! While the DSCR shows you if you can service debt comfortably in any one period, the LLCR shows the comfort in servicing the debt over the lifetime of the loan.
The LLCR is calculated as:
LLCR = NPV(CFADS over the entire Loan Life) / Debt Balance Outstanding
The NPV should be calculated using the cost of Senior Debt for a Senior LLCR, and the average cost of all debt for a Total LLCR.
Where is the Loan Life Cover Ratio used?
Why the LLCR is so useful is that the DSCR might be particularly constrained in a single period, for example, due to planned maintenance or a particular seasonality. At the same time, the LLCR looks at the whole loan life period. The LLCR is, therefore, typically a bit more robust than the DSCR (unless the debt is highly sculpted, in which case, they will probably be quite similar).
The LLCR should be analysed with the DSCR for a medium to long-term tenor loan. Shorter debt tenors can probably be quite effectively analysed by only looking at the DSCR. It should be noted that the LLCR is effectively an average DSCR and minimises the effect of periods of weaker CFADS.
The Loan Life Coverage Ratio or LLCR assesses the ability of the project to service the debt over the lifetime of a loan – i.e. for the whole project to meet its entire debt obligations;
What other metrics are there besides the Loan Life Cover Ratio?
What other metrics are there besides the Loan Life Cover Ratio? The final key debt service metric is the Project Life Cover Ratio or PLCR, which assesses the serviceability of debt over the project life. This measures the ability to restructure debt, especially if the construction of a project financing is delayed.
The Loan Life Cover Ratio forms one of three key metrics together with the DSCR and PLCR. By analysing all three, one can gain comfort in a project's ability to service debt.
To recap:
- Debt Service Coverage Ratio or DSCR assesses the ability of a project to service debt interest and principal in a single period from operating cash flow, and the
- Loan Life Coverage Ratio or LLCR assesses the ability of the project to service the debt over the lifetime of a loan – i.e. for the whole project to meet its entire debt obligations;
- The Project Life Coverage Ratio PLCR assesses the ability to service the debt over the lifetime of a Project and all of the Project’s expected cash flows.
Good luck and happy financial modelling!
Matthew
