What is a Loan Life Cover Ratio and why does it even exist?
If anyone has looked at a financial model and seen both 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 minimum and forecast DSCRs?
The Loan Life Cover Ratio
Well, the LLCR actually 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) / 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, while 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 together with the DSCR for loans of a medium to long term tenor. 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 therefore minimises the effect of periods of weaker CFADS.
What Other Metrics are there besides the Loan Life Cover Ratio?
What other metrics are there besides for 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 construction in 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 over a projects ability to service debt.
Good luck and happy financial modelling!