LLCR – Essential Project Finance ratio

By Shaun Comley

Friday 5th November 2021

The Loan Life Cover Ratio (“LLCR”) is one of the most commonly used debt metrics in Project Finance. It provides an analyst with a measure of the number of times the cashflow over the scheduled life of the loan can repay the outstanding debt balance. This metric gives an overview of the whole loan life rather than a period by period check of the project’s ability to repay debt.

This financial modelling tutorial is supported by our recorded LLCR for project finance webinar

Definition of LLCR

In a typical project finance transaction, it is necessary to report key financial metrics to debt providers. One of the key metrics is the LLCR. The LLCR compares the present value of future cashflow available for debt service (CFADS) versus the present value of future debt service. However, the present value of future debt service is equal to the debt balance. Below outlines the derivation:

We can therefore model the LLCR calculation as:

LLCR = NPV [CFADS over Loan Life] / Debt Balance c/f

The Discount Rate used in the NPV calculation is usually the Weighted Average Cost of Debt, however this will be defined in the term sheet.

Variations in LLCR Definition

From time to time borrowers request and Lenders allow other ‘assets’ to be either included in the numerator or excluded from the denominator to reflect instances where there will be other cash deposits available to the lender in the event of default rather than just the NPV of the Cashflow.

For example it is not uncommon to find the balance of the project’s cash account, or the Debt Service Reserve Account (‘DSRA’) added to the numerator or netted from the numerator. Extreme caution needs to be applied when assessing the economics of a project where the LLCR is supported with cash account balances.

When DSRA is included, the LLCR shall then be calculated as:

LLCR = (NPV [ CFADS over Loan Life ] + DSRA/c Balance c/f ) / Debt Balance c/f

Another key variation is period end versus period start cashflows. When calculating the LLCR it is key to consider the point at which you’re calculating. If you are looking at the period end then we include the discounted cashflows from the next period and use the balances carry forward. However, if we are looking at the period start, then we will use the balance brought forward and the future cashflows including this period’s. Both financial modelling methods yield the same results, however the reporting dates are slightly different so it is recommend to ensure that you know the exact calculation of any financial model that you build, or review.

LLCR Calculation

Below depicts the calculation of LLCR. The qualifying CFADS will be CFADS for the loan life. Note that LLCR is calculated until the penultimate debt service period as understandably, the outstanding debt at the end of the ultimate debt service period will be zero.

LLCR EXAMPLE 1

An LLCR of 2.00x means that the Cashflow Available for Debt Service (”CFADS”), on a discounted basis, is double the amount of the outstanding debt balance.

LLCR EXAMPLE 2

An LLCR of 1.00x means that the CFADS, on a discounted basis, is exactly equal to the amount of the outstanding debt balance. The movement of a key variable to achieve an LLCR of 1.00x is an important measure of the strength of the project economics, often referred to as the ‘LLCR break-even’. A typical example is analysis of a toll road where the analysis could be ‘the project achieves a break-even LLCR at 38% reduction of patronage from the Base Case’. In comparison the DSCR breakeven might only be 20%.

Common errors when modelling the LLCR

Algebraically the LLCR is a simple calculation, however it is also a calculation when building financial models, which is prone to error. Below are some of the frequently encountered mistakes:

• The definition of the LLCR in the financial model is not clear and has not been validated against the debt term sheet
• The inclusion of CFADS has not been correctly capped at the end of the loan life or until the maturity of the debt (ref: CFADS financial modelling tutorial for project finance)
• Inconsistent time basis for numerator and denominator. Numerator contains cashflow at the start of the period whereas the closing debt balance is used in the denominator
• CFADS have not been clearly presented in the cashflow waterfall and the LLCR is incorrectly referring to some other line in the waterfall
• When the DSRA/c balance is included, be cautious that the DSRA/c balance shall be added to the NPV (CFADS) line and not to be discounted as part of CFADS (ref: Financial modelling tutorial – DSRA – Debt Service Reserve Account)
• The discounting method used in covenant calculation is inconsistent with the debt service calculation
• Incorrect period discount rate is used to calculate NPV of cashflow
• LLCR covenants are used to trigger cash sweeps, while at the same time including interest on reserve accounts / cash balances in the model resulting in a circular model

Incorrect use of XNPV function for example, use of XNPV function with variable discount rate or use of periodic discount rate rather than annual discount rate

Caution needs to be applied when adding the DSRA/c Balance c/f into the numerator. Remember that the DSRA/c Balance shall be added to the NPV (CFADS) line, and not to be discounted as in CFADS. This clause must be carefully checked in the definition of LLCR in the Term Sheet.

More modelling errors can be found on our webinar “Top 10 errors in financial models (and how to fix them)”.

Include LLCR ratios in your project finance sensitivity and scenario tables

In many situations, it is recommended to include your LLCR outputs in your sensitivity and scenario output tables. If you want further guidance on how to best achieve this, you may enjoy this webinar on how to build sensitivity tables in a financial model

What’s the difference between LLCR and PLCR in Project Finance?

One of the most common errors while modelling the LLCR is confusing the LLCR with the Project Life Coverage Ratio (PLCR). The LLCR only considers the cashflows during the loan life, where as the PLCR looks at the cashflows during the whole project. For more background we recommend our financial modelling tutorial on PLCR for project finance.

This error can be easily controlled by checking the cashflows included during the loan life. Using binary logic flags to multiply the CFADS during the loan tenor is the easiest way to do this. To understand how to use flags within financial modelling, you can watch our webinar on Mastering Flags.