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The Project Life Coverage Ratio (“PLCR”) is a commonly used debt metric in Project Finance. It is the ratio of the Net Present Value (NPV) of the cashflow over the remaining full life of the project to the outstanding debt balance in the period.
Generally the PLCR is calculated as:
PLCR = NPV [CFADS over Project Life] / Debt Balance c/f
The Discount Rate used in the NPV calculation is usually the Cost of Debt, also known as the Weighted Average Cost of Debt.
The CFADS qualifying for PLCR calculation extend beyond loan life, so there is always a question as to what discount rate to use post loan final maturity date. This depends upon a lender’s perception of the certainty risk of the projected cash flows beyond the loan life.
Loan documentation often states the discount rate to be used post the loan life, should be at least equal or even greater than the cost of debt of the senior debt at final maturity date, to account for greater risk, as projected cash flows beyond the loan life are even more uncertain to be relied upon.
For example, in models pertaining to mining or resource industries, a substantial mine rehab cost or closure costs towards the end of the project life is often seen which can dramatically reduce the CFADS (the numerator for PLCR).
In practice, lenders often build in a safety cushion and ignore the revenue or cash flow beyond a certain cut-off date. This allows lenders to protect against relying on potentially more uncertain future cash flows. It is common to encounter an end date for the PLCR calculation in the term sheet or loan documentation before the end of the project life. This means the qualifying period for CFADS in the PLCR calculation is only from commercial operation date (COD), and up to such end date.
Extreme caution needs to be applied when assessing the economics of a project where the PLCR is supported with cash account balances. When, for example, DSRA is included, the PLCR shall then be calculated as:
LLCR = (NPV [CFADS over Project Life] + DSRA/c Balance c/f) / Debt Balance c/f
Screenshot#1 depicts the calculation of PLCR, where:
However a lower PLCR can also be seen if the model has substantial closure or decommissioning costs towards the end of the project life, bringing down the CFADS considerably.
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