In project finance, there are quantitative criteria used to reduce the risks and determine the amount and cost of debt financing. These indicators directly affect the effectiveness of the project, since they can lead both to an increase in tariffs (prices) for goods of the projectproduced, as well as to changes in the cost structure. These criteria can be divided into two groups:
I. D/E — the ratio of debt and equity capital in total financing of the project;
II. Debt cover ratio - the ratio characterizing, the durability of the project.
The ratio of debt and equity of the project company is an important factor taken into account when considering the application by the bank to finance the project. The greater the risk of the project, the greater the required value of the share of equity.
Coverage ratios characterize the possible project company to pay on its debt. These indicators can be of two types: interval and cumulative.
Debt coverage ratio (DCRt) or debt-service coverage ratio (DSCRt)refer to the number of interval indicators calculated for a certain period of time (for example, one year). It represents the ratio of the actual or estimated, values for the t-th time period free cash flow of the project company (FCF), to the value of the debt (with interest) of the project company (Debt), to be paid during this period (for all credit agreements and loan commitments.
In practice of project finance DCR value should be between 1.2 to 2 - depending on the project risk and credit rating of the project company. The greater the risk of the project, the greater the value of the index is required by the lender.
Along with interval indicators debt coverage in the practice of project finance indicators calculated by comparing the cumulative cash flow and debt of the project company, are widely used. The period of time for which the analysis can be limited to a term loan agreement (indicator LLCR - loan life cover ratio) or the remaining time of the project life cycle (PLCR - project life cover ratio).
The LLCR index reflects the interests of creditors:
PV (FCF) - the value of free cash flow, given the time of calculation using a discount rate reflecting the cost of capital.Indicator PLCR reflects the interests of all stakeholders of the project is to design and project company does not become bankrupt:
The greater the volatility of the FCF project, the more important LLCR creditors require (to reduce risk).For calculating and monitoring indicator PLCR is very important to determine the purpose of the project and thus the year of completion of the project lifecycle.
Since all coverage ratios are calculated based on the projected or actual value of Free Cash Flow, they can be applied only at the stage of the project life cycle, when the flow becomes positive. Cumulative figures characterize the possibility of the project and the project company to pay off the debt for the corresponding periods of time, allowing you to make decisions in advance about the necessity and conditions of a possible debt restructuring.The indicators characterizing the ratio of D / E, that is financial leverage and debt coverage indicators directly affect the effectiveness of the project, as they can lead both to an increase in tariffs (prices) for the products of the project, as well as to changes in the cost structure.