Applied Methods and Techniques Flashcards

Lenders to a PPP project company look closely at the Debt Service Coverage Ratio (DSCR). How is it calculated for a period?

Answer: Cash flow available for debt service divided by debt service due

DSCR is cash flow available for debt service in a period divided by the principal and interest due in that period.

Which ratio compares the NPV of cash flow available for debt service over the remaining loan life with the outstanding debt balance?

Answer: Loan Life Coverage Ratio (LLCR)

LLCR divides the NPV of future cash flow available for debt service over the loan tenor by the outstanding debt.

A PPP financed with 85% senior debt and 15% equity is described as having high:

Answer: Gearing (leverage)

Gearing measures the share of debt in the capital structure; 85:15 is a highly geared project.

Why does higher gearing usually lower the bid price in a PPP?

Answer: Debt is typically cheaper than equity, reducing the weighted cost of capital

Senior debt costs less than equity, so more debt lowers the blended financing cost and the required service payment.

The equity IRR in a PPP financial model represents:

Answer: The discount rate at which the NPV of equity cash flows equals zero

Equity IRR is the discount rate that makes the net present value of shareholder cash flows equal to zero.

A debt service reserve account (DSRA) in a project finance structure is designed to:

Answer: Cover a set number of months of debt service if cash flow falls short

A DSRA holds cash, often six months of debt service, so lenders are protected from short-term revenue dips.

In a cash flow waterfall, which payment normally comes first after revenues are received?

Answer: Operating and maintenance costs

Operating costs are paid first to keep the asset running, followed by senior debt service, reserves, and finally distributions to equity.