Debt sculpting methodology
Every formula the calculatoruses, derived from first principles and checked against a worked example you can reproduce by hand.
Step 1 — Start from CFADS
CFADS is cash flow available for debt service: revenue, less operating costs, less tax, less any movement in required reserves, and before any financing cash flow. It is the only cash the project can actually use to pay lenders, which is why debt is sized against it rather than against EBITDA or asset value.
The sculpting method takes CFADS as given — a vector, one figure per repayment period — and asks what debt that vector can support at a given covenant.
Step 2 — Derive debt service from the DSCR covenant
The debt service cover ratio is defined as cash over debt service in a period:
A conventional model picks a repayment profile and reads DSCR out of it. Sculpting runs the identity the other way: fix DSCR at the covenant target and solve for debt service.
This is the entire idea. Everything downstream is bookkeeping. Because debt service is a fixed multiple of CFADS, the repayment profile takes the same shape as the cash flows, and DSCR comes out flat at the target in every period by construction.
Step 3 — Size the debt as a present value
The maximum debt the project can support is the amount whose scheduled repayments are exactly that debt service stream. That is a present value:
where r is the periodic interest rate. For semi-annual repayment on a nominal 8% loan, r is 4%; for quarterly, 2%. The calculator divides the nominal annual rate by the number of periods per year, which is the standard project finance convention.
Sizing the debt as the PV of its own repayments has a useful consequence: the balance amortises to exactly zero at maturity. There is no balloon and no residual to plug. If your model leaves a residual on a flat sculpt, the discount rate and the interest accrual rate have drifted apart.
Step 4 — Split debt service into interest and principal
Standard amortisation bookkeeping, rolled forward period by period:
Principal is the plug. This is why sculpted debt is back-loaded: in early periods, when the balance is large and CFADS is still ramping, interest eats most of the debt service and little principal is repaid. As the balance falls, interest falls with it and principal accelerates.
When principal goes negative
If CFADS in some period is so low that CFADS[t] / DSCR < r × balance[t], principal is negative and the balance grows. This is not a bug in the arithmetic — it is the model telling you the structure does not work. In practice it is resolved with a grace period, capitalised interest during construction, or a lower DSCR target in the ramp-up years. The calculator flags these periods rather than silently producing an accreting loan.
Step 5 — DSCR and LLCR
DSCR is a single-period ratio. LLCR — the loan life cover ratio — is the whole-of-life equivalent: the present value of CFADS over the remaining loan life, divided by the debt outstanding at that point.
Why LLCR equals DSCR under a flat sculpt
This identity is worth knowing because it is the fastest way to check a model. The opening balance at any period t is the present value of the debt service still to come:
And each DS[k] is just CFADS[k] / DSCR, so:
Substituting into the LLCR definition, the PV terms cancel andLLCR[t] = DSCR for every t. If your own model shows LLCR drifting away from the DSCR target on a flat sculpt, something is wrong — most often a mismatch between the discount rate used for LLCR and the rate used to accrue interest.
Worked example
Four annual periods, CFADS of 100, 120, 140, 130, target DSCR 1.30x, interest 8% per annum. Debt service in period 1 is 100 / 1.30 = 76.92, and so on for each period. Discounting those four figures at 8% gives a maximum debt size of 309.36.
| Year | CFADS | Debt service | Interest | Principal | Opening | Closing | DSCR | LLCR |
|---|---|---|---|---|---|---|---|---|
| 1 | 100.00 | 76.92 | 24.75 | 52.17 | 309.36 | 257.18 | 1.30 | 1.30 |
| 2 | 120.00 | 92.31 | 20.57 | 71.73 | 257.18 | 185.45 | 1.30 | 1.30 |
| 3 | 140.00 | 107.69 | 14.84 | 92.86 | 185.45 | 92.59 | 1.30 | 1.30 |
| 4 | 130.00 | 100.00 | 7.41 | 92.59 | 92.59 | 0.00 | 1.30 | 1.30 |
Read down the DSCR column: flat at 1.30x throughout, which is the point of the exercise. Read down the LLCR column: identical, as the derivation above predicts. And the closing balance in the final period is 0.00 — the debt fully amortises.
The same cash flows on an annuity
For contrast, a level annuity sized to never breach 1.30x on these same cash flows supports only 254.78, against 309.36 sculpted — a difference of 21.4%. The binding constraint is year 1, the weakest CFADS period. That comparison is worked through in full here.
Assumptions and limitations
This calculator implements the standard textbook sculpt. It deliberately does not model:
- Construction phase and IDC. Interest during construction, drawdown schedules and capitalised fees are outside the model. CFADS should be entered from the first repayment period onward.
- Debt sizing constraints other than DSCR. Real transactions are often capped by a gearing limit, a minimum LLCR, or a maximum tenor before DSCR binds. The figure here is the DSCR-implied maximum, which is an upper bound.
- Floating rates and hedging. A single fixed periodic rate is used throughout. Sculpting against a forward curve requires period-specific discount factors.
- Cash sweeps, reserve accounts and multiple tranches. A DSRA funded from CFADS should be netted off before entry; sculpting across senior and mezzanine tranches needs the tranches solved jointly.
- Fees and taxes on the financing. Arrangement fees, commitment fees and withholding are excluded from debt service.
For a transaction, treat this as a fast sizing check and a way to see the shape of the answer — not as a substitute for a full financial model.