Project finance glossary

The terms that come up when sizing project debt, defined in plain English with the formulas that go with them.

CFADSCash Flow Available for Debt Service

Revenue less operating costs, less tax, less any movement in required reserve balances, and before any financing cash flow. CFADS is the numerator of every cover ratio in project finance and the input the whole sculpting exercise starts from. It is deliberately narrower than EBITDA: tax and working capital are real cash leakages that lenders cannot be paid out of.

DSCRDebt Service Cover Ratio

CFADS divided by debt service in a single period. The core covenant in project finance lending. Typical targets run from about 1.10–1.20x for fully contracted availability-based assets, 1.30–1.45x for contracted renewables, and 1.50x and above where there is merchant price or volume exposure. Two thresholds usually appear in documents: a lock-up level that traps distributions, and a lower default level.

DSCR[t] = CFADS[t] / debt service[t]

LLCRLoan Life Cover Ratio

The present value of CFADS over the remaining loan life divided by the debt outstanding. Where DSCR is a snapshot, LLCR is a whole-of-life measure and is far less sensitive to a single bad period. Under flat-DSCR sculpting, LLCR is exactly equal to the DSCR target in every period.

LLCR[t] = PV( CFADS[t..maturity] ) / debt balance[t]

PLCRProject Life Cover Ratio

The same construction as LLCR but discounting CFADS over the full project life rather than only the loan life. PLCR is always higher than LLCR when the project outlives the debt, and the ratio between them reflects the value of the tail.

PLCR[t] = PV( CFADS[t..project end] ) / debt balance[t]

Debt sculpting

Setting each period's debt service equal to that period's CFADS divided by a target DSCR, so that the repayment profile follows the shape of the cash flows and DSCR is constant across the tenor. The maximum debt is then the present value of that debt service stream.

debt service[t] = CFADS[t] / target DSCR

Annuity repaymentLevel repayment

A repayment structure with constant total debt service each period; interest falls as the balance amortises and principal rises to compensate. Familiar from mortgages. In project finance it caps debt at whatever the weakest CFADS period can support, which is why sculpting is preferred when cash flows are uneven.

payment = debt × r / ( 1 − (1+r)^−n )

Tail

The period between debt maturity and the end of the project's economic or contractual life. Lenders require a tail so there is a window to recover if the project underperforms and the debt has to be restructured or extended. A tail of two to five years, or a stated fraction of the concession, is common.

DSRADebt Service Reserve Account

A cash reserve, usually sized at six or twelve months of forward debt service, held to cover a temporary shortfall. Funding the DSRA consumes cash, so its movement should be deducted before CFADS is entered into a sculpting model.

GearingDebt-to-equity ratio

The split of project funding between debt and sponsor equity, usually quoted as debt as a percentage of total funding. A separate constraint from DSCR: a project can be DSCR-capable of 80% gearing and still be capped at 70% by the credit committee. The binding constraint is whichever is lower.

IDCInterest During Construction

Interest accruing on drawn debt before the project generates revenue. It is typically capitalised into the debt balance rather than paid in cash, which means the debt at the start of the repayment period is larger than the amount drawn for construction costs alone.

Cash sweep

A mechanism requiring a defined share of surplus cash — CFADS remaining after scheduled debt service — to prepay debt rather than flow to sponsors. Sweeps shorten the effective tenor when a project outperforms and are often the price of a more aggressive initial sculpt.

Refinancing risk

The risk that debt outstanding at maturity cannot be refinanced on acceptable terms. Fully amortising sculpted debt, by construction, has none — the balance reaches zero at maturity. Structures with a balloon or bullet at maturity carry it explicitly.

Merchant exposure

Revenue not covered by a fixed-price offtake contract and therefore exposed to market prices. Merchant exposure widens the CFADS distribution, which is why lenders set a materially higher DSCR target against it — often 1.50x or more versus 1.30x for equivalent contracted cash flow.