Project Finance & Financial Modelling · Cash-flow waterfalls, debt sizing and coverage ratios · lesson 13 of 20 · 14 min
LLCR, PLCR and financial covenants
Beyond a single period
DSCR tests one period at a time. Lenders also want forward-looking measures of whether the remaining cash flows can repay the remaining debt. Two common ratios do this.
Loan life coverage ratio (LLCR)
LLCR = NPV of CFADS over the remaining loan life (discounted at the debt interest rate)
÷ Senior debt outstanding at the calculation date
Some definitions add the DSRA balance to the numerator; always follow the loan agreement definition.
Project life coverage ratio (PLCR)
PLCR = NPV of CFADS over the remaining project life (discounted at the debt interest rate)
÷ Senior debt outstanding at the calculation date
PLCR includes cash flows after debt maturity (the tail), so it is normally higher than LLCR. It shows how much additional cushion exists if debt had to be extended.
Worked example
Illustrative. Continuing the flat CFADS example: CFADS USD 10M per year; debt of USD 31.54M repaid over 5 years at 7%, with CFADS continuing for 3 more years after maturity (8-year project life).
At the start of repayment:
NPV of CFADS over loan life (5 years at 7%) = 10 × 4.1002 ≈ 41.00M
LLCR = 41.00 / 31.54 ≈ 1.30x
NPV of CFADS over project life (8 years at 7%) = 10 × 5.9713 ≈ 59.71M
PLCR = 59.71 / 31.54 ≈ 1.89x
When debt is sized on a constant DSCR and the LLCR is discounted at the same rate, LLCR equals the target DSCR at the outset (as here, 1.30x). After one year, the outstanding balance is about 26.06M and the NPV of the remaining four years of CFADS is 10 × 3.3872 ≈ 33.87M, so LLCR remains about 1.30x, consistent with a sculpted profile.
How the ratios are used
| Ratio | Typical use | |---|---| | DSCR (historic, projected) | Lock-up, default, sizing | | LLCR | Sizing cross-check, default covenant, measure of overall debt capacity | | PLCR | Assessing tail cushion and refinancing capacity; sometimes a covenant |
Lenders often set minimum LLCR levels similar to or slightly above DSCR sizing levels (deal-specific).
Financial covenants and events of default
The loan agreement lists covenants, typically including:
- Financial covenants: minimum historic DSCR, projected DSCR, LLCR.
- Information covenants: delivery of financial statements, operating reports, updated models, budgets.
- Positive covenants: maintain insurances, permits, reserve accounts, comply with laws and environmental and social standards.
- Negative covenants: no additional debt, no disposal of assets, no change of business, restrictions on distributions.
Breaching a covenant can trigger an event of default, allowing lenders to accelerate the loan, enforce security or step in. In practice, lenders and sponsors often negotiate waivers or amendments, but the leverage shifts heavily to lenders.
Monitoring template
Test date: ______
Historic DSCR (last 12 months): ____ Lock-up: ____ Default: ____ Status: ____
Projected DSCR (next 12 months): ____
LLCR: ____ Minimum required: ____
Reserve accounts: DSRA ____ / required ____; MRA ____ / required ____
Distribution permitted? ____
Covenant compliance certificate signed by: ______
Worked example: early warning
Illustrative. A fictional wind SPV in Scotland has a lock-up DSCR of 1.15x and default at 1.05x. Two low-wind years push historic DSCR to 1.12x. Distributions are locked up; cash builds in the SPV. The sponsor's asset management team uses the model to project DSCR recovering to 1.25x with normal wind and agrees with lenders to use part of the trapped cash for a turbine upgrade that improves availability. Communicating early with updated projections preserved trust and avoided a default scenario.
Common mistakes
- Using the wrong discount rate for LLCR/PLCR (it should follow the loan agreement, usually the debt rate).
- Including or excluding the DSRA inconsistently with the definition.
- Monitoring only historic DSCR and missing deterioration in projected ratios.
- Treating covenants as a finance-team issue only; operations drive CFADS.
Quick self-check
Recalculate LLCR at a few dates by hand using the loan agreement definition, and compare with the model. Check which discount rate is specified, whether the DSRA balance is included, and whether the calculation date is before or after the scheduled repayment. Small definitional differences can move the ratio enough to change whether a covenant is met.
Hands-on: LLCR and PLCR rows in Excel
Columns = periods; Final_col = column number of final maturity; Life_col = last operating period
LLCR_t =IFERROR( NPV(Rate, INDEX(CFADS_row, t+1):INDEX(CFADS_row, Final_col)) / Debt_closing_t , "")
PLCR_t =IFERROR( NPV(Rate, INDEX(CFADS_row, t+1):INDEX(CFADS_row, Life_col)) / Debt_closing_t , "")
With DSRA in the numerator (if the definition says so):
LLCR_t =(NPV(...)+DSRA_balance_t)/Debt_closing_t
Place a comment above each row quoting the loan agreement definition (discount rate, DSRA treatment, calculation date relative to repayment) and hand-check two dates.
Hands-on: the same in Python
import numpy as np
def cover_ratio(cfads, balance_after, rate, t, end):
"""NPV of CFADS for periods t+1..end at the debt rate, over the balance at t (after repayment)."""
flows = np.asarray(cfads[t:end], dtype=float) # zero-based: cfads[t] is period t+1
pv = (flows / (1 + rate) ** np.arange(1, len(flows) + 1)).sum()
return pv / balance_after
cfads = [10] * 8 # flat case: 5-year loan, 8-year life (USD M)
rate, debt = 0.07, 31.54
ds = 10 / 1.30
bal = [debt]
for _ in range(5):
bal.append(bal[-1] * (1 + rate) - ds)
print(f"LLCR at start: {cover_ratio(cfads, bal[0], rate, 0, 5):.2f}x")
print(f"PLCR at start: {cover_ratio(cfads, bal[0], rate, 0, 8):.2f}x")
print(f"LLCR after year 1: {cover_ratio(cfads, bal[1], rate, 1, 5):.2f}x")
Second worked example: LLCR at the start of year 3 (sculpted case)
Using the sculpted schedule from the previous lesson (CFADS 10, 11, 12, 12, 13; debt ≈ 36.28M at 7%): the balance after two repayments is about 24.85M. The NPV at 7% of the remaining CFADS (12, 12, 13) is about 32.31M, so LLCR ≈ 32.31 ÷ 24.85 ≈ 1.30x. Because each year's CFADS is exactly 1.30 × that year's debt service, and the outstanding balance equals the PV of the remaining debt service at the same rate, LLCR stays at the sizing DSCR on every date in the lenders' base case. Under a downside case, CFADS falls while the balance does not, so LLCR drops below 1.30x: that is why it is useful as a forward-looking covenant.
Covenant monitoring template
| Test date | Historic DSCR | Lock-up / default | Projected DSCR | LLCR / minimum | DSRA vs required | MRA vs required | Distribution permitted? | Certificate signed by | |---|---|---|---|---|---|---|---|---|
How to measure success
- Ratios reproduced by hand at two dates using the exact loan agreement definitions.
- Projected ratios reported alongside historic ratios every test date.
- Lenders informed early, with updated projections, whenever a projected ratio approaches lock-up.
Video lecture: LLCR, PLCR and financial covenants
Lecture coming soon · 9 chapters · about 9 minutes. Read the full transcript below.
- Looking beyond one period
- Why it matters
- The concept: two forward ratios
- Worked example one: flat CFADS
- Worked example two: early warning in Scotland
- Watch me do it: LLCR at any date
- Covenants and events of default
- Projected ratios and the information trail
- Common mistakes, recap and try this now
Lecture transcript
Looking beyond one period
DSCR tells you whether this period's cash covers this period's debt service. That's important, but it's a snapshot. Lenders also want to know whether the remaining cash flows can repay the remaining debt, and how much cushion exists if things go wrong for longer than one period. That's what the loan life and project life coverage ratios measure. In this lecture you'll learn how LLCR and PLCR are defined, how to calculate them by hand, why LLCR equals the sizing DSCR in a sculpted structure, how lenders use each ratio, what financial and other covenants look like, and how early warning and communication can keep a struggling project out of default. By the end, you'll be able to calculate both ratios and build a covenant monitoring template.
Why it matters
Why does this matter? Because a project can pass its historic DSCR test this period while its future is deteriorating: a key contract is ending, costs are rising, or a technology is degrading faster than expected. Forward-looking ratios reveal that early. LLCR measures cover over the remaining loan life. PLCR measures cover over the remaining project life, including the tail. And covenants built on these ratios matter a great deal. Breach one, and it can trigger an event of default, allowing lenders to accelerate the loan, enforce security or step in. In practice, waivers and amendments are often negotiated, but the leverage shifts heavily to lenders. Seeing trouble early is how sponsors keep control.
The concept: two forward ratios
Here are the definitions. The loan life coverage ratio, LLCR, is the net present value of CFADS over the remaining loan life, discounted at the debt interest rate, divided by senior debt outstanding at the calculation date. Some definitions add the DSRA balance to the numerator, so always follow the loan agreement. The project life coverage ratio, PLCR, is the same, but it includes CFADS over the whole remaining project life, including the tail after debt maturity. So PLCR is normally higher than LLCR, and it shows how much extra cushion exists if the debt had to be extended. Think of LLCR as asking 'can the remaining cash during the loan repay the loan?', and PLCR as 'if we had to, could the whole remaining life of the asset repay it?'
Worked example one: flat CFADS
Let's continue the flat example from the lesson. CFADS is ten million a year. Debt of thirty-one point five four million is repaid over five years at seven per cent, and CFADS continues for three more years after maturity, an eight-year project life. At the start of repayment: the NPV of five years of CFADS at seven per cent is ten times four point one zero zero two, about forty-one million. LLCR is forty-one over thirty-one point five four: about one point three times. The NPV over eight years is ten times five point nine seven one three, about fifty-nine point seven one million, so PLCR is about one point eight nine times. Now roll forward one year. The balance is about twenty-six point nought six million, and the NPV of the remaining four years is about thirty-three point eight seven million. LLCR: still about one point three. That's no coincidence: when debt is sized on a constant DSCR and LLCR is discounted at the same rate, LLCR equals the sizing DSCR.
Worked example two: early warning in Scotland
Now a realistic scenario from the lesson. A fictional wind SPV in Scotland has a lock-up DSCR of one point one five times and a default level of one point nought five. Two low-wind years push historic DSCR down to one point one two. Distributions are locked up, and cash builds in the SPV. The sponsor's asset management team doesn't wait. They use the model to project DSCR recovering to about one point two five times with normal wind, and they go to the lenders early with the analysis. Together they agree to use part of the trapped cash for a turbine upgrade that improves availability. Communicating early, with credible updated projections, preserved trust and kept the project well away from default. The same story told late, after a breach, would have gone very differently.
Watch me do it: LLCR at any date
Let me show you how to calculate LLCR at every period, so you can see forward cover trend over time. For each calculation date, I need the NPV of CFADS from the next period to final maturity, divided by the debt outstanding. In a spreadsheet, I use a formula that picks a range from the next column to the maturity column, with INDEX on both ends, and wrap it in NPV at the debt rate. Then divide by the debt balance at that date. Here's the detail that trips people up: is the calculation date before or after that period's scheduled repayment, and does the numerator include the DSRA? Those small definitional choices can move the ratio enough to change whether a covenant is met. So I write the loan agreement's definition in a comment right above the row, and I recalculate a couple of dates by hand to prove the formula.
Covenants and events of default
A loan agreement lists several kinds of covenant. Financial covenants: minimum historic DSCR, projected DSCR and LLCR. Information covenants: delivering financial statements, operating reports, updated models and budgets on time. Positive covenants: maintain insurances, permits and reserve accounts, and comply with laws and environmental and social standards. Negative covenants: no additional debt, no disposal of assets, no change of business, and restrictions on distributions. Breaching a covenant can trigger an event of default, which can allow lenders to accelerate the loan, enforce security or step in. In practice, lenders and sponsors often negotiate waivers or amendments, but the leverage shifts heavily to the lenders. And remember: covenants aren't just a finance-team issue. Operations drive CFADS, so operations drive compliance.
Projected ratios and the information trail
One more practical point: which direction are you looking? Historic DSCR looks back over the last twelve months of actual cash flows. It's factual, but it's late: by the time it falls, the problem has already happened. Projected DSCR and LLCR look forward, using the updated model and the latest budget. They can warn you a year or more ahead, but they're only as good as the assumptions behind them. So a good covenant regime uses both, and the information covenants matter as much as the financial ones: delivering an updated model, an annual budget and a compliance certificate signed by an authorised officer, on time. Late or sloppy reporting erodes lender trust, and can itself be a breach. On a well-run asset, the compliance pack is prepared by the same people who run the monthly performance review, so there are never surprises.
Common mistakes, recap and try this now
The common mistakes. Using the wrong discount rate for LLCR or PLCR; it should follow the loan agreement, usually the debt rate. Including or excluding the DSRA inconsistently with the definition. Monitoring only historic DSCR and missing deterioration in projected ratios. And treating covenants as a finance-team issue only. So, to recap. LLCR and PLCR are forward-looking: NPV of remaining CFADS over the loan life or project life, divided by debt outstanding. In a sculpted structure, LLCR equals the sizing DSCR. Lenders use DSCR for lock-up, default and sizing, LLCR as a sizing cross-check and covenant, and PLCR to assess tail cushion. Monitor all of them, and communicate early. Your try-this-now: for the sculpted example in the previous lesson, calculate LLCR at the start of year three, and explain why it's close to the target DSCR.
Key takeaways
- LLCR = NPV of CFADS over remaining loan life ÷ debt outstanding.
- PLCR uses CFADS over the remaining project life and is usually higher than LLCR.
- Ratios feed sizing, lock-up and default covenants alongside information and operating covenants.
- Monitor historic and projected ratios and engage lenders early when trends deteriorate.
Try it
For the sculpted example in the previous lesson, calculate LLCR at the start of year 3 and explain why it is close to the target DSCR.