A seven-year loan on an eighteen-year repayment profile: the balance it leaves, what step-ups and a cash sweep do to it, and the refinancing rate at which the plan fails.
A mini-perm sizes and amortises the debt as if it ran for the life of the contract, but matures after five to seven years, so the balance left at maturity has to be refinanced. On an illustrative project with 40.0 a year of CFADS, a 320.8 loan on an 18-year profile still owes 233.7 at its year-7 maturity, which a new lender at 1.35x over the remaining 11 years will refinance only if rates stay at 6.00 per cent. A 50 per cent cash sweep from year 5 cuts the balance to 219.6 and holds up to 7.24 per cent.
Worked in full in The Project Finance Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A project with an 18 or 20-year contract can carry debt over most of that life, but many banks will not lend beyond seven years, or charge heavily to do so. The mini-perm reconciles the two: the debt is sized on the long profile, so debt service is affordable, and the bank's exposure is short, so its funding and capital cost is low. The price is refinancing risk, borne by the sponsor. Lenders manage it with margin step-ups and a cash sweep in the years before maturity; the sponsor's question is how much of the balance those tools actually remove, and at what refinancing rate the plan fails.
| Input | Value |
|---|---|
| CFADS a year, flat, contracted | 40.0 |
| Sizing cover / debt service | 1.35x / 29.63 |
| Repayment profile / all-in rate | 18 years / 6.0% |
| Debt = 29.63 × annuity factor 10.8276 | 320.8 |
| Maturity | year 7 |
| Margin step-ups, years 5 / 6 / 7 | +0.25% / +0.50% / +0.75% |
| Cash sweep from year 5, share of cash after debt service | 50% |
| Refinancing: cover / remaining tenor | 1.35x / 11 years |
Step 1: the scheduled balance. Repaying 320.8 on the 18-year annuity leaves, after 7 years, 233.7, 72.8% of the loan. Excel: =-FV(6%, 7, -29.63, 320.8)
Step 2: step-ups. The scheduled principal is unchanged; interest rises on the margin step-ups. Debt service climbs from 29.63 to 30.85 in year 7, cover falls to 1.30x, and the sponsor pays 3.86 more interest over the term. The balance is still 233.7.
Step 3: the sweep. From year 5, half of the cash left after debt service prepays the loan: 4.84, 4.69 and 4.58. Balance at year 7 = 219.6.
Step 4: refinancing capacity. A new lender sizes 40.0 / 1.35 = 29.63 of debt service over the 11 years left on the profile. At 7%: 29.63 × (1 − 1.07−11) / 7% = 222.2
| Year | Rate | Interest | Scheduled principal | DSCR | Sweep | Distributions | Balance |
|---|---|---|---|---|---|---|---|
| 1 | 6.00% | 19.25 | 10.38 | 1.35x | 0.00 | 10.37 | 310.4 |
| 2 | 6.00% | 18.63 | 11.00 | 1.35x | 0.00 | 10.37 | 299.4 |
| 3 | 6.00% | 17.97 | 11.66 | 1.35x | 0.00 | 10.37 | 287.8 |
| 4 | 6.00% | 17.27 | 12.36 | 1.35x | 0.00 | 10.37 | 275.4 |
| 5 | 6.25% | 17.21 | 13.11 | 1.32x | 4.84 | 4.84 | 257.5 |
| 6 | 6.50% | 16.73 | 13.89 | 1.31x | 4.69 | 4.69 | 238.9 |
| 7 | 6.75% | 16.12 | 14.73 | 1.30x | 4.58 | 4.58 | 219.6 |
| Refinancing rate | Capacity | Gap, no sweep (233.7) | Gap, 50% sweep (219.6) |
|---|---|---|---|
| 6% | 233.7 | 0.0 | 0.0 |
| 7% | 222.2 | 11.5 | 0.0 |
| 8% | 211.5 | 22.2 | 8.1 |
| 9% | 201.6 | 32.0 | 17.9 |
Without a sweep, the loan refinances only if the new rate is no higher than the 6.00 per cent it was sized at: the scheduled balance is, by construction, exactly what the same cover supports over the remaining tenor at the original rate. Any rise opens a gap the sponsor must fill with equity. The sweep buys headroom: 14.10 of cash diverted in years 5 to 7 takes the break-even refinancing rate to 7.24 per cent. It costs the sponsor 13.15 of distributions, the 14.10 swept less 0.96 of interest it saves.
| Sweep share | Balance at year 7 | Distributions forgone | Break-even refinancing rate |
|---|---|---|---|
| 0% | 233.7 | 0.00 | 6.00% |
| 25% | 226.8 | 6.45 | 6.59% |
| 50% | 219.6 | 13.15 | 7.24% |
| 75% | 212.2 | 20.07 | 7.94% |
| 100% | 204.5 | 27.25 | 8.70% |
Each 25 points of sweep buys 59 to 76 basis points of refinancing headroom for 6.45 to 7.17 of distributions. That is the trade a sponsor negotiates: a heavier sweep is cheap insurance if rates may rise, and expensive if they will not. In a soft mini-perm the same logic continues past the target date: if the loan is not refinanced, all cash is swept at a stepped-up rate, 7.00 per cent here, and the 219.6 balance is repaid within year 15, three years inside the profile, with nothing for the sponsor until then.
A 1.35x cover on the long profile says nothing about whether the balloon refinances. The test that matters is a third one at maturity: the balance left against what the remaining cash flow supports at a stressed rate, as the book's sizing on two tests and a third for what is left at maturity sets out. The opposite mistake is to think the bank would lend the same amount fully amortising over seven years: 320.8 would need 57.47 a year of debt service, 0.70x cover. The remaining contract life after maturity matters too; how much tail lenders want is in how long the debt tail should be.
The flat CFADS makes the arithmetic transparent. With a merchant tail or indexation, the refinancing lender sizes on its own downside case, and the gap can open even at the original rate.
The book's data centre loan amortises on a twenty-five year profile over a fifteen-year term and prints the balloon, and the free workbook for this case shows the rent at which that balloon refinances.
A hard mini-perm has a legal maturity at, say, year 7: if it is not refinanced, it is in default. A soft mini-perm keeps a long legal maturity but sweeps cash and steps up the margin after the target date to force a refinancing. On the illustrative project a 100% sweep at 7.00% from year 8 repays the 219.6 balance within year 15.
Banks lend more comfortably for 5 to 7 years than for 18, and the sponsor gets a long amortisation profile, which keeps debt service affordable. Sized on a 7-year amortisation instead, the illustrative 320.8 loan would need 57.47 a year of debt service, a 0.70x cover on 40.0 of CFADS: impossible.
The distributions it diverts, less the interest it saves. On the illustrative project a 50% sweep in years 5 to 7 takes 14.10 of cash, cuts distributions by 13.15 after 0.96 of interest saved, and reduces the year-7 balance by 14.1, enough to refinance at up to 7.24% instead of 6.00%.
This article is one calculation from The Project Finance Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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