The loan life coverage ratio averages the whole tenor; the DSCR finds the one year that cannot pay.
The loan life coverage ratio is the net present value of cash flow available for debt service over the remaining loan life, discounted at the debt's interest rate, divided by the debt outstanding. On an illustrative 100 loan at 6.0 per cent over twelve years, CFADS worth 133.72 gives an LLCR of 1.34 times at close, while the DSCR in the worst year is only 1.05. The LLCR measures whether the loan can be repaid; the DSCR measures whether a single year can pay.
Worked in full in The Infrastructure Investment Analyst by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The asset is an illustrative availability-payment concession: a public authority pays a fixed, indexed charge, so cash flow is predictable except for lifecycle replacement, which lands in lumps. The senior loan is a level annuity. All figures are in millions.
| Input | Value |
|---|---|
| Senior debt at financial close | 100 |
| Interest rate, all-in | 6.0% |
| Tenor, years | 12 |
| CFADS in year 1, before lifecycle | 15.0 |
| Indexation, per year | 2.0% |
| Lifecycle spend in years 6 and 11 | 4.0 |
| Annual debt service (annuity) | 11.93 |
DSCR in year t = CFADSt / debt servicet
LLCR at time t = NPV of CFADS from t to final maturity, at the debt rate / debt outstanding at t
At close: NPV of twelve years of CFADS at 6.0 per cent = 133.72; debt outstanding = 100; LLCR = 133.72 / 100 = 1.34
In Excel, with CFADS in D5:O5 and opening balances in row 7: =NPV(6%,D5:O5)/D7 at close, and =NPV(6%,H5:$O$5)/H7 copied across for later years.
Two conventions matter. The discount rate is the debt's own all-in rate, because the question is whether the cash flow can service this loan, not what the asset is worth to equity. And the numerator stops at the loan's final maturity, not at the end of the concession; cash flow after maturity belongs to a different ratio, the project life coverage ratio.
| Year | CFADS | DSCR | Opening balance | NPV of remaining CFADS | LLCR |
|---|---|---|---|---|---|
| 1 | 15.00 | 1.26 | 100.00 | 133.72 | 1.34 |
| 3 | 15.61 | 1.31 | 87.79 | 119.05 | 1.36 |
| 5 | 16.24 | 1.36 | 74.07 | 101.30 | 1.37 |
| 6 | 12.56 | 1.05 | 66.58 | 91.14 | 1.37 |
| 7 | 16.89 | 1.42 | 58.65 | 84.05 | 1.43 |
| 10 | 17.93 | 1.50 | 31.88 | 45.28 | 1.42 |
| 11 | 14.28 | 1.20 | 21.87 | 30.08 | 1.38 |
| 12 | 18.65 | 1.56 | 11.25 | 17.59 | 1.56 |
The two ratios tell different stories. The DSCR falls to 1.05 in year 6, when the lifecycle spend lands, and to 1.20 in year 11. The LLCR barely notices: it sits at 1.37 at the start of year 6, because one tight year is averaged against five good ones still ahead. In the final year the two ratios are the same number, 1.56, since only one year of cash flow and one payment remain.
The LLCR is an average and the DSCR is a minimum. A healthy LLCR with a weak DSCR in one year is a liquidity problem, solved by a reserve account. A weak LLCR is a solvency problem: the cash flow cannot repay the loan whatever the timing.
Sculpt the same asset's debt to a constant 1.25 times DSCR and it raises 107.0, and the LLCR at close is exactly 1.25. With debt service proportional to CFADS, the NPV of one is the NPV of the other times the DSCR, so the two ratios coincide. That identity is why sculpted deals often set the LLCR covenant at or near the DSCR floor, and why an LLCR that drifts below the DSCR on a sculpted loan is an early sign that the forecast behind the sculpt has moved.
Holding a debt service reserve changes the picture again. Six months of debt service, 5.96, is commonly added to the numerator, lifting the LLCR at close to 1.40. Whether it counts is a definition in the credit agreement, not a modelling choice, and it should be read before the ratio is reported.
Because LLCR is linear in CFADS, a permanent shortfall cuts it in proportion. A 10 per cent fall takes the LLCR at close from 1.34 to 1.20 and the year-6 DSCR from 1.05 to 0.95, below one, which is a payment default without a reserve.
| LLCR threshold | Typical meaning | Shortfall that reaches it |
|---|---|---|
| 1.10x | Distribution lock-up, illustrative | 17.7% |
| 1.05x | Event of default, illustrative | 21.5% |
| 1.00x | Cash flow just repays the loan | 25.2% |
Read the other way, the LLCR is a solvency cushion: at 1.34 the cash flow can fall 25.2 per cent for the life of the loan and still repay it, given perfect timing. The DSCR in year 6 shows that the timing is not perfect.
The frequent error is the discount rate. Discounting CFADS at the equity return or the project WACC instead of the debt rate understates the LLCR: at 8 per cent this loan shows 1.20 instead of 1.34, enough to report a covenant in difficulty that is not. The opposite error, extending the NPV past final maturity to the end of the concession, overstates it. Both come from treating the LLCR as a valuation rather than a repayment test.
Discount CFADS to final maturity at the loan rate and divide by the balance outstanding. Here that is 1.34 at close against a minimum DSCR of 1.05: the loan is solvent, and year 6 needs a reserve. The book's toll road case, in the free workbooks for this book, shows how a lumpy maintenance year becomes the binding year in sizing. For sculpting and coverage on the same structure, see sculpted debt against an annuity.
The debt's own all-in interest rate, including the margin and any hedged swap rate, because the LLCR tests whether the cash flow can repay this loan. Using a higher rate understates it: the illustrative loan shows 1.34 times at 6.0 per cent but 1.20 at 8 per cent, enough to misreport a covenant.
Sculpting sets debt service to CFADS divided by a constant DSCR, so the NPV of CFADS is exactly the DSCR times the NPV of debt service, which equals the debt. Sculpting the illustrative asset at 1.25 times raises 107.0 of debt with an LLCR of exactly 1.25 at close.
Only if the credit agreement says so; many definitions add the reserve balance to the numerator. With six months of debt service, 5.96, in reserve, the illustrative LLCR at close rises from 1.34 to 1.40. Check the definition before reporting the ratio.
This article is one calculation from The Infrastructure Investment Analyst. 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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: infrastructure, data centres and energy → · All 324 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.