What Is the Loan Life Coverage Ratio (LLCR)?

The loan life coverage ratio (LLCR) is a financial ratio used to estimate the solvency of a firm, or the ability of a borrowing company to repay an outstanding loan. LLCR is calculated by dividing the net present value (NPV) of the money available for debt 澳洲幸运5官方开奖结果体彩网:repayment by the amount of outstanding debt. 

LLCR is similar to the 澳洲幸运5官方开奖结果体彩网:debt service coverage ratio (DSCR), but it is more commonly used in project financing because of its long-term nature. The DSCR captures a single point in time, whereas the LLCR addresses the entire span of the loan.

The ꧃Formula for the Loan Life Cove൩rage Ratio (LLCR) Is

 $\begin{aligned} &\frac{\sum_{t=s}^{s+n}\frac{CF_t}{\left(1 + i\right)^t} + DR}{O_t}\\ &\textbf{where:}\\ &CF_t = \text{Cash-flows available for debt service at year t}\\ &t = \text{The time period}\left(\text{year}\right)\\ &s = \text{The number of years expected to pay the debt back}\\ &i = \text{The weighted average cost of capital}\left(\text{WACC}\right)\\ &\text{expressed as an interest rate}\\ &DR = \text{Cash reserve available to repay the debt}\\ &\left(\text{the debt reserve}\right)\\ &O_t = \text{The debt balance outstanding at the time of}\\ &\text{evaluation}\\ \end{aligned}$​Ot​∑t=ss+n​(1+i)tCFt​​+DR​where:CFt​=Cash-flows available for debt�⛦� service at year tt=The time period(year)s=The&nb🃏sp;number of years expected to pay the debt backi=Tᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚhe weighted average cost of capital(WACC)expressed as an interest rateDR=Cash reserve available to re💮pay the&nbs♐p;debt(the debt reserve)Ot​=The debt balance outstanding at the time&n𒐪bsp;ofevaluation​

How to Calculate the Loan Life Coverage Ratio

The LLCR can be c💮alculated using the above formula, or by using a shortcut: dividing the NPV of project free cash flows by the present value oไf the debt outstanding.

In this calculation, the weighted average cost of debt is the discount rate for the NPV calculation and the project "cash flows" are more specifically the 澳洲幸运5官方开奖结果体彩网:cash fl🍌💝ows available for debt service (CFADS).

What Does the Loaജn Life Coverage Ratio Tell You?

LLCR is a 澳洲幸运5官方开奖结果体彩网:solvency ratio. The loan life covera⭕ge ratio is a measure of the number of times over the cash flows of a project can repay an outstanding debt over the life of a loan. A ratio of 1.0x means that LLCR is at a break-even level. The h🎉igher the ratio, the less potential risk there is for the lender.

Depending on the risk profile of the project, sometimes a debt service reserve account is required by the lender. In such a case, the numerator of LLCR would include the reᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚserve account balance. Project financing agreements invariably contain covenants that stipulate LLCR levels.

The Difference Between LLCR and DSCR

In corporate finance, the 澳洲幸运5官方开奖结果体彩网:Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments. However, DSCR captures just a single point in time, while LLCR allows for several time periods, which is more suitableཧ for understanding liquidity available for loans of medium to long time horizons.

LLCR is used by analysts to assess the viability of a given amount of debt and consequently to evaluate the risk profile and the🐬 related costs. It has a less immediate explanation compared to DSCR, but when LLCR has a value greater than one, this is usually a strong reassurance for investors.

Limitations of LLCR

One limitation of the LLCR is that it does not pick up weak periods because it basically represents a discounted average that can smooth out rough patches. For this reason, if a project has a steady cash flows with a history of loan repayment, a good rule of thumb is that the LLCR should be roughly equal to 澳洲幸运5官方开奖结果体彩网:the average debt service coverage♛ ratio.