LLCR and PLCR Complexities and Meaning for Break Even

The DSCR can be used as a gauge for break-even.  The LLCR and PLCR can also be used to assess break-even but using different break-even definitions.  An analysis demonstrating the break-even idea is presented below as well as some tricky details about computing the LLCR when there are different debt issues.

If the cash flow available to pay debt service is 100 and the debt service is 50, then the break-even cash flow is 50, which is a decrease of 50, or 50%.  In this case the DSCR is 100/50 or 2.0.  The break-even percentage decline in cash flow is 50% (not 100%).  The formula for finding the break-even decline in cash flow is just:

Percent Reduction in Cash Flow Flow for Single Year Default = (DSCR-1)/DSCR. 

In a similar manner, the LLCR and the PLCR can be used to compute the percent decline in cash flow that can occur before a problem.  In the case of LLCR, the result gives the decline in cash flow with restructuring that can occur and the loan can still be paid by the end of the loan life:

Percent Reduction in Cash Flow  for Repaying Loan by end of Loan Tenor = (LLCR-1)/LLCR

Similarly, the PLCR provides the percent decline in cash flow over the entire project life that can occur and the loan can sitll be repaid in full.  The difference between the LLCR and the PLCR provides the added buffer the provides safety from the tail — the difference between the end of the debt tenure and the project life.  The formula for the PLCR that defines break-even can be expressed as:

Percent Reduction in Cash Flow over Entire Life  for Repaying Loan  = (LLCR-1)/LLCR

Definition of LLCR and PLCR

If the DSCR is CFADS/Debt Service, the PLCR puts PV factors around the CFADS and the Debt Service.  But since the PV of debt service is the same as debt at COD (or after COD), the PLCR can be defined as:

PLCR = PV of CFADS over Project Life/Debt

If there is a debt service reserve account this should be subracted from debt using the principal of net debt in corporate finance (cash is like negative debt).

For the LLCR, the formula is similar but the cash flow is computed over the loan life. So the formula is:

LLCR = PV of CFADS over the Loan Life/(Debt – DSRA)

To demonstrate the break-even points, you need to make a model with a default waterfall.  The file below includes a default that is repaid and demonstrates how the LLCR and PLCR measure the break-even cash flows.

PLCR and LLCR Break Even Exercise    PLCR and LLCR Break Even