PLCR tutorial workbook
The PLCR calculation from this tutorial, built out in Excel and ready to follow along with your own numbers. Excel binary workbook (.xlsb).
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How the PLCR is calculated
The project life cover ratio (PLCR), also called the project life coverage ratio, is a common debt ratio in project finance. It is the net present value (NPV) of the cash flow over the remaining life of the project, divided by the outstanding debt balance in the period.
PLCR=NPV of CFADS over the project lifedebt balance c/f
The discount rate in the NPV calculation is usually the cost of debt, also called the weighted average cost of debt.
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Discount rates beyond the loan’s final maturity
The cash flow available for debt service (CFADS) that qualifies for the calculation runs beyond the loan life, so there is always a question of which discount rate to use after the loan’s final maturity date. The answer depends on how certain the lender considers the cash flow beyond the loan life to be.
Loan documentation often states that the discount rate after the loan life should be at least equal to, or higher than, the senior debt’s cost of debt at the final maturity date. This reflects the greater risk of relying on cash flow projected so far beyond the loan life.
In models for mining and resources, for example, a large mine rehabilitation or closure cost often falls towards the end of the project life. It can reduce CFADS, the numerator, sharply.
Cut-off dates for qualifying CFADS
In practice, lenders often build in a safety cushion and ignore revenue or cash flow after a cut-off date. This protects them from relying on less certain future cash flow. The term sheet or loan documentation commonly sets an end date for the calculation before the actual end of the project life. The qualifying period for CFADS then runs only from the commercial operation date (COD) to that end date.
Including reserve account balances
Take great care when assessing a project whose ratio is supported by cash account balances. Where a debt service reserve account (DSRA) balance is included, for example, the calculation becomes:
PLCR=NPV of CFADS over the project life + DSRA balance c/fdebt balance c/f
Calculating the ratio in a model
The calculation typically involves:
- CFADS to the end of the project life qualifying for the present value calculation
- A constant discount rate, higher than the cost of debt at the final maturity date, to discount cash flow after the end of the loan life
- An end-of-period ratio calculated up to the penultimate debt service period
The PLCR is generally higher than the loan life coverage ratio (LLCR) because it covers a longer period. It can be lower, though, where the model includes large closure or decommissioning costs towards the end of the project life, which reduce CFADS considerably.
Common mistakes when calculating PLCR
- The discount rate, usually the average cost of debt, is overcomplicated instead of calculated simply as total interest (all tranches) divided by total debt balance brought forward (all tranches)
- The discount rate after the loan’s final maturity date is modelled at 0.00%, because the modelled cost of debt in that period is nil or only the base rate, instead of the higher, risk-adjusted rate the term sheet specifies
- The (X)NPV function in Excel is used incorrectly
- The definition in the model is unclear and has not been checked against the debt term sheet
- PLCR covenants trigger cash sweeps while interest on reserve accounts or cash balances is also in the model, creating a circular reference (watch our webinar on managing circular references)
- CFADS is not capped at the cut-off date in the term sheet, where there is one, and instead runs to the end of the project life or stops at loan maturity by mistake
- CFADS is not clearly presented in the cash flow waterfall, so the calculation references the wrong line
- Discounting is calculated incorrectly, confusing compound and simple interest rates
- An annual discount rate is applied to quarterly cash flow, or the other way round, without the necessary adjustment
PLCR questions
What is the difference between PLCR and LLCR?
The LLCR measures cover over the remaining loan life only. The PLCR applies the same idea over the remaining project life, which is usually longer, so the PLCR is generally higher than the LLCR for the same project, all else being equal.
What discount rate should be used after the loan’s final maturity date?
Loan documentation often specifies a rate at least equal to, and sometimes higher than, the cost of debt at final maturity, to reflect the greater uncertainty of cash flow projected that far ahead. Modelling this period at 0.00% because the modelled cost of debt is nil is a common and avoidable mistake.
Why do lenders apply a cut-off date to the PLCR?
To build in a safety cushion against relying on uncertain long-term cash flow projections, especially where late-life costs such as mine rehabilitation or decommissioning can reduce CFADS sharply. The term sheet often sets the cut-off date directly.
Why can the PLCR be lower than the LLCR?
Because the PLCR includes cash flow after the loan life. Where the model includes large closure or decommissioning costs late in the project life, those costs reduce CFADS in the extra years and can bring the PLCR below the LLCR. That reflects accurate modelling of real future costs, not a weaker underlying project.