Loan Life Coverage Ratio - LLCR

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 partitioning the net present value (NPV) of the money accessible for debt repayment by the amount of outstanding debt.

LLCR is like the debt service coverage ratio (DSCR), however it is all the more ordinarily utilized in project financing due to its long-term nature. The DSCR catches a single point in time, while the LLCR tends to the whole span of the loan.

The Formula for the Loan Life Coverage Ratio (LLCR) Is

$\begin &\frac{\sum_^{s+n}\frac{\left(1 + i\right)^t} + DR}\ &\textbf\ &CF_t = \text\ &t = \text\left(\text\right)\ &s = \text\ &i = \text\left(\text\right)\ &\text\ &DR = \text\ &\left(\text\right)\ &O_t = \text\ &\text\ \end$

Step by step instructions to Calculate the Loan Life Coverage Ratio

The LLCR can be calculated utilizing the above formula, or by utilizing an easy route: isolating the NPV of project free cash flows by the current value of 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 all the more explicitly the cash flows accessible for debt service (CFADS).

What Does the Loan Life Coverage Ratio Tell You?

LLCR is a solvency ratio. The loan life coverage 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 higher the ratio, the less possible risk there is for the lender.

Contingent upon 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 incorporate the reserve account balance. Project financing agreements perpetually contain pledges that specify LLCR levels.

The Difference Between LLCR and DSCR

In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow accessible to pay current debt obligations. The ratio states net operating income as a various of debt obligations due in no less than one year, including interest, principal, sinking-asset and lease payments. In any case, DSCR catches just a single point in time, while LLCR considers several time spans, which is more suitable for understanding liquidity accessible for loans of medium to long time skylines.

LLCR is utilized by analysts to survey the viability of a given amount of debt and thus to assess the risk profile and the connected costs. It has a less immediate clarification compared to DSCR, however when LLCR has a value greater than one, this is generally a strong consolation for investors.

Limitations of LLCR

One limitation of the LLCR is that it doesn't get weak periods since it fundamentally addresses a discounted average that can streamline difficult times. Thus, in the event that a project has a consistent cash flows with a history of loan repayment, a decent rule of thumb is that the LLCR ought to be generally equivalent to the average debt service coverage ratio.

Features

• 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.
• The higher the ratio, the less expected risk there is for the lender.
• The loan life coverage 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.