Credit Appraisal and Project Finance
What the exam tests
Credit appraisal and project finance test structuring: can the project generate cash, who bears which risk, and what debt the cash flow can support. Expect DSCR, LLCR, IRR, sensitivity, security and covenant questions.
Core rules and concepts
- Project finance is typically non-recourse or limited-recourse lending to an SPV; lenders rely on project cash flow and security, not sponsor balance sheet.
- Debt sizing uses CFADS and a minimum DSCR, then discounts debt service at the lending rate over the tenor. LLCR checks coverage over the loan life.
- Risk allocation: construction, completion, offtake, fuel supply, O&M, currency, regulatory and force majeure risks should sit with the party best able to manage them.
- Security package: mortgage over project assets, assignment of project agreements, pledge of shares, escrow of revenues, DSRA, and sponsor support during construction.
- Covenants: DSCR lock-up, distribution lock-up, additional debt limit, insurance, reporting, change-in-control and cure rights.
Worked example
CFADS is ₹90 crore. Minimum DSCR is 1.50, so maximum annual debt service = 90/1.50 = ₹60 crore. At 9% for 15 years, annuity PV factor = [1 − (1.09)^−15]/0.09 = 8.061. Debt capacity = 60 × 8.061 = ₹483.7 crore. If project cost is ₹700 crore, equity = ₹216.3 crore and debt/equity ≈ 2.24:1. If a sensitivity cuts CFADS 15% to ₹76.5 crore, DSCR becomes 1.275, below the lock-up; the structure needs a DSRA or lower gearing.
Traps
Do not confuse project IRR with equity IRR. Do not size debt on base-case CFADS without stress. Do not accept a DSCR that ignores tax or working capital. Do not treat a sponsor guarantee as equivalent to project cash flow.