DSCR Sculpting
Project lenders do not lend a round number and pick a repayment profile. They decide the cover they need in every period, shape the debt service to the cash the project will make, and lend the present value of what that service can repay. That is debt sculpting, and it is the one calculation every project finance modelling test asks for.
What is debt sculpting? Setting each period’s debt service equal to that period’s cash flow available for debt service (CFADS) divided by a target debt service coverage ratio (DSCR), then sizing the loan as the present value of that service at the loan rate. The cover is the target in every period and the balance reaches zero on the last payment.
Four steps on one case, marked together. Then open the project finance model to see the same mechanic over twenty years with reserve accounts and a lock-up.
Step 1 · Sculpt the debt service
Each period’s debt service is that period’s CFADS divided by the target DSCR, so the cover is exactly the target every time. $ millions, one decimal is enough.
| Half-year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
|---|---|---|---|---|---|---|---|---|
| CFADS | 13.5 | 16.4 | 12.9 | 18.5 | 18.7 | 18.9 | 19.1 | 19.3 |
| Debt service |
Step 2 · Size the loan
The loan the lender will make is the present value of that service at the loan rate per half-year (3.50%), each payment discounted from the end of its period.
Step 3 · Split the first payment
Interest is the opening balance (your loan) times the half-year rate; principal is whatever of the first payment is left.
Step 4 · Why sculpt at all
Lend the same amount but repay it in eight equal instalments instead. In which half-year does the DSCR first fall below the target?
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Download the model
- Project finance model · free Excel, formulas live