Case 001Credit analysis and lendingHard
A resort developer needs Rs 300 crore, earns nothing for two years and then earns three quarters of its cash in one season. Propose the loan structure.
1The situation
Tapovan Resorts is building a hill resort for Rs 300 crore, including interest during construction. Construction takes two years. From year 3 the resort expects steady EBITDA of Rs 60 crore a year, but 75% of it is earned from October to March, the peak season; April to September brings only a quarter. Maintenance capex is about Rs 6 crore a year, and depreciation on a new asset shelters most profit from tax in the early years, so ignore tax for now.
The sponsor will put in 40% as equity, so the bank is asked for Rs 180 crore at 10% interest. The loan year runs April to March.
2Your task
Propose the tenor, moratorium, repayment shape, reserve and covenants, and show the numbers that support each choice.
Quick check
Year 3 annual debt service coverage is about 1.5x. Why might the loan still run short of cash in its very first year of operation?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Lend Rs 180 crore over twelve years: a two-year moratorium for construction, then twenty semi-annual instalments with 25% of each year's principal due in September and 75% in March, a reserve of about Rs 22 crore, and a 1.3x annual DSCR test each 31 March. Year 3 cover is 1.51x, and timing the instalments to the season cuts the lean-half gap from Rs 6 crore to Rs 1.5 crore.
Step 1What does the lender size the loan on?
A project loan is repaid from the cash the asset throws off, not from a balance sheet. So the first number is cash available for debt service, and here it is Rs 54 crore a year: EBITDA of Rs 60 crore less Rs 6 crore of maintenance capex. At a 1.3x cover the resort can carry roughly Rs 42 crore of annual debt service. Rs 180 crore over ten years needs Rs 18 crore of principal and Rs 18 crore of first-year interest, about Rs 36 crore, so the size fits with room. A moratoriumA period at the start of a loan when no principal is repaid, because the asset is still being built and earns nothing. covers the two building years, when there is no cash to pay anything; interest during construction is already inside the Rs 300 crore.
Step 2Why should the instalments follow the season rather than the calendar?
Think of a mango farmer who borrows for an orchard. A bank that asks for equal monthly payments will see defaults every winter, though the farmer is perfectly sound over the year. Tapovan earns Rs 12 crore of spare cash from April to September and Rs 42 crore from October to March, so the big instalment belongs at the end of March. Equal instalments ask for Rs 18 crore in the lean half, Rs 6 crore more than the resort earns. Putting a quarter of the principal in September and three quarters in March asks for Rs 13.5 crore, a gap of only Rs 1.5 crore.
The remaining lean-season gap shrinks as the balance falls, because the September interest falls with it: it is Rs 0.6 crore in year 4 and gone from year 5. After year 3 the previous peak season's spare cash, about Rs 20 crore, easily carries the next September, provided the sponsor cannot take it out as a dividend first.
| Year | September payment | March payment | Annual debt service | DSCR | Loan at 31 March |
|---|---|---|---|---|---|
| 3 | 13.5 | 22.3 | 35.8 | 1.51x | 162.0 |
| 4 | 12.6 | 21.4 | 34.0 | 1.59x | 144.0 |
| 5 | 11.7 | 20.5 | 32.2 | 1.68x | 126.0 |
| 6 | 10.8 | 19.6 | 30.4 | 1.78x | 108.0 |
| 7 | 9.9 | 18.7 | 28.6 | 1.89x | 90.0 |
Step 3What protects the bank in the first lean season and in a bad peak?
Two protections do different jobs. A debt service reserveCash set aside in a lender-controlled account, sized to the next instalment, that the borrower can draw only to pay the lender. of about Rs 22 crore, the next half-year's payment, funded by the sponsor at opening, covers the first September and any shock after. A cash trap does the rest: no dividends unless the reserve is full and cover is at least 1.4x, so peak-season cash stays in the business. All revenue runs through an escrow account the bank can see.
Now test the covenant honestly. Cover can fall to 1.3x if cash available drops to Rs 46.5 crore, a fall of Rs 7.5 crore, which is 12.5% of EBITDA. Because three quarters of EBITDA arrives in one season, one weak peak, down about 17%, is enough to breach. That is why the test runs on the trailing twelve months to 31 March: a September test on six months would read 0.89x every year and breach by design.
Close with the rest of the term sheet in one breath: mortgage over the land and buildings, a charge on receivables and the escrow account, a sponsor undertaking to fund cost overruns during construction, net debt no more than 3.0x EBITDA once open, and a final maturity well inside the land lease. The structure is sound because every term answers a specific way the cash could fail to arrive on time.
Where candidates lose it
Candidates divide Rs 180 crore by ten, ask for equal quarterly instalments from the first day of operation, and present a 1.5x annual cover as proof of safety. The interviewer then asks what happens in the first September, and the structure has no answer.
The second miss is testing the covenant on a period that cannot pass. A six-month test on a seasonal business breaches every year and turns a healthy loan into a waiver negotiation.
What the interviewer asks next
- How would a sculpted repayment profile, rising each year, change the year 3 cover?
- The sponsor wants a 50% loan to cost instead of 60%. What would you trade for it?
- Construction runs six months late. Which term protects the bank, and who pays the extra interest?
- Would you lend at a fixed or floating rate, and what would you ask the sponsor to hedge?
Asked at Scotiabank, Debt Capital Markets, New York, 2026 (Wall Street Oasis): had to make a short deck in an hour and a half ish and propose a loan structure for a company
Company names and figures are illustrative.