Case 063Credit analysis and lendingWarm up

Mahapath Expressway collects Rs 150 from 30,000 vehicles a day, spends Rs 30 crore a year on O&M and owes Rs 90 crore a year of debt service, with a six-month reserve. Compute DSCR, stress traffic down 20%, and say how long the reserve lasts.

The situation

Mahapath Expressway is a special purpose company that built and operates a 60 km toll road. Traffic is 30,000 vehicles a day at an average toll of Rs 150. Operations and maintenance cost Rs 30 crore a year. The project loan requires Rs 90 crore a year of interest and principal, and the lenders hold a debt service reserve equal to six months of payments, Rs 45 crore, that is drawn only if the road's cash cannot cover a payment.

Ignore tax and assume the toll is fixed for the year.

Your task

What is the DSCR today? What is it if traffic falls 20%? At what traffic does the reserve start to be used, and how long does it last if traffic falls 35% or 40%?

Quick check

Traffic falls 20%. Does the project draw on its reserve?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

DSCR is about 1.49x today and 1.13x with traffic down 20%; the reserve is untouched until traffic falls about 27%. Revenue is Rs 164.25 crore a year, Rs 134.25 crore after O&M, against Rs 90 crore of debt service. Because O&M is fixed, a 20% fall in traffic cuts cash available by 24%. Below 21,918 vehicles a day the reserve drains: it lasts about 3.4 years at a 35% fall and 2.1 years at 40%.

Step 1What does a project lender look at first?

The cash the asset makes before the lender is paid, year by year. CFADSCash flow available for debt service: revenue less operating costs and tax, before any interest or principal is paid. is toll revenue less operations and maintenance, and DSCR is that cash divided by the year's interest plus principal. A landlord whose only income is one shop's rent is judged the same way: rent less upkeep against the EMI. Here revenue is 30,000 vehicles times Rs 150 times 365 days, Rs 164.25 crore; less Rs 30 crore of O&M leaves Rs 134.25 crore; divided by Rs 90 crore gives 1.49x.

The relationship

\text{DSCR} = \frac{30{,}000 \times 150 \times 365 / 10^7 - 30}{90} = \frac{134.25}{90} \approx 1.49\times

30,000 x 150 x 365	annual toll revenue in rupees, divided by 10 million to express it in crore
30	annual operations and maintenance, Rs crore
90	interest plus principal due in the year, Rs crore

What it says in wordsThe road makes Rs 134.25 crore of cash for every Rs 90 crore it owes the lenders, about one and a half times.

Step 2What does a 20% fall in traffic do?

More than 20% to the cushion, because O&M does not fall with traffic. Revenue drops to Rs 131.4 crore; cash after the fixed Rs 30 crore is Rs 101.4 crore, down 24%. DSCR falls from 1.49x to 1.13x, still above 1.0x, so the lenders are paid in full from operations and the reserve is not touched. That is the point of the stress: a 20% miss is a bad year for the equity, which gets nothing after debt service, not a problem for the bank.

Traffic case	Vehicles a day	Revenue	CFADS	DSCR	Reserve lasts
Base	30,000	164.2	134.2	1.49	not used
-10%	27,000	147.8	117.8	1.31	not used
-20%	24,000	131.4	101.4	1.13	not used
-27%	21,918	120.0	90.0	1.00	not used
-35%	19,500	106.8	76.8	0.85	3.4 years
-40%	18,000	98.5	68.5	0.76	2.1 years

Rs crore. Coverage falls from 1.49x to exactly 1.0x at a 27% fall in traffic; beyond that the shortfall is paid from the Rs 45 crore reserve, which lasts 3.4 years at a 35% fall and 2.1 years at 40%.

Step 3When does the reserve start to drain, and how long does it last?

Find the traffic at which DSCR is exactly 1.0x. The road needs Rs 120 crore of revenue to cover Rs 30 crore of O&M and Rs 90 crore of debt service, which is 73.1% of today's revenue: about 21,918 vehicles a day, a 27% fall. Below that, each year's shortfall comes out of the Rs 45 crore reserve: at a 35% fall the shortfall is Rs 13.2 crore a year and the reserve lasts about 3.4 years; at 40% it is Rs 21.5 crore and the reserve lasts 2.1 years. A six-month reserve buys a year or three of time, not a rescue; it exists so a lender can restructure before a default rather than after one.

Mahapath's DSCR falls from 1.49x to 1.13x when traffic drops 20% and reaches 1.0x at a 27% drop, about 21,918 vehicles a day; only beyond that does the six-month reserve start to drain, lasting 3.4 years at a 35% fall and 2.1 years at 40%.

Step 4What else would a rating analyst ask before signing off?

Whether the base case is the right base. Traffic forecasts for new roads are the most over-estimated number in project finance, so the analyst asks for the ramp-up history, the share of trucks versus cars, since trucks pay more and move with the economy, and whether the toll escalates with inflation under the concession. Then the debt profile: whether Rs 90 crore is flat or rises, and when the concession ends relative to the final repayment. The road is a single asset with one revenue line and one cost line, so the whole credit is the traffic number, and everything else is a cushion around it.

Where candidates lose it

The common miss is applying the 20% fall to cash available instead of to revenue. Because O&M is fixed, revenue down 20% is cash down 24%, and a candidate who skips that step quotes a DSCR that is too high.

The second is assuming the reserve is used as soon as traffic disappoints. It is drawn only when coverage is below 1.0x, and the useful answer is the traffic level at which that happens.

What the interviewer asks next

O&M rises 5% a year while the toll is frozen for two years. What happens to DSCR?
Would you prefer a larger reserve or a cash sweep above 1.3x, and why?
How does the concession's remaining life affect how much debt the road can carry?

Company names and figures are illustrative.