Case 013Credit and leveraged financeCore

An agro processor asks its bank for a five-year term loan to fund an expansion that only earns from year 2. Should the bank lend, and on what terms?

ScotiabankCity of London · 2026

The situation

Ruchvel Agro Processors, which mills and packs pulses, has EBITDA of Rs 60 crore and Rs 150 crore of existing debt at 10%, repayable in one go after this loan's term. It asks for a Rs 100 crore term loan at 10.5%, drawn at once and repaid in five equal annual instalments of Rs 20 crore, to build a new line that adds Rs 15 crore of EBITDA from year 2.

Maintenance capex is Rs 12 crore a year and equals depreciation; tax is 25%. Bank policy caps leverage, total debt over EBITDA at each year end, at 3.5x, and requires a debt service cover, cash after capex and tax over interest plus principal, of at least 1.3x.

Your task

Test the loan as requested against both policy limits, year by year. Would you lend, and if so, how would you restructure it?

Quick check

Which year is the hardest for this loan as requested?

Worked solution

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

30-second answerThe answer to give first

Not as requested; yes if the loan is built around the ramp. Drawn at once and repaid from year 1, it breaches both limits in year 1, 3.83x leverage and 0.93x cover, and stays under 1.3x cover until year 4. Drawing it in two Rs 50 crore stages, taking no principal in year 1 and amortising over seven years from year 2 keeps leverage at or below 3.33x and cover at or above 1.35x throughout.

Step 1What is a lender actually testing?

Two things, both about the borrower's ability to pay rather than its value. Leverage asks how many years of EBITDA the debt represents; debt service coverCash left after maintenance capex and tax, divided by the interest and principal due in the same year. Below 1.0x the company cannot pay from its own cash. asks whether this year's cash pays this year's instalment with room to spare. A household asking for a car loan just before a salary rise starts faces the same two questions: how big is the loan against income, and can this month's pay cover this month's EMI?

Step 2How does the loan as requested look, year by year?

Run year 1 out loud. Debt is Rs 250 crore, interest Rs 15 crore on the old debt plus Rs 10.5 crore on the new. Tax is 25% of Rs 60 crore less Rs 12 crore of depreciation less Rs 25.5 crore of interest, about Rs 5.6 crore, so cash for debt service is Rs 60 crore less 12 less 5.6, about Rs 42.4 crore. Debt service is Rs 25.5 crore of interest plus Rs 20 crore of principal, Rs 45.5 crore, so cover is 0.93x: Ruchvel cannot pay year 1 from its own cash. Leverage after the instalment is Rs 230 crore over Rs 60 crore, 3.83x.

From year 2 leverage falls to 2.80x, comfortably inside the cap, but cover stays below 1.3x until year 4 at 1.22x, 1.27x, then 1.33x. Two problems, then: the cost arrives a year before the earnings, and five years is too short a repayment for cash flow of this size.

The loan as asked against the loan built around the rampYear 1: no new EBITDA yetcap 3.5x2.0x3.0x4.0x3.833.332.803.142.532.952.272.762.002.57Leverage: debt / EBITDA at year end (lower is better)floor 1.3x0.8x1.5x2.2x0.932.031.221.351.271.391.331.441.391.49Debt service cover (higher is better)Year 1Year 2Year 3Year 4Year 5as asked: all drawn now, 20 a yearstaged draw, year-1 holiday, 7 years
As requested, Ruchvel's loan breaches the 3.5x leverage cap and the 1.3x cover floor in year 1 and stays below 1.3x cover until year 4; drawn in two stages with a year-1 principal holiday and seven-year amortisation, it stays within both limits every year.
Step 3How would you restructure it?

Match the debt to the asset's timing. Draw Rs 50 crore at the start and Rs 50 crore a year later as construction is paid for, take no principal in year 1, then repay over seven years at about Rs 14.3 crore a year. Year-1 leverage becomes Rs 200 crore over Rs 60 crore, 3.33x, and with only interest due the cover is 2.03x. From year 2 the full loan is drawn, but the new EBITDA has arrived: leverage 3.14x, cover 1.35x, both improving after that.

YearLeverage, as askedCover, as askedLeverage, restructuredCover, restructured
13.83x0.93x3.33x2.03x
22.80x1.22x3.14x1.35x
32.53x1.27x2.95x1.39x
42.27x1.33x2.76x1.44x
52.00x1.39x2.57x1.49x
Against a 3.5x leverage cap and a 1.3x cover floor, the loan as requested fails in year 1 on both tests and on cover until year 4; the restructured loan passes every year, with cover never below 1.35x.
Step 4What else would you ask for before credit committee?

The structure handles timing; it does not handle the risk that the line is late or never earns. So tie the second draw to construction progress, ask the promoters to cover cost overruns, and set the cover covenant from year 2 with a test the bank can act on. Also ask how sure the Rs 15 crore is: pulses processing is a thin-margin business, and if the new line earns Rs 10 crore instead, cover in year 2 falls to about 1.25x, a whisker from the floor. That sensitivity is what a credit committee will ask first.

Where candidates lose it

Candidates test the loan in year 2 or on pro forma EBITDA of Rs 75 crore, find it passes leverage, and approve it. That skips the year the bank is most exposed: the money is out, the instalment is due and the new line has earned nothing.

The second miss is saying no and stopping. A corporate banker is paid to find the structure that works; the interviewer wants the restructured terms, not a refusal.

What the interviewer asks next

  • If the new line earns Rs 10 crore instead of Rs 15 crore, does the restructured loan still pass?
  • Why might the bank prefer a cash sweep to a longer tenor?
  • What security would you take over the new line?
  • How would you treat the existing Rs 150 crore if it matured in year 3?

Asked at Scotiabank, Corporate Banking, City of London, 2026 (Wall Street Oasis): Case study was decently technical and involved assessing if you should or should not lend to the company.

Company names and figures are illustrative.