A solar park costs Rs 500 crore and will generate Rs 60 crore a year of cash available for debt service for 25 years. Lenders need 1.3x cover over an 18-year tenor at 9%. What is the maximum debt, the gearing, and why does the tenor matter?

Maximum debt is about Rs 404 crore, 81% of cost, leaving an equity cheque of about Rs 96 crore. Debt service can be at most 60 / 1.3 = Rs 46.2 crore a year, and that annuity for 18 years at 9% is worth Rs 404 crore. The tenor matters because the same payment supports Rs 372 crore over 15 years and Rs 453 crore over 25; lenders stop at 18 to keep a seven-year tail of cash flow as their reserve.

From what the project can pay, which is the whole idea of project financeLending to a single asset where the only source of repayment is the cash flow of that asset, with no recourse to the other businesses of the sponsor.. A bank deciding how large a home loan to give does not start from the house price; it starts from the salary and asks what monthly payment the borrower can carry, then works back to a loan. Here the salary is Rs 60 crore a year. Lenders want it to be 1.3 times the payment, so the payment is at most Rs 46.2 crore. An annuity of Rs 46.2 crore for 18 years at 9% has a present value of 46.2 x 8.756 = Rs 404 crore, and that is the loan. Equity is whatever the cost leaves: 500 less 404, about Rs 96 crore, so gearing is 81/19.

Because the payment is fixed and the loan is the sum of the payments, discounted. Rs 46.2 crore a year supports Rs 372 crore over 15 years, Rs 404 crore over 18 and Rs 453 crore over 25, so three extra years of patience are worth about Rs 32 crore of debt. The curve flattens: years 19 to 25 add only Rs 49 crore, because a rupee due in year 25 is worth 0.12 rupees today at 9%. The rate works the same way: at 10% the 18-year loan is Rs 379 crore, and at a 1.20x cover it is Rs 438 crore. Each lender term is a lever on the debt size, and the sponsor negotiates all three.

Lenders stop at 18 years on a 25-year contract so that seven years of cash flow, Rs 420 crore undiscounted, sit behind the loan as a reserve nobody has borrowed against. If output disappoints and the project cannot pay in year 12, the loan can be stretched into the tail instead of defaulting. Lenders also doubt year 25 more than year 5: panels degrade, the offtaker may weaken, and a contract renewal is not a certainty. For the sponsor, the equity of Rs 96 crore receives Rs 13.8 crore a year during the loan and the full Rs 60 crore in the tail, an equity IRR of about 16.2% against the 9% the lenders earn. Gearing is what turns a project earning a modest return on cost into a double-digit return on equity, and the tenor is what sets the gearing.

Close with the limit. The Rs 60 crore is flat and certain in the case; in a real model it varies with irradiation, tariff escalation and degradation, and lenders size on a downside case, often a P90 output estimate, so the real loan is smaller than this. In the first year Rs 36.4 crore of the payment is interest and only Rs 9.8 crore is principal; sculpting the repayments to a flat cover ratio rather than a flat payment is the usual refinement, and it gives the same loan size when cash flow is flat.