A toll road with a 15-year concession is sized for debt at 1.3 times cover on its base case. How much can it borrow, and what happens to cover if traffic comes in 15% below the forecast?

The road can carry about Rs 936 crore of debt, and a 15% traffic miss cuts cover from 1.30x to about 1.06x. Cash available for debt service is Rs 160 crore, so debt service can be Rs 123.1 crore a year, which supports Rs 936 crore at 10% over 15 years. Because operating costs are fixed, the miss removes 18.75% of cash and over four fifths of the cushion. Lenders should size on a downside case, not the base case.

A bank lending to a family looks at what is left each month after rent and groceries, and lets the EMI take only part of it, so a bad month does not mean a missed payment. Project lenders do the same with a ratio. Cash available for debt service is Rs 200 crore less Rs 40 crore, Rs 160 crore, and at 1.3 times cover, debt service can be at most 160 / 1.3 = Rs 123.1 crore a year. At 10% over 15 years, each rupee of yearly instalment repays Rs 7.61 of loan today, so the maximum debt is Rs 123.1 crore x 7.6061 = Rs 936.1 crore.

In the first year, Rs 93.6 crore of the Rs 123.1 crore instalment is interest and only Rs 29.5 crore repays principal. That is normal for an equal-instalment loan, and it means the debt stays large for most of the concession.

A 15% traffic miss takes revenue from Rs 200 crore to Rs 170 crore, but the maintenance contract still costs Rs 40 crore. Cash falls from Rs 160 crore to Rs 130 crore, an 18.75% drop from a 15% miss, and cover falls from 1.30x to 1.06x. This is operating leverageThe effect of fixed costs on profit: when costs do not fall with revenue, a given percentage fall in revenue causes a larger percentage fall in cash.: fixed costs make cash move more than traffic. The road still pays, but the cushion above debt service shrinks from Rs 36.9 crore to Rs 6.9 crore, which is 81% of it gone.

Work backwards from the levels that matter. Cover reaches 1.00x, where the road can no longer pay in full, at a traffic miss of 18.5%, only 3.5 points beyond the stress the committee asked about. Most project loans also have a lock-upA cover level, above default, below which the project may not pay dividends to its sponsor; cash is kept inside the project to protect lenders. test; taking it at an illustrative 1.15x, the sponsor stops receiving dividends at a miss of just 9.2%. Traffic forecasts for new roads rest on assumptions about growth and diversion from other routes, and they are often missed in the early years, so these are not remote cases.

Three changes would make the loan sturdier. First, size on a downside case: if lenders take traffic 10% below base as their sizing case, cash is Rs 140 crore and maximum debt falls to about Rs 819 crore, Rs 117 crore less, with the sponsor putting in that much more equity. Second, require a debt service reserve of six months' payments, about Rs 62 crore, which can pay through a bad year without default. Third, end the loan two or three years before the concession expires, so a slow start can be caught up before the road is handed back. The limitation is that each change lowers the sponsor's return, and the sponsor will push back; the lender's job is to show what the traffic miss costs and price or structure for it.