A port company has a Rs 1,200 crore bullet loan at 8.5% maturing in two years and operating cash flow of Rs 180 crore. If refinancing costs 11%, what happens to its interest burden and cover, and what should the lender require now?

Refinancing at 11% lifts interest from Rs 102 crore to Rs 132 crore and cuts cover from 1.76x to 1.36x. The bigger risk is not the rate but the date: Rs 1,200 crore is due on one day, more than six years of cash flow. The lender should require a refinancing plan now, a cash sweep instead of dividends, which would cut the loan to Rs 1044 crore and hold cover near 1.57x, and a hedge on the new rate.

Interest today is 8.5% of Rs 1,200 crore, Rs 102 crore, covered 1.76x by Rs 180 crore of cash flow. At 11% the same loan costs Rs 132 crore a year, and cover falls to 1.36x, so a 20% drop in port volumes would leave Pelagor barely covering its interest. Nothing about the port has changed; the cost of its money has.

A family that owes nothing on its house until one balloon payment in two years is fine every month until the day it is not. A bullet loan concentrates the whole repayment risk on one date: on that day Pelagor must find Rs 1,200 crore, about 6.7 years of its entire operating cash flow, from new lenders at whatever the market charges. If markets are shut that month, or the port has had a bad quarter, cover ratios are irrelevant; the company defaults because it cannot roll the loan. Lenders call this refinancing riskThe risk that a borrower cannot replace maturing debt, or can only do so at a much higher cost., and it is the main risk in this file.

Use the two years. Stop the cash leaving: Pelagor has Rs 78 crore a year left after interest, and sweeping it to repay debt instead of paying dividends cuts the loan to Rs 1044 crore by maturity. Refinanced at 11%, that costs Rs 114.8 crore a year, cover 1.57x instead of 1.36x. Then ask for a refinancing plan with milestones, starting twelve to eighteen months before maturity, so a failed attempt leaves time for a second. Consider a forward-starting swap to lock the new rate, and a minimum cover covenant tested on the expected refinancing cost, not today's 8.5%, so trouble shows up while there is still time to act.

Say what the sponsor will push back on. A cash sweep stops dividends for two years, and the sponsor will argue the port is sound. The lender's answer is that the port is sound and the capital structure is not: sound assets still default when a single maturity meets a closed market. A compromise is a partial sweep with an agreed amortisation schedule in the new loan, so the next maturity is not another cliff.