Case 097Project and real asset financeCore
A hydro project sells all its power to one state distribution company, which now pays 240 days after billing on Rs 600 crore a year. With Rs 280 crore of annual debt service and a six-month reserve, how much cash is trapped, how long does the reserve last, and what can the lender do?
1The situation
Jalvanti Hydro Power sells all its output under a long-term contract to one state distribution company. It bills about Rs 600 crore a year, Rs 50 crore a month, and the buyer used to pay in about 60 days. Over the last six months the buyer has stopped paying, and now settles bills 240 days after they are raised.
Jalvanti's operating costs are about Rs 60 crore a year, paid from a small operating account. Its debt service is Rs 280 crore a year, and the lenders hold a debt service reserve account equal to six months of debt service. You are the lenders' credit analyst.
2Your task
How much cash is trapped in receivables, how long does the reserve last, and what are the lender's options?
Quick check
How much cash is tied up in receivables at 240 days?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 395 crore is tied up in receivables, Rs 296 crore more than at 60 days, and the Rs 140 crore reserve covers exactly six months of debt service. Moving from 60 to 240 days means about six months with no cash at all. If the delay stops at 240 days, the reserve just bridges it and then needs about 6.5 months to refill; if it stretches further, the project defaults. The project carries its one buyer's credit risk, so the lender's options all work on that buyer's payments.
Step 1How much cash does a 240-day delay trap?
Days outstanding turn into rupees at the billing rate. A landlord whose only tenant starts paying eight months late is owed eight months of rent at any moment, whatever the lease says. Rs 600 crore a year times 240 over 365 is about Rs 395 crore owed to Jalvanti at any time, against about Rs 99 crore at 60 days: Rs 296 crore of cash moved from the project to the buyer. The project is as profitable as before, with debt service covered 1.93 times on paper; the cash has simply stopped arriving.
Step 2How long does the reserve last?
Moving from 60 to 240 days means about 180 days, six months, when no bill is paid. Debt service is Rs 23.3 crore a month, and the debt service reserve accountCash held by the lenders, usually a set number of months of debt service, that the project can draw when its own cash falls short. holds Rs 140 crore, so it lasts exactly six months. Operating costs of Rs 5 crore a month must come from the operating account. If the buyer settles at 240 days from month 7 on, cash of Rs 50 crore a month resumes and the reserve refills at about Rs 21.7 crore a month. If it slips to 300 days, month 7 is a default.
Step 3What are the lender's options?
Everything that helps works on the buyer's payments or on who funds the wait. The lender's problem is not the dam; it is the credit of one state distribution company, which the project was always exposed to and which is now visible. The options, roughly in the order a lender would use them, are in the table.
| Option | What it does | Limit |
|---|---|---|
| Call the contract's payment security, such as a letter of credit, if one exists and is live | Turns a late bill into cash from a bank | Often undersized or not renewed |
| Claim late payment surcharge | Compensates for the delay | Paid by the same late payer |
| Receivables discounting facility | Advances cash against unpaid bills | Priced on the buyer's credit |
| Sponsor top-up of the reserve | Restores the six-month cushion | Depends on the sponsor's capacity |
| Reschedule repayments | Lowers monthly debt service | Admits the problem; may need approvals |
Close with the underwriting lesson. A single-buyer project should be underwritten on the buyer, with a reserve sized to the buyer's payment history, not to a normal year. For this loan, the analyst would push for a discounting line and a sponsor top-up now, before the reserve runs out, and would watch the buyer's payment days monthly.
Where candidates lose it
The common error is reading the healthy debt service cover and concluding the project is fine. Cover is a profit measure; the project is failing on cash, and a reserve that lasts exactly as long as the transition leaves no margin at all.
The second is treating the problem as the project's. The project did nothing wrong; its buyer stopped paying. Options that do not address the buyer's payments only buy time.
What the interviewer asks next
- The buyer pays 360 days late instead. When does the project default?
- How big should the reserve have been, given the buyer's payment history?
- Why might a lender prefer a state government guarantee to a larger reserve?
Company names and figures are illustrative.