Sponsor vs Lender: Who Is Paid First and Who Is Last

The sponsors put in Rs 540 crore and take whatever is left. The project lenders put in Rs 1,260 crore and take a contracted Rs 182.70 crore before anyone else. In the modelled year that leaves the sponsors Rs 65.30 crore, so one point off toll receipts takes nothing at all from the lenders and 4.75 per cent from the sponsors.

What does each party put into the crossing, and what is each entitled to take out?

Tapti Crossing Infrastructure Private Limited exists to build and operate one crossing. The company has no other business, no second stream of cash and no trading history, so everything anybody is ever paid out of it comes from vehicles going over one stretch of road. Rs 1,800 crore went in to build it. Debt from the project lenders came to Rs 1,260 crore and equity from the sponsors to Rs 540 crore, the 70 to 30 shape the project was funded on.

Now look at what each side is entitled to take back out. The project lenders are entitled to a number that was written down before the first vehicle crossed: interest at the project's own contracted rate of 9.5 per cent on Rs 1,260 crore, or Rs 119.70 crore, plus scheduled principal of Rs 63 crore. Together that is Rs 182.70 crore of debt serviceThe total cash a borrower has to hand over in a period under its loan agreement, being the interest that has accrued plus whatever principal the schedule says must be repaid. in the modelled year, and it is the same Rs 182.70 crore whether the crossing has a brilliant year or a wretched one.

The sponsors are entitled to no number at all. The sponsors' share is arithmetic done at the end: toll receipts of Rs 310 crore, less operating cost of Rs 62 crore, giving Rs 248 crore of cash, less the lenders' Rs 182.70 crore, leaving Rs 65.30 crore. The sponsors put in less than half of what the lenders put in and hold the only claim on the crossing that changes size. The two statements are not in tension with each other. Both are the same fact seen from two sides. Rs 540 crore buys the position that absorbs everything; Rs 1,260 crore buys the position that absorbs nothing until the whole structure stops working.

Everyone already knows this shape from somewhere else. A shopkeeper who rents a stall pays the landlord the same rent in a slow month and a festival month. The landlord's month does not have a mood. The shopkeeper's does, and the whole of the difference between a good week and a bad one lands on the takings left after the rent is paid. The sponsors are the shopkeeper. The project lenders are the landlord. The crossing is that arrangement at a larger size, and nothing about it is more complicated.

Which claim is fixed and which one is whatever is left?

A fixed claimAn entitlement to a stated amount of money, set by contract before the period begins, which does not grow when things go well and does not shrink when they go badly. is an entitlement to a stated amount. The agreement set the amount before the year began. A heavy traffic year at Tapti Crossing Infrastructure Private Limited does not improve the amount, and a thin one does not shrink it, right up until the point where there is not enough cash to pay it at all. Until that point it is simply a number that has to be handed over.

A residual claimAn entitlement to whatever remains after every fixed claim ahead of it has been met in full. It is a subtraction rather than an amount, so it can be large, small or nothing. is not an entitlement to an amount. A residual claim is an entitlement to a subtraction instead. The residual is whatever the crossing produced minus whatever the claims in front of it took, and the size of it is only known once both of those are known. The residual absorbs a good year completely and a bad year completely, in both directions. Of the two claims, only the residual is worth watching move.

Of the Rs 248 crore the crossing produced in the modelled year, Rs 182.70 crore is fixed and Rs 65.30 crore is what is left, being 73.7 per cent and 26.3 per cent of it, and only the second of those two numbers can be different next year on the same road. Notice what that means about the picture below: the two blocks look like two slices of the same pie, and they are nothing of the kind. One block is a rule and the other block is a remainder.

Who is paid first, and what does standing last actually cost?

The cash a crossing collects does not arrive in a drawer that the sponsors can reach into. In a financing of this shape the receipts of Tapti Crossing Infrastructure Private Limited land in accounts the project lenders control, the contracted Rs 182.70 crore is met out of those accounts, and only then does anything move outward to the people who put in the equity. The full order in which a project's accounts are cleared, and the reserve that sits inside it, is covered separately under debt service.

Standing last is the narrower question and the more important one. Being last is not a matter of politeness, paperwork or timing: it is the single property that turns the sponsors' Rs 65.30 crore into a residual rather than a payment. Reversing the two stations changes the meaning of every figure above. If the sponsors were entitled to Rs 65.30 crore first and the lenders took what was left, then Rs 65.30 crore would be the contracted claim and Rs 182.70 crore would be the number that moved with traffic. The amounts would be identical. The positions would have swapped entirely.

And the position is priced. The sponsors' Rs 540 crore is expected to be paid more than the project lenders' Rs 1,260 crore, not because the sponsors are cleverer or because equity is worth more per rupee, but because it stands behind Rs 1,260 crore that has to be satisfied first. A claim that gets paid last, out of accounts somebody else operates, is worth less per rupee at the outset, so it is offered a larger share of whatever the crossing turns out to produce. The bargain is no more than that, and neither side is doing the other a favour.

How far does the residual move when revenue moves one point?

Here is the arithmetic, and it is worth doing slowly because the answer surprises most people the first time. One per cent of the Rs 310 crore of toll receipts at Tapti Crossing Infrastructure Private Limited is Rs 3.10 crore. Take that off. The cost of keeping a crossing lit, staffed and repaired barely notices how many vehicles used it, so the operating cost of Rs 62 crore does not follow the receipts down. Earnings before interest, tax, depreciation and amortisation (EBITDA) falls by the full Rs 3.10 crore to Rs 244.90 crore.

Now split the smaller pot. The schedule says Rs 182.70 crore, so the project lenders still take it in full. Not a rupee of the Rs 3.10 crore comes off their side. All of it comes off the other side, so the residual goes from Rs 65.30 crore to Rs 62.20 crore. Rs 3.10 crore is one per cent of revenue and 4.75 per cent of the residual, so a one point move in toll receipts is a 4.75 point move in the sponsors' cash for that year, and the lever runs in both directions. A one per cent better year lifts the residual to Rs 68.40 crore, or 4.75 per cent up.

The multiple of 4.75 is not a warning or an opinion. The multiple is Rs 3.10 crore divided by Rs 65.30 crore, and it exists because the claim standing in front of the sponsors does not flex. GearingThe proportion of a thing that is funded with borrowing rather than with equity. Here the crossing was funded 70 per cent with debt, so it is described as geared 70 to 30. does exactly that, stated as a number instead of as an adjective. Continuing in the same direction reaches the figure that a lender thinks about most: the residual runs out entirely when toll receipts fall Rs 65.30 crore, or 21.1 per cent below the modelled year. At exactly that point EBITDA is Rs 182.70 crore, the lenders are met to the last rupee, and the sponsors get nothing at all.

What does the worked year look like when receipts fall ten per cent?

Run the same split once at a size that cannot be dismissed as a rounding artefact. Toll receipts at Tapti Crossing Infrastructure Private Limited fall 10 per cent, from Rs 310 crore to Rs 279 crore. The fall is Rs 31 crore. Operating cost stays at Rs 62 crore, so EBITDA falls from Rs 248 crore to Rs 217 crore.

The project lenders are met in full. Rs 217 crore still clears Rs 182.70 crore of interest and scheduled principal with room over, so their side of the year is identical to the modelled one: Rs 119.70 crore of interest, Rs 63 crore of principal, nothing missed, nothing renegotiated, nothing to discuss. A ten per cent fall in toll receipts removed 47.5 per cent of the sponsors' cash for the year and not one rupee of the lenders'. Standing last looks like that in figures rather than in adjectives. The residual falls from Rs 65.30 crore to Rs 34.30 crore, and the whole Rs 31 crore that left the top of the statement arrives at the bottom of it.

On the Rs 540 crore of equity the sponsors put in, Rs 34.30 crore is a 6.35 per cent cash returnCash actually received in a period divided by the money originally put in, expressed as a percentage. It measures cash movement in that period and nothing else. for that year, against 12.09 per cent in the modelled year. Both of those figures belong to a single year, and the record for this crossing carries no concession period, no debt tenor and no traffic forecast, so neither figure can be stretched into a statement about any other year. Say the year out loud every time either number is used. Naming the year keeps the arithmetic honest.

What does each party control, and when does that control change hands?

Control follows the same logic as payment, and it splits the same way. During ordinary operation the sponsors run Tapti Crossing Infrastructure Private Limited. The sponsors appoint the people who manage the crossing, decide how it is maintained, deal with the granting authority and take the operating decisions that a road needs taken. Everything inside that job is theirs. The limits around the job are not theirs, and the project lenders agreed those limits when the money was drawn.

The project lenders control something narrower and heavier: the accounts the receipts land in, the order in which those accounts are cleared, and how much cash may leave the vehicle and reach the people who put in the equity. The sponsors may hold every share in the company and still not be able to take a rupee out in a year where the agreed conditions are not met. The everyday version is a household with a home loan: the household decides what to cook, when to repaint and whether to add a room, and the lender decides nothing about any of that, right up to the month the instalment is missed, when the questions change completely.

Where control moves is the point worth marking. Control moves when the cover fails, meaning when the crossing stops producing enough cash to meet the contracted claim on the agreed terms. From there the lender moves to enforcementThe set of steps a lender may take once a borrower has failed to meet the agreed terms, exercised under the security and the loan documents rather than by negotiation., a subject covered separately. The project lenders' own requirements before lending at all are covered under lender requirements, and how a shortfall is worked through belongs with the documents. The comparison being made here stops at the boundary where the ordinary case ends.

Why is a cash return on equity not a profit on it?

The gap between cash received and profit earned is the one most people walk past, and it costs them the most. The Rs 65.30 crore the sponsors received from Tapti Crossing Infrastructure Private Limited in the modelled year is equity cash flowThe cash that actually reaches the people who put in the equity in a period, after every prior claim on the period's cash has been met., and it was struck after Rs 182.70 crore went out. But those Rs 182.70 crore are not one kind of thing. Rs 119.70 crore of it is interest, a genuine cost of the year: the money left the crossing and nobody inside it has it any more. Rs 63 crore of it is scheduled principalThe part of the borrowing that the loan schedule says must be repaid in the period, as opposed to the interest that accrues on it., and that is a different animal altogether.

Repaying principal is a return of capitalA repayment that hands back money originally put in, rather than paying for the use of it. It reduces what is owed instead of consuming what was earned. rather than a cost of using it. The Rs 63 crore did not evaporate. The instalment reduced what the crossing owes, so the obligation standing in front of the sponsors is Rs 63 crore smaller than it was at the start of the year. A cash measure does not see that. A cash measure charges the whole Rs 63 crore against the year as though it had been spent, when the repayment only shifted value from one line to another inside the same structure.

The 12.09 per cent therefore understates what the sponsors' position did in the modelled year and overstates nothing at all, so it cannot be set beside a yield, a margin or another company's return without an adjustment this record does not carry the figures to make. If the schedule had carried no instalment in that year, the sponsors' cash would have been Rs 248 crore less Rs 119.70 crore of interest. The figure is Rs 128.30 crore, or 23.76 per cent on Rs 540 crore. The crossing did not change. Only which line the money sat on changed.

Why does more debt lower this project's cash return to equity?

Most readers predict this one backwards, and the reason they do is sound instinct applied to the wrong measure. Hold the cash Tapti Crossing Infrastructure Private Limited produces at Rs 248 crore, hold its own contracted shape of 9.5 per cent interest and principal at 5.0 per cent of the amount drawn, and change only how much of the Rs 1,800 crore was borrowed.

At 60 per cent debt the borrowing is Rs 1,080 crore and the sponsors put in Rs 720 crore. Interest is Rs 102.60 crore, principal is Rs 54 crore, debt service is Rs 156.60 crore, and Rs 91.40 crore is left, or 12.69 per cent on Rs 720 crore. At 70 per cent, the shape actually used, the sponsors put in Rs 540 crore and take Rs 65.30 crore, or 12.09 per cent. At 80 per cent the borrowing is Rs 1,440 crore and the sponsors put in Rs 360 crore. Interest is Rs 136.80 crore, principal is Rs 72 crore, debt service is Rs 208.80 crore, and Rs 39.20 crore is left, or 10.89 per cent.

The reason the measure falls is not that debt is expensive: it is that debt service here includes an instalment, and a cash measure charges the whole instalment against the year while the capital it repays stays inside the project. Prove it by removing the instalment and leaving everything else alone. Charge interest only, and the same three settings give Rs 145.40 crore on Rs 720 crore, or 20.19 per cent; Rs 128.30 crore on Rs 540 crore, or 23.76 per cent; and Rs 111.20 crore on Rs 360 crore, or 30.89 per cent. Now the measure climbs steadily as the borrowing rises, exactly as most readers expected in the first place. Nothing about the crossing moved between those two sets of figures. Only the presence of a principal instalment did.

There is a second effect running alongside, and it goes the way instinct says. As the borrowing rises, the residual gets smaller, so the same Rs 3.10 crore of revenue is a larger slice of it. One point of toll receipts moves the sponsors' cash 3.39 per cent at 60 per cent debt, 4.75 per cent at 70 per cent and 7.91 per cent at 80 per cent. So on this measure more borrowing lowers the reading and sharpens the lever at the same time, and a reader who takes away only one of those two has taken away half the point.

How does each side actually use this split in practice?

Both sides compute exactly the same two numbers and then read them from opposite ends. The opposite reading is the most useful thing to notice in the whole comparison. A credit team on the lending side takes the Rs 248 crore and asks how far it can fall before Rs 182.70 crore stops being met. Rs 65.30 crore is 21.1 per cent of Rs 310 crore, so on these figures the answer is a 21.1 per cent fall in toll receipts. Everything above that line is the room the lender has; everything the sponsors receive sits inside that room.

A sponsor's finance team takes the identical figures and asks a different question: what does the residual have to fund? The residual has to service whatever the sponsors themselves borrowed to put the Rs 540 crore in, it has to pay whatever the sponsors expect out of the position, and it has to do all of that out of a number that moves 4.75 times as fast as toll receipts. A sponsor therefore cares about the size of the residual in a way a lender does not, and a lender cares about the distance to zero in a way a sponsor cannot afford to ignore.

The same finance team at Harivansh Packaging Limited, borrowing against a packaging business rather than a crossing, does not have this arithmetic available at all. The borrowing there is served by everything the company does, and no single asset's cash divides cleanly into two claims. How a project financing differs from an ordinary corporate borrowing is worked through separately in this sequence. The clean two way split is a property of the ring-fenced structure and does not survive outside it.

What do the two positions have in common?

More than a comparison usually admits. Both the sponsors and the project lenders funded the same Rs 1,800 crore crossing. Both are paid out of one stream of toll receipts and no other. Both depend on the same vehicles turning up, the same granting authority honouring the same arrangement and the same road staying open. There is nothing outside Tapti Crossing Infrastructure Private Limited, so neither has a claim on anything else.

So the two positions are not exposed to different things. Both are exposed to the same thing, in different order, and the order is doing all of the work. One party agreed in advance what it would take and gave up any share of a good year; the other party agreed to take whatever was left and kept every share of one. Every figure above follows from that single trade. The two halves are prices for two different positions in one queue, so neither is the better bargain.