Project finance—financial covenants
Project finance—financial covenants

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Project finance—financial covenants
  • When are financial covenants tested in project finance transactions?
  • Monitoring the project’s performance
  • Common financial covenants in project finance transactions
  • Debt to equity ratio in project finance transactions
  • Debt service cover ratio in project finance transactions
  • Historic DSCR
  • Forecast DSCR
  • Loan life cover ratio in project finance transactions
  • Project life cover ratio in project finance transactions
  • More...

For project finance lenders, understanding the financial health of a project is critical. In a typical project finance transaction, the project is the borrower's only source of income from which to repay the debt (see Practice Note: Introduction to project finance—Concept of project finance).

Project finance lenders monitor the financial health of a project by using a number of different financial covenants.

Financial covenants are used in many different types of commercial finance transactions (see Practice Note: Financial covenants—principles).

Financial covenants are generally used:

  1. to enable lenders to monitor the financial performance of the borrower and/or its group, and/or

  2. as triggers for an event of default

In a project finance transaction, financial covenants are also used to test:

  1. the debt capacity of the project (ie how much can it afford to borrow), and

  2. the ability of the project to generate enough revenue to meet its payment obligations (ie debt service and construction and/or operating expenses)

The appropriate types of financial covenants vary from project to project but there are a few which appear in most transactions and which are generally considered to be standard.

When are financial covenants tested in project finance transactions?

Project finance lenders test financial covenants many times during the term of the project loan, including:

  1. as a condition precedent to financial close and, sometimes, to drawdown

  2. as part of the completion tests

  3. as a

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