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12 sample questions from the SPL Bankability League — with correct answers and explanations. No sign-up required.
A solar project sells power to a state DISCOM under a 25-year PPA. Lenders require a 3-party escrow agreement (DISCOM, solar SPV, escrow bank). What is the standard waterfall order when DISCOM payments are received into the escrow account?
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The standard project finance escrow waterfall for DISCOM-backed solar PPAs in India follows this priority order: (1) O&M expenses — first priority, keeping the plant operational is paramount (a non-operational plant cannot generate revenue for anyone); (2) Debt service — interest and principal repayment to senior lenders, meeting the DSCR covenant; (3) DSRA replenishment — topping up the Debt Service Reserve Account to the required level (typically 3-6 months of debt service) if it has been drawn upon; (4) Capital maintenance reserves — periodic major maintenance funds; (5) Sponsor/equity dividend — residual cashflow distributed to the project sponsor. This waterfall is defined in the Escrow Trust and Retention Agreement (ETRA) which is a condition precedent to financial close. The escrow bank deducts automatically in this order before releasing any surplus to the developer. DISCOM payments must be made directly into the escrow account — not to the developer's operational account.
A lender is evaluating a 500 MW solar project where 100% of modules are from a single Chinese manufacturer. What is 'technology concentration risk' and how might a lender mitigate it?
Explanation
Technology concentration risk is the risk that all modules in the plant fail, underperform, or become difficult to replace due to: (1) manufacturer insolvency or factory shutdown; (2) a systematic defect affecting all modules of that model; (3) supply chain disruption affecting spare modules for replacement. For a single-manufacturer plant, any of these events could cause widespread production loss. Lenders mitigate this by: requiring module warranties backed by parent guarantees; requiring module insurance (MLPE insurance covering manufacturer default); requesting ALMM-listed modules; and sometimes requiring a maximum single-manufacturer concentration limit (e.g., not more than 70% from one manufacturer).
A DISCOM instructs a solar generator to back down (curtail output) due to grid constraints. The generator loses 50 lakh units of generation in a quarter. Under current CERC DSM/RE regulations, is the generator compensated for this curtailment, and how does this affect project bankability?
Explanation
Under CERC DSM regulations (and MNRE's RE tariff policy), a RE generator is entitled to compensation for 'must-run' curtailment ordered by the grid operator or DISCOM without technical justification. For projects under central PPAs, CERC orders have affirmed RE generators' must-run status and compensation at PPA tariff for curtailed units. For state PPAs, compensation depends on the state PPA terms — some older PPAs have no must-run protection. Uncompensated curtailment reduces revenue and can breach DSCR covenants. Lenders increasingly require must-run PPA provisions and curtailment compensation clauses as a bankability prerequisite.
What is a Payment Security Mechanism (PSM) in a solar PPA, and what are the three layers of security typically provided under central sector PSM structures (e.g., SECI/NTPC)?
Explanation
Payment Security Mechanism (PSM) addresses the risk of DISCOM payment default to solar generators. In central sector SECI/NTPC structures, PSM typically has three layers: (1) Letter of Credit (LC) from the DISCOM's bank covering 1–3 months of billing — first line of recourse; (2) State government guarantee or DISCOM Escrow account — if LC is exhausted; (3) Rebate/termination payment trigger — if payments are delayed beyond a specified period (usually 60–90 days), the generator can invoke termination with lump-sum payment or trigger a state guarantee drawdown. SECI's tripartite agreement with state governments is the third-layer security.
A solar project has an outstanding loan of Rs 200 crores. The PV of projected CFADS over the remaining 12-year loan life (at an 8% discount rate) is Rs 240 crores. The lender's LLCR covenant requires a minimum of 1.20x. Is the project in compliance?
Explanation
LLCR = PV of CFADS / Outstanding loan = Rs 240 crores / Rs 200 crores = 1.20x. This exactly meets the 1.20x minimum covenant. The project is in compliance but has zero headroom — any underperformance in future cash flows would push it into breach. A project at exactly the LLCR covenant floor is a yellow flag for lenders. The project sponsor may face requests for a reserve top-up or additional security.
A solar project has EBITDA of Rs 55 crore in Years 1-2 (ramp-up) and Rs 85 crore from Year 3 onwards. To maintain a minimum DSCR of exactly 1.20x throughout the loan term, what should the sculpted annual debt service be in Years 1-2 and Years 3+?
Explanation
Debt sculpting matches annual debt service to available cashflows while maintaining the minimum DSCR covenant. DSCR = EBITDA / Debt Service. For minimum DSCR = 1.20x: Maximum DS in Years 1-2 = Rs 55 crore / 1.20 = Rs 45.83 crore/year. Maximum DS from Year 3+ = Rs 85 crore / 1.20 = Rs 70.83 crore/year. The loan is structured with lower repayments in Years 1-2 and higher repayments from Year 3 onwards — a back-loaded sculpting profile. This differs from equal amortization (which would cause DSCR < 1.20x in Years 1-2) and from a balloon structure (which would pile too much into the final year). The total loan amount is the NPV sum of all sculpted debt service payments discounted at the loan interest rate. Lenders verify sculpting via a detailed financial model with annual-level cash flow projections.
A lender requires LLCR >= 1.40x. The NPV of project cashflows available for debt service over the remaining 10-year loan life (discounted at 9% loan rate) = Rs 120 crore. Outstanding debt principal = Rs 80 crore. What is the LLCR and is the covenant met?
Explanation
Loan Life Coverage Ratio (LLCR) = NPV of cashflows available for debt service over the remaining loan life / outstanding debt balance. LLCR = Rs 120 crore / Rs 80 crore = 1.50x. Since 1.50x > the required 1.40x, the LLCR covenant is met with 0.10x headroom. LLCR differs from DSCR in that it is a forward-looking ratio that uses the net present value of all future cashflows, not just the current year's ratio. It is particularly useful for projects with uneven cashflow profiles (e.g., solar with declining revenue due to degradation, or projects with major capex events). Lenders monitor LLCR alongside DSCR: a project can have DSCR above covenant in the current year but falling LLCR if future cashflows are deteriorating, which provides early warning of potential covenant breach.
A solar project has 15 years remaining on its loan. Projected annual CFADS for the next 15 years are approximately Rs 20 crores per year (assume constant for simplicity). The lender uses an 8% discount rate. Outstanding loan balance is Rs 180 crores. Calculate the LLCR and state whether it meets the 1.25x minimum covenant.
Explanation
PV of annuity (Rs 20 Cr/yr for 15 years at 8%): PV = 20 × [(1 – (1.08)^(-15)) / 0.08] = 20 × [(1 – 0.3152) / 0.08] = 20 × [0.6848 / 0.08] = 20 × 8.56 = Rs 171.2 crores. LLCR = Rs 171.2 / Rs 180 = 0.95x. This is well below the 1.25x covenant — the project is in breach. The discounted CFADS (171 Cr) is actually less than the outstanding loan (180 Cr), meaning the PV of projected cash flows does not fully cover the debt on a present-value basis — a serious bankability concern.
What does LLCR stand for in project finance, and what does it measure?
Explanation
LLCR stands for Loan Life Coverage Ratio. It measures the number of times the present value (PV) of projected cash flows available for debt service (CFADS) over the remaining loan life covers the outstanding loan balance. LLCR = PV of CFADS over remaining loan life / outstanding loan balance. An LLCR of 1.3x means the PV of future cash flows is 1.3 times the current outstanding debt — giving a 30% coverage buffer. Lenders typically require LLCR ≥ 1.20x as a maintenance covenant.
What is a Debt Service Reserve Account (DSRA) in solar project finance, and how many months of debt service does it typically hold?
Explanation
A Debt Service Reserve Account (DSRA) is a restricted cash account maintained by the borrower SPV, held in trust or under a lien in favour of lenders. It holds a reserve equal to typically 3–6 months of upcoming principal and interest (debt service) obligations. If project revenues in a given period are insufficient to service debt on the scheduled payment date, lenders can draw from the DSRA. The SPV must replenish the DSRA back to the required level (the DSRA floor) before making any distributions to equity.
A solar project's loan agreement restricts equity distributions unless the trailing 12-month DSCR exceeds 1.20x. The project generated CFADS of Rs 18 crores over the past year. Annual debt service was Rs 15 crores. Can the project distribute dividends?
Explanation
DSCR = CFADS / Debt service = Rs 18 crores / Rs 15 crores = 1.20x. This exactly meets the 1.20x distribution threshold. So yes, distributions are permitted. If the threshold were >1.20x (strictly greater than), the project would not be permitted to distribute — but most agreements use 'at least 1.20x' or '≥ 1.20x', allowing distributions at exactly 1.20x. The key lesson is understanding the precision of covenant language.
A 100 MW solar SPV receives Rs 8 crores in tariff from the DISCOM in a quarter. Its quarterly obligations are: O&M Rs 50 lakhs, insurance Rs 20 lakhs, land lease Rs 10 lakhs, interest Rs 1.2 crores, principal Rs 80 lakhs, DSRA top-up needed Rs 60 lakhs, maintenance reserve Rs 20 lakhs. After meeting all waterfall obligations, how much is available for equity distribution, and what is the quarterly DSCR?
Explanation
Waterfall calculation: (1) OpEx = Rs 50L + Rs 20L + Rs 10L = Rs 80 lakhs; (2) Debt service = Rs 1.2 Cr (interest) + Rs 80L (principal) = Rs 2 crores; (3) DSRA top-up = Rs 60 lakhs; (4) MRA = Rs 20 lakhs. Total senior claims = 80L + 200L + 60L + 20L = Rs 360 lakhs = Rs 3.6 crores. Available for distribution = Rs 8 Cr – Rs 3.6 Cr = Rs 4.4 crores. Quarterly DSCR = CFADS / Debt service = (Rs 8 Cr – Rs 80L OpEx) / Rs 2 Cr = Rs 7.2 Cr / Rs 2 Cr = 3.6x (strong).