Infrastructure lending

How infrastructure debt works

Infrastructure loans finance long-lived assets such as roads, bridges, energy projects and social infrastructure. They're usually made to a special-purpose company that owns only the project, so the lender relies on the project's own cash flows, not a parent's balance sheet.

The debt is sized to the cash flow, not to a leverage multiple. The core question is: after operating costs and maintenance, how many times does cash cover debt service in every period, including the weakest one?

Where the revenue comes from

Documents in the packet

• The concession or project agreement: term, payment mechanism, deductions, handback conditions and termination compensation.
• The construction contract: fixed price or not, completion date, liquidated damages and the contractor's credit.
• The operations and maintenance contract, and the lifecycle (major maintenance) plan.
• The financing terms: debt service reserve account, lock-up and default ratios, and the cash waterfall.

Key metrics

Typical risks

• Construction: delays and cost overruns before the asset earns any revenue.
• Ramp-up and demand: traffic or usage below forecast in the early years.
• Counterparty and appropriation: the paying authority or offtaker failing to pay on time.
• Performance: availability deductions from poor operations.
• Lifecycle and handback: major maintenance costs, and the condition the asset must be returned in.

A simple coverage example

Illustrative numbers only. A project earns $60M a year of availability payments and spends $15M on operations and maintenance, so CFADS is $45M. Annual debt service is $33M.

• DSCR = $45M ÷ $33M ≈ 1.36x.
• If a lock-up applies below 1.20x, CFADS can fall by about 12% before distributions to equity stop.
• If default sits at 1.05x, CFADS can fall by about 23% before the lender can act.
• A six-month debt service reserve holds about $16.5M, cash that can pay the lender through a short disruption.

Questions an IC will ask

• What happens to the minimum DSCR if construction finishes six months late?
• Who pays for a cost overrun, and how much contingency is there?
• How much can availability deductions or traffic shortfalls reduce CFADS before lock-up?
• Is there enough tail after the loan matures to refinance if needed?

Common memo mistakes

• Quoting average DSCR and ignoring the minimum, which is where the loan is weakest.
• Treating construction risk as solved because there is a contractor, without checking the contract's protections.
• Using corporate leverage multiples instead of coverage-based sizing.
• Ignoring reserve accounts and the cash waterfall that decide who gets paid first.
• Stressing revenue without testing the lock-up and default covenants.

Practice on the availability-payment bridge case in the library. Its model template runs an annual CFADS and debt build with sculpted debt service, coverage ratios, a combined operating stress and a construction delay test. For the core credit tabs, see How to build the credit model.