The idea, explained
Start with the legal and cash-flow boundary. Sponsors contribute equity to an SPV, while lenders provide debt. The SPV signs construction, operating, customer or offtake, insurance and financing contracts. An offtake agreement commits a buyer to purchase output or capacity under defined terms. Because a new project may earn nothing during construction, lenders examine completion risk, cost overruns, permits and the reliability of later revenue.
Non-recourse does not mean risk-free or that sponsors can always walk away. The loan documents may provide limited recourse for specified problems, sponsor guarantees during construction, security over project assets, reserve accounts, restrictions on new debt and lender step-in rights. Step-in rights let lenders or a substitute operator intervene after serious default to preserve the project’s ability to operate and repay debt.
Once operations begin, lenders track cash available for debt service, often called CFADS. This is operating cash remaining after required operating costs, taxes and similar deductions but before principal and interest payments to lenders and distributions to equity owners. The debt service coverage ratio is:
DSCR = CFADS ÷ scheduled principal and interest.
A DSCR above 1.0 means the period’s cash can cover scheduled debt service; below 1.0 means it cannot. Loan agreements commonly set a higher minimum buffer and test downside scenarios such as delayed completion, higher costs or lower revenue. A breach may block dividends, require reserve cash, trigger additional lender controls or eventually become a default. The ratio is a period measure, so one strong year does not guarantee that later years are safe.
Follow a worked example.
Consider a C$100 million data-centre project financed with C$70 million of debt and C$30 million of sponsor equity. The debt-to-equity mix is therefore 70:30. During construction, the SPV has no customer revenue, so the financing plan must cover construction spending and interest until operations begin.
In the first full operating year, suppose the project produces C$20 million of revenue. Required operating costs, taxes and other permitted deductions total C$8 million, leaving CFADS of C$12 million. Scheduled principal plus interest is C$9 million. The DSCR is C$12 million ÷ C$9 million = 1.33. The project has C$3 million of coverage above scheduled debt service before any equity distribution.
Now run a downside case. If lower utilization and higher power costs reduce CFADS to C$8.1 million while debt service stays C$9 million, DSCR becomes 0.90. The project is short C$0.9 million for that period. If the loan requires at least 1.20, both 0.90 and any value between 1.00 and 1.19 would breach the covenant even though only values below 1.00 show an immediate cash shortfall. Lenders may then restrict distributions, use reserves or exercise negotiated control rights.
Where people get stuck
A common misconception is that an SPV makes project debt disappear. Legal separation can ring-fence risk, but it does not create revenue, remove guarantees or eliminate contingent obligations. Off-balance-sheet accounting also does not automatically eliminate economic exposure. Another mistake is to read a 1.30 DSCR as a 30% investment return: it is a debt-payment coverage measure, not a shareholder return.
Now try it yourself.
1. Check the core idea
An SPV expects C$15 million of CFADS next year. Scheduled interest is C$4 million and principal repayment is C$6 million. What is its DSCR, and what would a 1.25 minimum covenant imply?
Reveal the answer & reasoning
Total debt service is C$4 million + C$6 million = C$10 million. DSCR is C$15 million ÷ C$10 million = 1.50. That exceeds a 1.25 minimum, leaving C$5 million above scheduled debt service before permitted equity distributions and other restricted uses. The result does not prove the project is safe: lenders would still test construction, revenue, operating-cost, refinancing and regulatory risks and examine whether the C$15 million forecast is credible.
Why this was added
The library explains credit risk and financial statements but not how infrastructure SPVs isolate projects, allocate recourse and test periodic debt-payment capacity with DSCR.