Loan Amortisation

Hi there

I’m trying to practice solar site financial modelling and am confused about loan amortisation (with a DSCR constraint).

do you need to have equal total debt service payment (principal + interest)? Or can you just have equal principals? Or is the only important thing that total debt service doesn’t breach covenant (issue with that is you can use an excel solver to solve for principal amounts, but you may end up with wildly different principal / total debt service payment amounts), so I just wanted to know whether it matters how much you pay back each year? (beyond simple DSCR constraint)?

thanks

Angelos

If you’re going to use level total payment, the payment amount will be constant, but the interest/principal split will change over time as part of standard amortization. However, if the principal is constant for each payment, the total payment will start large (larger than under level payment!) and decrease over time as the outstanding principal shrinks and the interest charge shrinks as well. It’s probably risker for DCSR to use level principal in the early years. As well, the total payments over the life of the loan will be less under level principal than under level payment: since the outstanding principal is decreasing faster, then total interest paid will also decrease.

hi Breadmaker, thank you so much for your super fast response!

what you say makes complete sense. what would you say is industry standard practice? I’ve seen other solar models where the total debt service payment varies according to the DSCR covenant (as EBITDA varies too), but because EBITDA doesn’t change wildly with a solar model, the total debt service payment doesn’t vary massively either.

thanks

Angelos

I was talking strictly on the math around TVM; I don’t know what the practice is within the solar industry.