Credit Analysis for Water Project Lending
Expert-defined terms from the Postgraduate Certificate in Infrastructure Financing for Water Projects course at London School of Business and Administration. Free to read, free to share, paired with a globally recognised certification pathway.
**A** #
**A**
Abatement #
The reduction or elimination of pollution from a source. In water project lending, abatement measures may be required to meet regulatory standards and protect water quality.
Absolute Rating #
A credit rating that does not consider any external support or guarantees. It reflects the creditworthiness of the water project or entity based solely on its own financial and operational performance.
Acid Test Ratio #
A measure of a water project's short-term liquidity, calculated as current assets minus inventory, divided by current liabilities. Also known as the quick ratio.
**B** #
**B**
Bond #
A debt instrument issued by a water project or entity to raise capital. Bonds typically have a fixed term and pay interest to investors.
Bond Indenture #
A legal agreement between a water project or entity and bondholders that outlines the terms and conditions of the bond issuance, including interest payments, maturity date, and any covenants or restrictions.
Bond Ratings #
Credit ratings assigned to bonds by rating agencies such as Moody's and Standard & Poor's. Bond ratings reflect the creditworthiness of the water project or entity and the likelihood of timely interest and principal payments.
Bullet Payment #
A lump-sum payment of principal at the maturity date of a bond or loan.
**C** #
**C**
Cash Flow #
The inflow and outflow of cash in a water project or entity. Positive cash flow indicates that more cash is coming in than going out, while negative cash flow indicates the opposite.
Cash Flow Analysis #
A financial analysis that examines a water project's cash inflows and outflows to assess its liquidity and ability to meet its financial obligations.
Cash Flow Statement #
A financial statement that reports a water project's cash inflows and outflows over a specific period of time.
Cash Reserves #
The amount of cash that a water project or entity has on hand to meet unexpected expenses or shortfalls in revenue.
Credit Analysis #
The process of evaluating the creditworthiness of a water project or entity to determine its ability to repay debt.
Credit Default Swap (CDS) #
A financial derivative that acts as a form of insurance against the default of a bond or loan.
Credit Enhancement #
A technique used to improve the creditworthiness of a water project or entity, such as through guarantees, insurance, or collateral.
Credit Rating #
A rating assigned to a bond or water project by a credit rating agency that reflects its creditworthiness and likelihood of timely interest and principal payments.
Credit Risk #
The risk that a water project or entity will not be able to repay its debts as agreed.
Credit Spread #
The difference in yield between a bond and a risk-free benchmark, such as a U.S. Treasury bond.
**D** #
**D**
Debt Service Coverage Ratio (DSCR) #
A financial metric used to assess a water project's ability to meet its debt obligations. DSCR is calculated by dividing the project's net cash flow by its debt service.
Debt Service #
The total amount of principal and interest payments due on a bond or loan over a specific period of time.
Default #
The failure of a water project or entity to make timely interest or principal payments on its debts.
Derivative #
A financial instrument that derives its value from an underlying asset, such as a bond or loan.
Discount Rate #
The rate used to calculate the present value of future cash flows in a financial analysis.
**E** #
**E**
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)</… #
EBITDA is calculated by subtracting operating expenses from revenue.
Enterprise Risk Management #
The process of identifying, assessing, and managing risks faced by a water project or entity.
Expected Default Frequency (EDF) #
A measure of the likelihood of default on a bond or loan, based on historical data and statistical models.
**F** #
**F**
Financial Covenants #
Contractual provisions in a bond indenture or loan agreement that require a water project or entity to meet certain financial metrics, such as debt service coverage ratio or interest coverage ratio.
Financial Modeling #
The process of creating financial projections for a water project or entity, typically using spreadsheet software.
Financial Risk #
The risk that a water project or entity will not have sufficient financial resources to meet its obligations.
Fixed Charge Coverage Ratio #
A financial metric used to assess a water project's ability to meet its fixed charges, such as debt service and lease payments.
Fixed Income #
A type of investment that pays a fixed rate of interest, such as a bond or loan.
**I** #
**I**
Interest Coverage Ratio #
A financial metric used to assess a water project's ability to meet its interest obligations. Interest coverage ratio is calculated by dividing EBITDA by interest expense.
Issuer #
The entity that issues a bond or loan, typically a water project or entity.
**L** #
**L**
Leverage #
The amount of debt relative to a water project's equity. High leverage indicates a greater proportion of debt to equity.
Liquidity #
The ability of a water project or entity to convert its assets into cash quickly and easily.
Loan Agreement #
A legal agreement between a lender and a borrower that outlines the terms and conditions of a loan, including interest payments, maturity date, and any covenants or restrictions.
Loan Covenants #
Contractual provisions in a loan agreement that require a borrower to meet certain financial metrics, such as debt service coverage ratio or interest coverage ratio.
Loan Participation #
An arrangement in which multiple lenders provide funds for a single loan to a water project or entity.
**M** #
**M**
Maturity #
The date on which a bond or loan becomes due and payable.
Maturity Structure #
The distribution of maturities in a water project's debt portfolio, typically shown in a chart or table.
Monoline Insurer #
An insurance company that specializes in insuring bonds or loans against default.
**N** #
**N**
Net Present Value (NPV) #
A financial metric used to evaluate the profitability of a water project or investment. NPV is calculated by discounting the project's expected cash flows to their present value and subtracting the initial investment.
Non #
Recourse Financing: A type of financing in which the lender has no recourse to the borrower's other assets in the event of default.
**O** #
**O**
Operating Cash Flow #
The amount of cash generated by a water project's normal operations, calculated as net income plus non-cash expenses such as depreciation and amortization.
Operating Leverage #
The degree to which a water project's fixed costs are proportionate to its variable costs. High operating leverage indicates a greater proportion of fixed costs.
Operational Risk #
The risk that a water project or entity will not be able to operate effectively, due to factors such as equipment failure, natural disasters