Project Finance - Decoding Debt Repayment
Ashish Agarwal
Agile Coach, Scrum Master, Technology Evangelist, Blogger and Lifetime Learner
Introduction
In project finance, the financial architecture of a deal is as crucial as the engineering blueprint of the asset itself. One of the cornerstones of this financial structure is the Amortization Schedule — the roadmap that defines how the borrowed money will be repaid over time.
Among the most common approaches to debt repayment, two methods dominate discussions:
Constant Principal Repayment
Constant Debt Service Repayment
Each carries strategic implications for borrowers and lenders, especially in sectors like infrastructure, energy, and utilities where project cash flows fluctuate over the asset life.
What is an Amortization Schedule?
An Amortization Schedule is a structured table showing:
How much principal and interest is repaid in each period.
The outstanding loan balance after each repayment.
In project finance, amortization schedules are often tailored to match the project's cash flow patterns — a practice known as cash flow-based lending.
Constant Principal Repayment
Definition
In a Constant Principal structure:
A fixed amount of the loan principal is repaid every period.
The interest portion declines over time as the outstanding principal reduces.
Thus, total debt service payments (Principal + Interest) are higher at the beginning and decrease over time.
Numerical Example
Assume:
Loan Amount = USD 100 Million
Interest Rate = 5% per annum
Tenure = 5 years
Debt service reduces progressively each year.
Advantages
Lenders recover principal faster → reduces their risk early.
Project leverage falls quickly → improved credit profile over time.
Disadvantages
High early payments may strain project cash flows, especially during ramp-up.
Constant Debt Service Repayment
Definition
In a Constant Debt Service structure:
The total payment (Principal + Interest) remains constant every period.
The proportion of principal and interest varies: initially more interest, later more principal.
This approach is similar to how home mortgages are typically structured.
Numerical Example
Same assumptions:
Loan Amount = USD 100 Million
Interest Rate = 5% per annum
Tenure = 5 years
The annual constant debt service is approximately USD 23.10 Million (calculated through annuity formula).
Total payment stays the same, even though composition changes.
Advantages
Predictable payments simplify cash flow planning.
Matches well with stable or growing revenue projects.
Disadvantages
Slower principal repayment → lenders exposed to higher risk for longer.
Slightly higher interest paid overall compared to constant principal.
Which One is Better?
The best choice depends heavily on the project profile:
In high-risk projects, lenders often insist on constant principal to reduce their exposure faster. In growth-stage projects, sponsors prefer constant debt service to avoid early cash flow pressures.
Excel Layout for Amortization Schedule
You can set up your Excel template like this (with Years as Columns):
For Constant Debt Service, you would fix Total Debt Service and derive Principal and Interest dynamically.
Summary: Choosing Wisely Between Two Approaches
Understanding the trade-offs between Constant Principal and Constant Debt Service empowers project sponsors and lenders to design financing structures that fit the project’s economic reality.
Ultimately, a well-chosen amortization strategy supports not just repayment, but project viability, resilience, and long-term success.
Senior Financial Analyst | I Help Companies Succeed in Project Finance & M&A through Expert Financial Models | $1.6 M Funding & $300 M+ Deal Closed
3wAshish Agarwal Debt Repayment Schedule is the core of any Project Finance Models. For Projects with a definite cash flows, lenders would want to be paid definite principal repayments over the life of the debt. This makes sure their risk declines faster than with a constant DS approach. However for projects where there is a volatile cashflow such as in case of Solar. Lenders would agree for a principal repayment as per the company's cash profile and DSCR ratio. This means that the project if meets the DSCR ratio can withdraw good dividends in the early periods increasing its IRR. For Solar projects we have seen debt sculpting can lead to a higher Equity IRR for sponsors. This gets even more complex when you have debt through gearing as your constraint, as you would need to determine a gradually declining DSCR with the minimum kept at whatever the convenant is, however for this to work cash sweep should be kept as minimum as possible. To overcome these type of issues lenders often negotiate with a Average Loan Life Coverage Ratio rather than a full LLCR and cash sweep mechanism. At the end of the day, it comes down to the negotiation between the lenders and sponsors.