Interest cover and Operational asset: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Add link.)
 
imported>Doug Williamson
(Add link.)
 
Line 1: Line 1:
''Financial ratio analysis - long-term solvency ratios.''
''Sustainability - renewables - electricity - power purchase agreements.''


'''1.'''
In this context, an operational asset is one that has already been built, and is already generating renewable electricity.


From a whole-firm perspective, interest cover is the ratio of Profit before interest and tax ÷ Interest payable.
Contrasted with a New build.




Interest cover measures the safety or sustainability of the future debt servicing flows, from the perspective of the lenders.
In simple terms, striking a power purchase agreement in relation to an operational asset is likely to be:
*Less expensive, because set up and installation costs may already be covered, but
*Considered less "green", because no new green capacity is added to the power network.


The greater the interest cover ratio, the greater the likelihood that the firm paying the debt interest (and other debt servicing costs) will continue to be able to service the debt in the future. 


So a higher cover ratio is associated with lower risk for the debt investors.
In this context, operational assets are sometimes known as Existing assets.




In the theoretical situation where the cover ratio fell below 1.0, the interest would be said to be ''uncovered'' and the debt would not be sustainable at its previous level unless there was a recovery in the firm's operating profitability.
== See also ==
* [[Additionality]]
* [[Asset finance]]
* [[Corporate finance]]
* [[Distribution]]
* [[Gas purchase agreement]]
* [[Green]]
* [[Infrastructure]]
* [[Integrated water and power plant]]
* [[New build]]
* [[New-to-earth asset]]
* [[Offtaker]]
* [[Plant]]
* [[Power purchase agreement]]
* [[Project finance]]
* [[Recourse]]
* [[REGO]]
* [[Renewables]]
* [[Sleeving]]
* [[Solar CSP]]
* [[Solar PV]]
* [[Sustainability]]
* [[Transmission]]
* [[Transmission and distribution]]
* [[Virtual PPA]]


In practice lenders want much higher minimum interest cover ratios than 1.0, such higher minimum usually stipulated in the related loan documentation. 


So the borrower in this situation would be likely to be already in breach of a related borrowings covenant.
==External link==
 
[https://assets.crowncommercial.gov.uk/wp-content/uploads/Power-Purchase-Agreements-PPA-An-Introduction-to-PPAs.pdf Introduction to Power Purchase Agreements - UK Crown Commercial Service]
 
Also known as the Interest cover ratio or TIE (times interest earned).
 
 
'''2.'''
 
An analogous measure, in relation to an individual tranche or class of debt (rather than to the whole firm).
 
 
== See also ==
* [[Cost of financial distress]]
* [[Covenant]]
* [[Cover ratio]]
* [[Cross acceleration]]
* [[Gearing]]
* [[Interest rate risk]]
* [[Long-term solvency ratio]]
* [[Profit before interest and tax]]
* [[Uncovered]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]
[[Category:Treasury_operations_infrastructure]]

Latest revision as of 02:54, 15 June 2021

Sustainability - renewables - electricity - power purchase agreements.

In this context, an operational asset is one that has already been built, and is already generating renewable electricity.

Contrasted with a New build.


In simple terms, striking a power purchase agreement in relation to an operational asset is likely to be:

  • Less expensive, because set up and installation costs may already be covered, but
  • Considered less "green", because no new green capacity is added to the power network.


In this context, operational assets are sometimes known as Existing assets.


See also


External link

Introduction to Power Purchase Agreements - UK Crown Commercial Service