3.11 As noted previously, project finance lenders focus on downside risks rather than the upside possibilities available to equity, and in PPP projects seek to protect their loan by minimising risks through the contracting and subcontracting arrangements. Lenders further seek to reduce the risks debt faces by requiring that the cash flow projections for the project show more cash available for debt service than is strictly necessary to pay interest and make repayments. This results in a requirement for minimum levels of cash to be available to equity in each period after debt service (cover ratio) and the establishment of undistributed cash reserves.
3.12 Some equity investors have commented that lenders' cover ratio requirements, together with high debt to equity ratios, restrict their ability to offer lower levels of equity returns and hence to make more competitive bids for PFI projects. The Treasury intends to issue guidance addressing this issue.