OT22085 - Interest and Financing

Lending Practice. Risk Control. Gearing.

In the past if the debt/equity ratio was in practice better than 1.5:1 (ie debt less than 1.5 times equity) the position was accepted as broadly satisfactory, provided the borrower company was already an oil producer. For some years other indicators, including interest cover, and cover ratio, have been considered equally important.

Arm's length lenders will not be prepared to assume all risk. For example, if on a very reasonable discounted future cash flow the net present value is £2bn, a lender would not lend that figure. He will expect to see the borrower demonstrating his commitment by putting some of his own equity at risk.