OT22086 - Interest and Financing

Lending Practice. Risk Control. Cover Ratios

In some agreements one of the primary mechanisms for the control of debt is described as "cover ratios". This a comparison between the aggregate discounted (at, typically, 10%) field net cash flows over the life of the loan with the outstanding debt. A cover ratio of 1.5:1 is the norm, but examples can occur from 1.4 to 1.75:1. Under normal lending practice a cover ratio of less than 1.5:1 would tend to be more expensive than 1.5:1. There might be additional conditions such as seeking say 60% of net production income to service the loan interest plus repayment.

Lenders will normally require a minimum level of net proceeds to be applied to service a loan. It is understood there are no standard rates and everything depends upon the factors identified in negotiating the particular transaction.