Debt sizing is used in project finance (infrastructure) to figure out how much debt can be raised to support an infrastructure project each month / year.
As dictated by the debt term sheet, there is usually a maximum leverage ratio (eg maximum of 70% debt and 30% equity) and a minimum debt service coverage ratio (eg. no less than 1.3x).
Debt service coverage ratio = cash flows available for debt service / (principal repayments + interest payments). We can switch this formula to figure out what the maximum principal repayment is each month / year based on how much cash flow we have.
Principal repayments = cash flows available for debt service / (debt service coverage ratio – interest payments)
The maximum principal repayable based on our cash flows is essentially what drives the maximum debt size.
Since our equity will be increasing every month / year based on net income, this will also affect the maximum amount of debt we can take on.
These calculations can be solved iteratively in Excel or using a debt size macro. Macros are quite common since it is quite complex to calculate.
When debt sizing in project finance, the steps for calculating the debt schedule are:
1) Determine when the loan is expected to mature and if it fully amortizes or if there is a balloon at maturity
2) Adjust CFADS to the targeted DSCR
3) The CFADS will first service the interest payment on the outstanding debt
4) The remaining CFADS will be used to amortize the loan