Case Study: Accounting Estimates Review for a Construction Borrower
Reassessing project profitability and debt service capacity through independent accounting-estimate verification
Executive Mandate Summary
Key Transaction & Governance Challenges
- •Reported project performance did not fully reflect the updated cost and completion estimates.
- •Project P9 had an expected loss of Rs 1.8 crore that required recognition in the current period.
- •After the accounting adjustments, DSCR reduced from 1.7x to 0.95x.
- •The requested Rs 10 crore enhancement was not supportable against the borrower's adjusted cash-generation capacity.
Northrop Execution Architecture & Methodology
Section 1 - The Credit Question
The lender was evaluating a Rs 10 crore facility enhancement for a construction borrower that reported EBITDA of Rs 9.8 crore and DSCR of 1.7x.
The underlying question was whether reported project economics accurately reflected the borrower's sustainable cash-generation capacity.
Section 2 - Project Estimate Review
Project completion estimates were recalculated using cost-based inputs and compared with engineer-reported physical progress.
The exercise tested whether reported revenue and profitability appropriately reflected actual project economics.
Section 3 - Onerous Contract - Project P9
Project P9 carried an expected loss of Rs 1.8 crore. The loss was identified as an onerous-contract loss and required recognition in the current period.
Section 4 - Reassessment of Credit Metrics
After the identified Rs 6 crore of adjustments, reported EBITDA of Rs 9.8 crore reduced to Rs 5.6 crore. DSCR reduced from 1.7x to 0.95x.
This changed the credit assessment materially: the existing Rs 37 crore debt was already only marginally serviceable under the previous repayment schedule.
Verifiable Institutional Outcomes & Value Realized
- The Rs 10 crore facility enhancement was declined after adjusted DSCR fell to 0.95x.
- The repayment schedule was revised to better align with actual cash-generation capacity.
- Quarterly instalment reduced by 15%.
- Facility tenure extended by 8 months.
Ashish Chaudhary
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