Lock-Up and Default: The Two DSCR Floors, and Why the Gap Between Them Is the Most Important 0.10×

A project financing can contain several coverage-based gates that do different jobs: a restricted-payment condition, an excess-cash-flow sweep trigger, a financial covenant, and an equity-cure mechanism. Some deals place one DSCR threshold on distributions and another on default; others use different ratios, test periods or cure mechanics.

The modelling question is therefore not “what are the two market DSCR floors?” It is what cash action follows each threshold in this credit agreement?

There is no universal 0.10×–0.15× spacing. Filed agreements illustrate very different structures. A 2026 credit agreement permits unlimited restricted payments only if pro forma DSCR is at least 1.15× and other conditions are satisfied. Another 2025 project facility requires aggregate DSCR of at least 1.60× and forward contracted DSCR of at least 1.20×, with an equity-cure mechanism if the covenant would otherwise fail.

That small gap is the most consequential drafting in the document, because it separates a liquidity event from a solvency event — and because a project sized at 1.30× only has to lose 11.5% of its cash flow to reach the first one.

This post covers the ladder, what the headroom actually is, what a lock-up does and does not do, the exit test that catches sponsors out, and how to price the cost of an event that never becomes a default.

ℹ️ Note: Levels vary by market, technology and offtake quality. All figures are labelled assumptions; the structure is the point.

What Is a Distribution Lock-Up?

A cash trap. When the coverage ratio falls below a stated level, distributions to shareholders are suspended and cash accumulates in the project until coverage recovers. Scheduled debt service continues; reserve accounts continue to be funded; nothing is accelerated.

Its purpose, as one description puts it, is to keep surplus cash inside the secured perimeter when coverage weakens, giving lenders time and liquidity without immediate enforcement.

That framing is worth holding onto. A lock-up is not a penalty. It is a mechanism for converting a problem that might become a solvency problem into a liquidity buffer, before anyone has to decide whether to enforce.

The Ladder

Three levels, and each is doing a different job.

Level	Worked example	What it is	What happens
Base case / sizing	1.30×	The structuring target	Facility sized to it
Lock-up	~1.15×	Distribution test	Cash trapped, no enforcement
Default	~1.05×	Event of default	Acceleration, remedies, step-in

Where a financing uses separate restricted-payment and default thresholds, the distribution gate will ordinarily be structured to protect cash before enforcement becomes relevant. But the executed agreement can use different metrics and cure periods, so do not infer the hierarchy from a market template.

The Headroom That Actually Matters

Not the DSCR. The distance from the base case to the lock-up.

CFADS fall to reach lock-up  = 1 − (1.15 ÷ 1.30)   =  11.54%
CFADS fall to reach default  = 1 − (1.05 ÷ 1.30)   =  19.23%
Band between the two         = 1 − (1.05 ÷ 1.15)   =   8.70%

A project sized at a comfortable 1.30× is 11.5% of cash flow away from having its distributions suspended.

Put that next to the numbers from earlier in this series. A generation-weighted basis assumption moving by two dollars a megawatt-hour. A curtailment rate moving three points. A capture rate falling five points. A single adverse operating year. Any one of those, on the worked figures from market structure material, is capable of consuming most or all of that headroom on its own — and the operating leverage point from the merchant tail post applies, so each lands on CFADS harder than on revenue.

This is why publishing the DSCR is much less useful than publishing the headroom. "1.30×" sounds comfortable. "11.5% from lock-up" is a different sentence, and it is the same fact.

What a Lock-Up Does, and Does Not, Do

It does not reduce the debt. Trapped cash sits in an account. Unless the agreement provides for a sweep — which is a different mechanism, covered later in this series — the money accumulates rather than deleveraging. The project is not getting safer at any particular rate; it is just not paying its owners.

It does not accelerate anything. No default, no remedies, no step-in. Scheduled amortisation continues on its original terms.

It does hurt equity, immediately and disproportionately. Distributions are the equity return. Suspending them does not reduce the total cash the project generates over its life, but it moves it later, and equity returns are extremely sensitive to timing. The quantification is in the Excel section below and the answer is larger than most sponsors expect.

It does buy time. Which is the point. A lender facing deteriorating coverage would rather have cash inside the perimeter and a conversation than a defaulted loan and a decision about enforcement.

Getting Out Is Harder Than Getting In

This is the sharp edge, and it is where the real cost sits.

Exit from lock-up requires satisfaction of the distribution tests on the relevant test dates — often for one or two consecutive periods — together with the absence of any default and full funding of the reserve accounts.

Read that carefully. A single bad year does not produce a single year of suspended distributions. It produces the bad year, plus however many consecutive clean periods the agreement requires to demonstrate recovery, plus whatever time is needed to restore reserve balances that may have been drawn.

A distribution suspension can outlast the operating event because release may require one or more later clean test dates, reserve restoration and no continuing default. The exact duration depends on the rolling test period and release mechanics in the agreement; it cannot be inferred from the DSCR level alone.

Two drafting points follow, and they are worth more to a sponsor than several basis points on margin.

Negotiate the number of consecutive clean periods. One is meaningfully better than two, and the difference is a full year of distributions.

Negotiate the reserve restoration condition. A requirement that all reserves be fully funded before distributions resume can extend a lock-up well beyond the point at which coverage has recovered, particularly where a maintenance reserve was drawn.

What Happens to the Trapped Cash?

It stays inside the secured perimeter, and what happens next is genuinely negotiable.

The default position is that surplus cash accumulates in a project account — the proceeds account, or a dedicated distribution reserve — continues to earn interest for the project, and is released to equity when the exit conditions are satisfied. Nothing is applied to the debt.

Three variants appear, and the difference between them is worth real money.

Full release on exit. Some structures release trapped cash once the distribution conditions are restored; others apply some or all of it to debt. The release clause determines whether the event is temporary deferral or permanent deleveraging.

Partial sweep. A stated share of trapped cash — often 50% — is applied to prepay debt rather than being released. The lender gets permanent deleveraging out of a temporary event, which is a substantially better outcome for it and a permanently worse one for equity.

Full sweep. Trapped cash is applied to the debt entirely. Economically this converts the lock-up into a cash sweep, and at that point the two mechanisms are the same clause.

The distinction matters because the cost of a lock-up is completely different under each. Under full release it is a timing cost — the 4.2% NPV effect computed below. Under a full sweep the cash never comes back at all; equity has funded a prepayment out of a bad year, and the loss is the full amount rather than its deferral.

A sponsor reading a term sheet that mentions a lock-up should therefore establish, before anything else, whether the trapped cash is released or applied. Two clauses that read almost identically produce outcomes an order of magnitude apart.

What Else Triggers It?

DSCR is the headline test and rarely the only one.

Distribution conditions can combine several gates: the relevant coverage test, no continuing default, required reserve funding and any forward-looking test specified in the agreement. The exact combination must be taken from the restricted-payment clause.

Each of those is a separate way to lose distributions, and two deserve specific attention.

The forward-looking condition is the softest and the most contested. A requirement that projected DSCR for the next twelve months also clears the threshold hands the lender a veto based on a forecast — and the drafting question is whose forecast, updated when, and on what assumptions. market structure material's material is directly relevant: a lender revising its curtailment or basis assumption can trigger a forward-looking distribution block on a project whose historic performance is fine.

"No default subsisting" can sweep in non-coverage breaches. A reporting failure, lapsed insurance or another uncured default can block a distribution if the restricted-payment clause says so. That makes administrative compliance economically relevant even where DSCR is strong.

The practical instruction is to treat the distribution conditions as a checklist maintained continuously, not as a ratio tested twice a year. Most missed distributions are not coverage events.

What Else Does the Test Gate?

More than distributions, and the additional items are easy to overlook.

The restricted-payment definition may also capture subordinated or shareholder loan service, sponsor fees and related-party payments. Check the definition before assuming a contractual payment to an affiliate sits outside the lock-up.

Additional-debt tests can use DSCR, LLCR, PLCR or a combination. Do not assume the restricted-payment metric is also the leverage-incurrence metric.

For a sponsor this has a structuring consequence worth planning for. Returns routed through a subordinated loan can be just as exposed as dividends if the restricted-payment definition captures shareholder debt service. The documents, not the label on the payment, decide.

Equity Cures

Some facilities permit an equity cure: the sponsor injects cash, the injection is treated as CFADS or as a reduction of debt service, and the ratio is restored.

Where available, the terms are where the value is.

How the injection counts. Treating it as CFADS raises the numerator and cures the current period. Treating it as a prepayment reduces future debt service and helps subsequent periods. The two are not equivalent and sponsors should know which they have.

How often it can be used. Cure rights are document-specific and usually constrained. One 2025 filed facility permits no more than five specified equity contributions over the loan life, subject to limited additional cures and annual limits. A 2026 credit agreement permits four cure exercises with restrictions on consecutive quarters. Those are examples, not a market rule.

Whether it cures lock-up, default, or both. These are frequently different. A cure right that restores distributions is valuable; a cure right that prevents acceleration is worth considerably more.

The honest observation about equity cures is that they are most useful for timing mismatches and least useful for structural deterioration. A project that needs a cure once, after a storm year, is using the mechanism as intended. A project that needs one every year has a different problem, and the cure limit is what forces that to be acknowledged.

Where Does the DSRA Fit?

Between the two floors, functionally.

The debt service reserve account holds cash or permitted credit support at the Required Balance defined by the financing documents and can be drawn for specified debt-service shortfalls. Its job is to provide liquidity before a payment default.

One possible deterioration path is: coverage weakens, a distribution gate blocks equity cash, a later operating shortfall draws the DSRA, and a further shortfall can become a payment default. The exact sequence depends on the reserve and covenant mechanics.

Two points are worth checking in the signed definitions. First, whether reserve drawings enter the DSCR numerator. Second, whether a drawn DSRA must be restored before restricted payments resume. The reserve and the lock-up can be linked, but only as the documents provide.

How Do You Model This in Excel?

As headroom percentages and an explicit event scenario, not as a pass/fail flag.

The headroom, which is the reporting output

Base_DSCR                                            1.30×
Lockup_DSCR                                          1.15×
Default_DSCR                                         1.05×

Headroom_to_lockup   = 1 − Lockup ÷ Base            = 11.54%
Headroom_to_default  = 1 − Default ÷ Base           = 19.23%
Band                 = 1 − Default ÷ Lockup         =  8.70%

Publish the first of those on the front page of any credit paper. It converts a ratio into a statement about how much can go wrong.

The cost of a lock-up event

Assumptions, labelled as such:

Annual distribution                              $8,000,000
Project life                                       20 years
Equity discount rate                                    12%
Event                                    year 5, one bad year
Exit test                          2 consecutive clean periods
Suspension                                years 5, 6 and 7
Release                                 lump sum in year 8

NPV of distributions, no event                  = $59,755,549
NPV of distributions, with the lock-up          = $57,237,489
                                                  -----------
Cost of the event                               =  $2,518,060   (4.21%)

A single bad year, fully recovered, with every dollar eventually paid, costs equity 4.2% of the present value of its entire distribution stream. Nothing was lost — the cash was deferred by three years and released in full. Timing alone did that.

The sensitivity that makes the drafting point

Exit test = 1 consecutive period  → suspension of 2 years
Exit test = 2 consecutive periods → suspension of 3 years
Exit test = 3 consecutive periods → suspension of 4 years

Each additional consecutive period required is roughly another year of deferred distributions. That is what the drafting negotiation is worth in cash, and it is almost never quantified before the agreement is signed.

The sweep variant, which changes the answer entirely

Full release on exit    NPV cost                 =  $2,518,060   (4.21%)
50% swept to debt       cash permanently lost    = $12,000,000
                        NPV cost                 =  $7,364,659  (12.32%)

The second line is not a refinement of the first; it is a different transaction. Under a sweep the sponsor has prepaid debt out of a bad year using money it will never see again, and the equity cost is roughly three times larger. A model that reports a lock-up without establishing which variant applies has produced a number with an error bar of an order of magnitude.

The event to actually test

Run: the single worst plausible operating year, at the lock-up threshold
Report: trigger? yes/no · years of suspension · NPV cost to equity

ℹ️ Note: Model the lock-up as a cash flow consequence, not only a covenant flag. If distributions are blocked, the cash must remain in the security perimeter, sweep, reserve or otherwise move exactly as the documents require.

To build the headroom analysis and the lock-up event cost, prompt Dezzmond with your ratio levels and distribution profile.

What Do Sponsors and Lenders Actually Check?

• What is the headroom to lock-up as a percentage of CFADS, not as a ratio?
• How many consecutive clean periods are required to exit, and has that been priced?
• Must reserves be fully restored before distributions resume?
• Is the lock-up modelled as a cash flow consequence or only as a flag?
• Is there an equity cure, how does it count, and how often can it be used?
• What are the actual restricted-payment and financial-covenant thresholds, and how much CFADS headroom separates them?
• Is the test rolling twelve-month historic? If so, a bad year sits in the window for four quarters after it ends.

Frequently Asked Questions

What is a DSCR lock-up?

A distribution test. When coverage falls below the lock-up level, distributions to equity are suspended and cash is trapped in the project until coverage recovers. Debt service continues and nothing is accelerated.

How far apart are the lock-up and default levels?

There is no universal spread. Extract the restricted-payment threshold, financial-covenant threshold, test periods and cure rights from the executed agreement, then convert them into cash-flow consequences in the model.

How much can cash flow fall before a lock-up triggers?

On those levels, 11.5%. A further 8.7% fall from the lock-up level reaches default. Those percentages are a more useful statement of headroom than the ratio itself.

How long does a lock-up last?

Potentially longer than the event that caused it. Release can require later test dates, reserve restoration and no continuing default. Model the actual rolling test window and release conditions rather than applying a fixed “one bad year equals three years” rule.

Is trapped cash returned to the sponsor?

It depends entirely on the drafting. Full release on exit makes a lock-up a timing cost; a partial or full sweep applies the cash to the debt permanently, so it never comes back. Two clauses that read similarly produce outcomes an order of magnitude apart.

Can something other than DSCR block a distribution?

Yes. Restricted-payment conditions often include items beyond DSCR, such as no continuing default and required reserve funding. Which additional conditions apply — and whether an administrative breach blocks a distribution — is document-specific.

What does a lock-up cost equity?

On the worked example, a single fully-recovered bad year costs 4.2% of the present value of the whole distribution stream — with no cash lost at all, purely from a three-year deferral.

Closing: Negotiate the Clause You Will Actually Hit

Sponsors spend most of their covenant negotiation on the default level, which is reasonable in that a default is the catastrophic outcome. It is also the level they are least likely to reach, because the lock-up sits above it and does its job.

In the worked example, the 1.15× restricted-payment threshold is reached after an 11.5% fall in CFADS from a 1.30× sizing case, and the model quantifies the equity cost of the resulting suspension. The threshold, release periods and reserve-restoration mechanics should be negotiated as economics, not treated as boilerplate.

They are economics. Each additional consecutive period required is about a year of deferred distributions, which on the worked figures is worth more than several basis points of margin over the life of the facility. And the question of whether trapped cash is released or swept moves the cost of the same event by a factor of three — $2.5m against $7.4m on identical facts, decided by a clause most term sheets dispose of in a line.

Coverage-gate mechanics are harder to compare across term sheets than margin because definitions, test periods, cure rights and release conditions differ. The model should convert those drafting differences into distribution timing and equity value before the terms are accepted.

The general instruction is the one this whole series keeps arriving at: report headroom rather than ratios, model consequences rather than flags, and quantify the clauses before agreeing them rather than after triggering them.

the next post follows the cash itself, through the waterfall that decides which of these mechanisms gets paid first.

Sources: 2026 SEC-filed credit agreement — restricted payments require pro forma DSCR ≥1.15× · 2025 SEC-filed project credit agreement — DSCR 1.60×, forward contracted DSCR 1.20× and specified equity cures · 2026 Energy Vault filing — actual DSCR waiver and $1.2m sponsor equity cure · Dezzmond analysis; worked-example thresholds are illustrative.