Libya Required Returns — Build-Up Calculator

Build-up of the cost of equity, cost of debt and WACC for Libya-based exposures: tenor-matched risk-free rate, relevered industry beta, size premium, lambda-scaled Libya country risk, and a specific-risk layer — USD core with an LYD conversion layer.

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How to use

Pick the industry: it sets the unlevered beta (Damodaran, cash-corrected). The tool relevers it automatically via Hamada at your chosen capital structure and the 24% Libyan effective tax.
Pick the size tier: a Kroll-style size premium, from 0% for large caps (over $2bn) to 4.5% for nano caps (under $50m).
Choose the country-risk scenario: Base is Damodaran's PRS-composite estimate for Libya (CRP 3.90%); Conservative applies the Caa1 tier of Iraq/Egypt (9.71%). Libya is unrated with no CDS, so the two scenarios bracket a reasonable range.
Calibrate lambda to the cash-flow currency: below 1 for offshore-USD cash flows against hard-currency offtakers (e.g. crude exports through offshore structures), 1.0 as the general case, above 1 for purely domestic LYD businesses.
Add the specific risk premium for factors the build-up does not capture: customer concentration, key-person dependence, completion risk on greenfield projects.
Set the target capital structure (market values), the issuer rating, and the structure adjustment: negative for security, collateral, escrows and offtake cover; positive for subordination.
Match the risk-free tenor to the horizon of the investment or instrument (2Y for short-term funding, 10Y for company valuation, 30Y for long-dated infrastructure).
Set the LYD premium: USD results convert to LYD by the inflation differential, plus an explicit judgment premium (default 3%) for the official-vs-parallel FX gap and devaluation risk (the LYD was devalued to ~5.56/USD in April 2025).
Read the outputs: the tiles show cost of equity, cost of debt and WACC in USD and LYD; the waterfall decomposes every component; the table lists the full set.

The framework

Ke = Rf + (relevered β × ERP) + size + (λ × Libya CRP) + specific

Cost of equity (USD): tenor-matched risk-free rate, plus the relevered industry beta times the mature-market ERP (4.23%), plus the size premium, plus the lambda-scaled Libya country premium, plus the specific premium.

Kd = Rf + Libya sovereign spread + issuer credit spread + structure · after-tax at 24%

Cost of debt / debt pricer (USD): tenor-matched risk-free, plus the Libya sovereign default spread, plus the issuer credit spread, plus the structure adjustment; then after-tax at the 24% effective rate (CIT 20% + jehad 4%). Note: upstream DPSA/EPSA fiscal terms differ — use contract terms in cash-flow models.

k(LYD) = (1 + k(USD)) × (1 + π_Libya) / (1 + π_US) − 1 + devaluation premium

LYD layer: international Fisher conversion at the inflation differential (Libya 2.5% 2026f; US 2.29%), plus an explicit devaluation/convertibility premium. WACC is weighted at the target capital structure at market values.

Unrated issuers and sovereigns

Unrated issuer? Derive a synthetic rating from interest coverage: divide normalised EBIT by interest expense and pick the corresponding grade in the rating dropdown per Damodaran's coverage table (e.g. coverage of 1.8× ≈ B1/B+ at a 2.75% spread). Use sustainable EBIT, not an exceptional year. This approach is not for banks or insurers — those are rated on capital, asset quality and funding.

Greenfield projects: rate the projected steady-state coverage, and load completion risk into the structure adjustment or the specific premium — not into the rating.

Sovereign general-government debt: the required yield is risk-free plus the Libya sovereign spread plus structure only — the issuer spread is zero, because the country spread already prices the sovereign (no double-count). In this tool, select the top grade (Aaa, 0.40%) and offset it with a −40bp structure adjustment, or use the extended model. Sovereign project-backed issuance (a project bond/sukuk against a dedicated revenue stream) keeps a standalone project spread via the rating on top of the sovereign spread, with structure credit for ring-fenced revenues, escrows and guarantees.

SANAD national-scale ratings: the national scale strips sovereign risk — when using a national rating here, the tool's sovereign-spread line is what adds it back.

Worked example

Oil & gas E&P, micro-cap, Base scenario, λ = 1, specific premium 1%, 30% debt, Ba2/BB, −75bp secured, 10Y tenor: cost of equity 15.6% USD, after-tax cost of debt 6.3%, WACC 12.9% USD / 16.1% LYD, and a secured debt yield of 8.3% USD — roughly +3.65% over the curve, comparable to trade-finance pricing at SOFR+3.25%. These are the tool's default inputs above, so you can verify directly.