A project’s Cashflow Available for Debt Service (CFADS or CADS) is analysed by project lenders (senior debt banks) to determine debt sizes and repayment criteria.
CFADS is calculated by netting out Revenue, Operating Expenditure (OpEx), Capital Expenditure (CapEx), Debt & Equity Funding, Tax and Working Capital Adjustments. The annual Cashflow Waterfall below clearly demonstrates the calculations.
Screenshot #1: Annual Cashflow Waterfall to determine CFADS
Application of CFADS in Project Finance analysis
CFADS is preferred to determine gearing and lending capacity as opposed to EBITDA since this measure does not take taxes and timing of cashflows into consideration.
EBITDA is a common metric in Corporate Finance but in Project Finance the focus is on actual cashflow (CFADS).
This project illustrated below is repaying the funds borrowed to finance the Capital Expenditure as an Annuity (Credit Foncier) over a four year tenor. Principal and interest together sum up to an equal amount every year, however more principal is repaid in the later years since the interest component decreases in line with the debt balance.
Screenshot #2: Graph of CFADS vs Debt Service
Many projects experience a ramp-up period before they reach steady state production and revenue, this can be clearly seen by plotting CFADS vs Debt Service as illustrated in Screenshot #2.
Project lenders usually determine borrowing capacity on the basis of debt service ratios. Most common debt ratios in project finance are Debt Service Cover Ratio (DSCR) and Loan Life Cover Ratio (LLCR) which both use CFADS in the numerator.
Debt Service Cover Ratio (DSCR)
The DSCR uses CFADS in the numerator and Debt Service (Principal + Interest) in the denominator. A ratio of 1.00x would thus mean that the project cashflows are equal to total debt service in the period.
DSCR = CFADS / Scheduled Debt Service
Scheduled Debt Service = Interests + Principal Repayment
Loan Life Cover Ratio (LLCR)
Unlike period on period measures such as the DSCR, LLCR measures how many times the Discounted CFADS over the scheduled life of the loan can repay the outstanding debt balance.
LLCR = NPV (CFADS over Loan Life) / Debt Balance b/f
Screenshot #3: Example of DSCR calculation and Graph
Common Mistakes in CFADS Calculations
- Incorrect items are included in the calculation: Depreciation; Cash Balances; Reserve Accounts etc.
- When modelling Sub or Mezzanine debt, it is important to include cashflow available at the appropriate level of seniority
- CFADS calculations set up to ‘back out’ CFADS from EBITDA is a warning sign the modeller is inexperienced in project finance modelling and should be checked carefully.