Features of a Cashflow Waterfall in Project Finance

The Cashflow Waterfall ensures that each cashflow item occurs at the correct seniority to other items. This article outlines key categories of cashflow items and how to present Cashflow Waterfall in comparison to Cashflow Statement in a Project Finance Model.
In Project Finance, a project’s cashflow is summarised using a Cashflow Waterfall, which shows the priority of each cash inflow and outflow. The cashflow waterfall ensures that each cashflow item occurs at the correct seniority to other items. The cashflow waterfall becomes especially important when illustrating debt repayments of many debt tranches with reducing seniority.

Cashflow waterfall categories
A cashflow waterfall is simple in its approach, as all cashflow items are placed in the order in which they occur. The main categories of a cashflow waterfall, in order of occurrence are:

  • Revenues: Operating revenues and other income
  • Expenses: Operating expenses and capital expenses
  • Tax
  • Debt Service: Principal repayments and interest paid
  • Distributions
  • Net movement in Cash Balance

Key Summary Lines of Cashflow Waterfall

The cashflow waterfall is used to calculate key cashflow lines, which are used in different parts of project finance modelling. Key lines of the cashflow waterfall are:

  • Cashflow Available for Debt Service (CFADS)This is the most significant line which drives all debt repayment calculations and ratios including Debt Service Coverage Ratio (DSCR), Project Life Coverage Ratio (PLCR) and Loan Life Coverage Ratio (LLCR).
  • Cashflow before Funding:This line is useful as a quick check against funding to ensure that initial construction costs are being met by debt or equity
  • Cashflow Available for Debt Service Reserve (or other reserve) Account
  • Cashflow Available to Equity to calculate distributions
  • Net Cashflow

The figure below is a high level illustration of a typical cashflow waterfall. Each category will be separated into individual line items, such as individual operating costs.

It clearly shows that by going down the page, the user is able to identify the timing and seniority of each cashflow and the highlighted key cashflow lines.


Screenshot #1: Example of presenting cashflow waterfall in Project Finance model

Comparison of a Cashflow Statement and a Cashflow Waterfall

Grouping of cashflows
The cashflow statement presents information in three key categories: Cashflow from Operations: Cashflow from Investing and Cashflow from Financing, which are standalone from each other.

Seniority of cashflow Items
The cashflow statement does not order cashflows in order of seniority, thereby making it less efficient when analysing a project’s debt repayment ability. The cashflow waterfall clearly shows the amount of cashflow at each level as described in the Term Sheet.

Investors or Financiers?
The cashflow statement provides information that can be readily analysed from an external investor’s perspective, whereas the cashflow waterfall provides information that can be easily analysed by the banks.

The screenshot below is a high-level illustration of a cashflow statement. When compared with the structure of the cashflow waterfall above, the differences are easily identified.


Screenshot #2: Illustration of a cashflow statement

Points to Consider in cashflow waterfall modelling

The term sheet specifies the seniority of certain categories, such as reserve accounts.
The addition of an Annual Cashflow Waterfall significantly improves the usability of the model, as it facilitates analysis at a high level. This is efficiently coded using the SUMIF formula based on Calendar Year, Financial Year or Operating Year.

Ensure that debt is being repaid according to seniority of the tranches. This is especially important in downside sensitivity or scenario analysis, where the operating cashflows are highly stressed.

The cashflow waterfall is used to calculate the net movement in the cash balance and also the Cash Closing Balance. Adding an integrity check to this line that indicates whether the Closing Cash Balance (or Balance Carried Forward – Balance C/f) is negative, is a critical component of a complete model. If this integrity check is not added a project can appear to be funded by a negative cash balance which is not a realistic scenario.

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