## CFADS – Cash Flow Available for Debt Service

By Rickard Wärnelid

Thursday 25th September 2008

## Introduction

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 an important meansure that determines debt repayment calculations and ratios including Debt Service Coverage Ratio (DSCR), Loan Life Coverage Ratio (LLCR) and Project Life Coverage Ratio (PLCR).

In a typical project finance model, the Cashflow Available for Debt Service is calculated by netting out Revenue, Operating Expenditure, Capital Expenditure, Tax and Working Capital Adjustments. The annual cashflow waterfall below clearly demonstrates the calculations of CFADS.

## Application of CFADS in Project Finance analysis

CFADS is preferred over EBITDA in determining gearing and lending capacity because 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).

Many projects experience a ramp-up period before they reach steady state production and revenue, In this example in Screenshot #2, CFADS is plotted against Debt Service as. CFADS is increasing over time while debt service is decreasing over time.

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 of the calculation.

## Debt Service Cover Ratio (DSCR)

The DSCR uses CFADS in the numerator and Debt Service (calculated as Principal + Interest) is in the denominator. A ratio of 1.00x means that the CFADS in a period is equal to the total debt service in that same period. A ratio of greater than 1.00x means that there is sufficient cashflow to meet principal and interest payments.

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 brought forward

## Common mistakes in CFADS calculations

It is important to check that each cashflow item leading to CFADS line occurs at the correct seniority to other items and is modelled in accordance to the term sheet. Few common mistakes in CFADS modelling are listed below.

• Incorrect and n-n cashflow items are included in the CFADS calculation such as. depreciation, cash balances, and reserve accounts balances.
• When modelling subordinated or mezzanine debt, it is important to include cashflow available at the appropriate level of seniority. Different CFADS may need to be calculated at each level of seniority.
• CFADS calculations back calculated from EBITDA is a warning sign that the modeller is inexperienced in project finance modelling and should be checked carefully.

### Mazars Financial Modelling – Resources

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