CFADS and DSCR - Words from a Foreign Language?

Some of you might be wondering whether CFADS and DSCR are words from another language. Well we’re here to explain to you that they’re not. CFADS and DSCR are acronyms which are common place in project finance deals. We’ll look at each in turn. 

NOTE: You can follow the examples by downloading the accompanying Excel spreadsheet and YouTube video in the above Blog Downloads area. 

CFADS 

Cash is KING in project finance deals and CFADS is well, the heir to the throne. 

CFADS stands for cash flow available for debt service and is usually defined in the project finance loan documentation. It is used by financiers to calculate ratios and debt sizing. 

Although it can be defined in many different ways, the simplest definition is:

•  
  • Revenues
  • less: Expenses 
  • less: Capital Expenditure during Operations(1)
  • less: Tax
  • plus/minus: Net Working Capital Movements

(1) In some instances Video Financial Modelling has seen growth capital expenditure, excluded from CFADS. The reason for this is that it is a discretionary expenditure. 

In a large number of cases project finance deals exhibit:

1. A ramp-up period post construction completion. For example think of a toll road. As soon as it is completed it does not get the predicted baseline traffic. People don’t automatically switch to using the toll road from alternate routes, it takes time. 
2. CFADS usually grows over the life of the project. This is why project finance debt is often sculpted as opposed to repayments via a credit foncier profile. We will look at sculpted and credit foncier repayment profiles in the next blog tutorial. 

In the meantime let’s take a look at an example of CFADS. 

Example

Find the CFADS given the following information:

• Revenue = 50
• Expenses = (10)
• Capital Expenditure = (15)
• Tax = (5)
• Working Capital Movements = (2) 
• Depreciation = (10)

If you got a CFADS of 18, then you’d be correct. Don’t get fooled by the depreciation, which is a non-cash movement. 

Now let’s take a look at what the DSCR is. 

DSCR

DSCR stands for Debt Service Coverage Ratio and is defined in the project finance loan documentation. In most cases it is equal to the:

CFADS divided by Debt Service 

The DSCR can be taken over a forward or backward looking period, say 6 months, or simply during one individual period.  More often than not the DSCR is calculated during the operations phase of the project only. 

Debt Service is usually defined as the aggregate of senior debt interest, repayments/principal and in some circumstances may also include other fees.

As you probably already guessed the DSCR is a measure of the amount cash flows can cover debt. The higher the DSCR, the more cash flow is available for debt financiers as a safety net.  

There are usually two benchmarks DSCR’s, defined in the project loan documentation, which are compared to the calculated DSCR. The first is the lock-up DSCR and the second is the default DSCR. 

When the calculated DSCR is below the lock-up DSCR all cash is locked up and may not be distributed to equity, until such time as the calculated DSCR is above the lock-up DSCR again.

If the calculated DSCR goes below the default DSCR, then the company would be in default and there may be many mechanisms to deal with such default, such as the lenders stepping in to perform the company’s duties, selling the project etc. The default provision is done on a project by project basis. 

Let’s take a look at an example for calculating the DSCR.  

Example

If we have the following CFADS, Interest and Principal payments what is the DSCR for each period individually and also using a look-back of two periods.  

Figure 1: CFADS, Interest and Principal

Firstly let’s work out the Debt Service:

Figure 2: Calculating Debt Service

Now let’s look at finding the DSCR for each individual period and also the DSCR for a two period look-back.

Figure 3: Individual Period DSCR

Figure 4: Two Period Look-Back DSCR

You should notice something here. There isn’t sufficient cash in period 3 despite the look-back DSCR ratio being above one. Be careful of this and make sure your financial model has a check for cash flow shortfalls. 

Hopefully this blog clears up the fact that CFADS and DSCR are not words from foreign languages. 

If you like this blog tutorial, take a look at our Intermediate financial modelling courses.

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