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Cashflow available for debt service

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Cashflow available for debt service (sometimes cash available for debt service, abbreviated to either “CFADS” or “CADS”) is used in most cashflow based covenant calculations, such as DSCR, ICR, LLCR and PLCR. It seeks to measure the true ability of a business to repay its debts, whether in the one period or over time, without any influence of accrual accounting “tricks” or manipulations.

Calculation

Depending on who is building the financial model and what their background is, you will usually see one of two different constructions of CFADS. Someone with a project finance background would usually calculate CFADS using this methodology:

Receipts from customers
-Payments to suppliers and employees
-Royalties
-Taxes + Tax refunds
-Capital expenditure

If the model developer comes from a leveraged finance, corporate finance or M&A background then you may see them use P&L based measures as a starting point.

EBIT
+Depreciation
+Amortisation (or start with EBITDA from this point)
+/- Other non-cash items in the P&L
+/- Movements in working capital
-Taxes + Tax refunds
-Capital expenditure

Whichever method is used, it is important to ensure that it is actually calculating cash that is available to pay debt.

Complicating factors

Debt and equity contributions

Where debt and/or equity contributions are used to pay directly for capital expenditures (such as during a construction period in a project financing) these should occur above the CFADS line in your model and be additive to your CFADS number (and will effectively “net-off” the capital spending). Care needs to be taken to ensure that this does not introduce a circular reference in your debt calculations, such as by ensuring that drawdown calculations only refer to the opening balance of the debt, not the closing balance (which would link drawdowns and repayments together).

Reserve accounts

Movements in the balance of reserve accounts may appear both above and below the CFADS line in your cash waterfall. With the exception of the initial funding of any Debt Service Reserve Account (“DSRA”) from debt or equity contributions (usually at the end of construction), transfers into a reserve account would usually be made out of post-CFADS and post debt repayments cash. The treatment of releases out of an account will depend on what that account was set up for. Releases from DSRAs which are being used to top up a cashflow shortfall would be post-CFADS and post-debt. Releases from a capex reserve account, lifecycle reserve account or similar would usually occur prior to CFADS, usually at the same time that the relevant amount of money is being spent.

Seniority of debt

Different classes of debt may have different measures of CFADS. First-ranking / senior debt will use the calculation methodology we have already outlined. For other classes of debt, the CFADS they reference will likely be the “senior CFADS” and then deducting senior debt interest and repayments, as well as any movements in reserve accounts that are required to occur before those lenders can be paid.

Interest earned

In businesses where you have a financial covenant that uses CFADS (usually in a project finance or leveraged finance transaction), most of the interest that the business will earn will be from various reserve accounts. Any interest these accounts earn is usually kept within that same reserve account unless it results in the balance being above the target amount, at which point surplus funds are released. This usually means it can be incorporated within “above target releases” (or something with a similar name) which would usually not be incorporated within the CFADS definition, and occurs after debt payments have been made.

Cash waterfalls

The easiest way to make all these calculations is to use a “cash waterfall” sheet within your model, rather than the standard corporate finance cashflow statement. You start at the top of the sheet with revenues, operating costs, taxes, etc. move onto capital items and funding and then get to your CFADS line. By putting all the debt facilities and reserve account movements after that, it is much easier to ensure that your model construction lines up with whatever is in your loan agreements, rather than trying to back-solve. An example cash waterfall is contained here.
The main thing to remember is that each line item should only be calculated with reference to things that appear above it in the waterfall. The exception to this is income taxes, which will necessarily reference interest payments. To avoid this causing a circular reference, when you are calculating interest expense lines, ensure that they are calculated with reference to the opening balance in that time period, rather than the average or closing balances. This implicitly assumes that each cashflow occurs at the end of the period in question, which is usually how loans work anyway.

See also:

Debt Service Cover Ratio
Interest Cover Ratio
Loan Life Cover Ratio
Project Life Cover Ratio
Circular references and breaking them
Debt service reserve accounts
Senior or total debt

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Brendan WalpoleCashflow available for debt service

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