Table of Contents
Cash flow available for debt service (CFADS) is arguably the most important metric in project finance. It determines how much cash is available to all debt and equity investors. Conceptually similar to unlevered free cash flows, CFADS is calculated as follows:
- Revenue = Revenue from operations & other income
- Expenses = Operations & maintenance, land lease, other labor etc
- Net working capital adjustments = Adjustments to get from accrual to a cash basis
- Cash Tax = This is tax paid in cash (not accrual tax expense)
- Other items = Examples include annual fees on the senior debt facility and refinancing fees.
CFADS Uses of Funds
CFADS represents the amount of funds available to be distributed to the various providers of capital. Because debt is paid before equity, it is important to correctly model the order of payments.
The chart below shows a breakdown in revenue for a simple project (years on the x-axis). The blue area (light + dark blue) is CFADS. There’s a (very slight) revenue fluctuation with the seasons, and after paying opex, capex & tax, the blue area is collectively CFADS.
Going through the various distinctive phases:
Construction Phase (Quarters 0-6)
No CFADS as limited to no revenue during this phase.
Debt tenor (Quarters 7-47)
During this phase, the majority of CFADS goes towards paying down senior debt principal & interest until the debt is paid down.
Upon construction completion, CFADS might ramp-up over several quarters:
- As a toll road project is opened, users take time changing their behavior to drive on the new road.
- As a gas fired power plant goes through completion testing, the turbines require minimum operating hours at lower capacities before they can be run at full capacity.
Lenders understand the ramp up and allow for a grace period before a full debt service is required as CFADS may not be enough to cover full debt service of interest and principal.
Debt tail (Years 48+)
By this point, debt should be fully repaid and there is no further (senior) debt service or Debt Service Reserve Account payments required. If there is no subordinated debt remaining, CFADS will be available for equity holders.