CFADS: a Worked Example of Project Cash Flow

A project company owns one asset and does one thing: it runs a toll road, a wind farm, a hospital under a long-term contract. It has no other business to lean on, and its shareholders' support is usually limited to the equity they put in. The lender is repaid from the asset's cash or not at all. In that position profit is the wrong measure. Depreciation is irrelevant, tax is paid in cash before the lender sees anything, and a heavy maintenance year takes cash out whether or not the accounts capitalise it.

So the project's cash runs through a waterfall the agreement sets. Cash received pays operating costs and tax, and the maintenance the asset needs to keep earning; what is left, on the agreement's definition, is CFADS. Senior interest and principal come next, then the reserve accounts the agreement requires, and only then can money go to the shareholders. Where a maintenance reserve sits in that order varies: some agreements fund it ahead of debt service, others below it, and the CFADS definition says whether transfers to it are deducted. CFADS is the line where the lender's claim begins.

The working parts are where models and agreements differ. Major maintenance may come out as it is spent or as a steady transfer to a reserve that is then drawn when the work is done; the reserve smooths CFADS, and the definition says which applies. Transfers into and out of a debt service reserve account are commonly kept outside CFADS, since drawing a reserve to pay the lender is not the project earning its debt service. Interest earned on reserve balances, insurance proceeds, compensation from the contracting authority and any equity injected are each treated as the agreement states, and a lender checks that cash from shareholders or new borrowing cannot be counted as cash from the asset.

A bulk-liquids storage terminal at a port, constructed for this page like every figure in it, earns most of its revenue under take-or-pay contracts with fuel and chemical distributors. For the year in US$m:

In the same year two other sums reached the project's accounts: US$2.0m from insurers for a damaged jetty, which the agreement sends to the repair, and US$1.5m released from the debt service reserve when a reserve balance was re-sized. A loose definition counts both:

Nothing about the terminal's trading changed between the two lines. The jetty money is committed to the repair, and the reserve release is the lender's own protection being handed back. At 1.50 times the year's cash covers debt service with half again to spare; the 1.71 describes a stronger project than the one that exists. Those ratios belong to the example. So does the next use of the number: at a sizing ratio of 1.40 times, chosen here only to show the arithmetic, the year's CFADS would support debt service of up to US$18.2m (25.5 ÷ 1.40).

EBITDA stops before tax, maintenance spending and working capital, which are all paid ahead of the lender in a project. For a corporate borrower with many sources of cash and a debt service cover ratio built on EBITDA or operating cash flow, that gap is part of the analysis; for a project it would overstate what the loan can rely on each period. Free cash flow sits on the other side. Measured after interest, it belongs to the shareholders. Measured before financing altogether, analysts often take tax as if the business had no debt, while CFADS uses the tax the project actually pays, with its interest deductions.

CFADS also differs from the cash a shareholder receives. Between them sit debt service, reserve top-ups, and any distribution lock-up that holds cash in the project when cover falls below a level in the agreement. A sponsor's model and a lender's model can therefore agree on CFADS and disagree sharply on the equity return.

DEFINED IN ONE PARAGRAPH → · LOAN LIFE COVER RATIO → · DEBT SCULPTING →

At financial close, forecast CFADS sizes the loan. The lender takes a banking case, usually more conservative than the sponsor's, divides each period's CFADS by its target cover; where repayments are sculpted, that sets each period's debt service, and the loan is commonly also limited by a gearing test. A dollar of CFADS a year over a long tenor carries several dollars of debt, so every assumption under it, from availability and prices to the maintenance profile and tax, is argued line by line, and on many deals an independent model audit checks that the definition in the model matches the one in the agreement.

During the loan, actual and forecast CFADS commonly drive the tests at each calculation date: historic and projected cover ratios, a lock-up level that stops distributions, and often a default level below that. The definition then decides who carries a bad year. A project that can count insurance money, reserve releases or a one-off settlement in CFADS reaches distributions sooner and trips its covenants later. The exclusions are where much of the lender's protection sits, which is why they are negotiated line by line.

DEBT SERVICE RESERVE ACCOUNT → · MAINTENANCE CAPEX →