CFADS tutorial workbook
The CFADS waterfall from this tutorial, built out in Excel and ready to follow along with your own numbers. Excel binary workbook (.xlsb).
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What CFADS measures
Senior lenders use a project’s cash flow available for debt service (CFADS, sometimes CADS) to size the debt and set repayment terms. It is the base for the main project finance debt ratios: the debt service coverage ratio (DSCR), the loan life coverage ratio (LLCR) and the project life cover ratio (PLCR).
In a typical project finance model, CFADS is revenue less operating expenditure, capital expenditure and tax, adjusted for working capital. The annual cash flow waterfall in figure 1 shows the calculation.
CFADS=revenue− operating expenditure− capital expenditure− tax± working capital
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Why lenders use cash flow, not EBITDA
Lenders set gearing and lending capacity on CFADS because EBITDA takes no account of tax or the timing of cash flows. EBITDA is a common corporate finance measure. Project finance lenders look at actual cash flow.
Many projects ramp up before they reach steady-state production and revenue. CFADS rises as the project ramps up, while debt service usually falls as the loan amortises.
Lenders usually set borrowing capacity from debt service ratios. The two most common, the DSCR and the LLCR, both put CFADS in the numerator.
Debt service coverage ratio (DSCR)
DSCR=CFADSscheduled debt service
Debt service is principal plus interest. A DSCR of 1.00x means CFADS in a period exactly equals debt service in that period. Above 1.00x, the period’s cash flow covers principal and interest with some to spare.
For the full formula, a worked example and the covenant mechanics, read our DSCR tutorial.
Loan life coverage ratio (LLCR)
LLCR=NPV of CFADS over the remaining loan lifedebt balance brought forward
The DSCR tests one period at a time. The LLCR measures how many times the discounted CFADS over the remaining scheduled loan life could repay the outstanding debt. It gives lenders one view across the whole loan life.
For more detail, read our LLCR tutorial.
Common mistakes in CFADS calculations
Check that every item feeding the CFADS line sits at the right level of seniority and follows the term sheet. Watch for these mistakes:
- Non-cash items included in CFADS, such as depreciation, cash balances and reserve account balances
- Subordinated or mezzanine debt tested against the wrong CFADS. Each level of seniority may need its own CFADS.
- CFADS worked backwards from EBITDA. This is a warning sign that the modeller is new to project finance, so check the model carefully.
CFADS questions
What is CFADS in project finance?
The cash a project generates in a period after operating costs, capital expenditure, tax and working capital movements, and before any debt principal or interest. It is the numerator in the DSCR, LLCR and PLCR, and the measure lenders rely on to assess repayment capacity.
Why is CFADS used instead of EBITDA?
EBITDA ignores tax and the timing of cash flows. Both change how much cash a project has to service debt in a given period. CFADS starts from the same operating base but strips out these accounting distortions, so lenders size debt and test covenants on it.
How is CFADS calculated?
From the project’s cash flow waterfall: revenue, less operating expenditure, capital expenditure and tax, adjusted for working capital movements. Check the exact line items and their order against the financing documents, because conventions vary between transactions.
What is the difference between CFADS and free cash flow?
CFADS is a project finance measure taken before any debt service, because it sets how much debt the project can support. Free cash flow is a corporate finance measure, usually taken after some financing costs, and shows a company’s overall cash generation.