THE CRUCIAL ROLE OF CFADS & DSCR METRICS IN PROJECT FINANCE
In project finance, Cash Flow Available for Debt Service (CFADS) and Debt Service Coverage Ratio (DSCR) are two critical financial metrics. These metrics are used to assess a project’s financial viability, determine the maximum amount of debt the project can support, and monitor the project’s ability to meet debt obligations.
ASSESSING A PROJECT’S CASH FLOW WITH CFADS
CFADS measures the cash generated by a project available to meet debt obligations. It provides an accurate representation of a project’s ability to generate cash and meet debt obligations. Lenders use CFADS to determine the maximum amount of debt a project can support and to assess the project’s cash flow.
MONITORING THE PROJECT’S ABILITY TO MEET DEBT OBLIGATIONS WITH DSCR
DSCR is the ratio of CFADS to debt service payments. It is a critical measure of a project’s ability to meet its debt obligations and is monitored by lenders throughout the life of the project. DSCR provides an ongoing assessment of the project’s financial health and its ability to meet its debt obligations.
THE IMPORTANCE OF CFADS & DSCR IN PROJECT FINANCE
CFADS and DSCR are crucial metrics in project finance. They enable lenders to assess a project’s financial viability, determine the maximum amount of debt the project can support, and monitor the project’s ability to meet debt obligations. These metrics are essential in ensuring that projects are financially sustainable and successful.
USING CFADS & DSCR TO MANAGE PROJECT RISK
CFADS and DSCR can be used to manage project risk. By assessing a project’s cash flow and debt service coverage ratio, lenders can identify potential risks and take steps to mitigate them. These metrics can also be used to evaluate the impact of changes to a project’s financial structure, enabling lenders to make informed decisions.
(PROJECT FINANCE INSIDER’S TIP: various industries have various standardised minimum DCSR ratios that need to be satisfied for the project to go ahead, depending on the perceived risk of the industry. Though there is no industry standard, a DSCR of at least 2 is considered very strong. Many lenders will set minimum DSCR requirements between 1.2 and 1.25 => and it needs to be reflected in the Project’s Financial Model for the Project to go ahead.)
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