Levered Free Cash Flow Calculation
What do you do with the principle part of an amortizing bond when calculating levered free cash flow?
You have an amortizing bond. The principle part of the amortization payments is not interest, but at the same time this is a required cash payment and thus not available to equity holders.
My textbook says "If there are mandatory repayments of debt, then some analysts utilize levered free cash flow which is the same formula as unlevered free cash flow, but less interest and mandatory principal repayments." However it then gives the formula Unlevered Free Cash Flow + Net Borrowing - Interest x (1 - tax rate). Does this mean if I took out a 50mm loan that levered FCF would increase by $50mm?
Levered Cash Flow Formula and Debt Paydowns
While unlevered free cash flow looks at the funds that are available to all investors, levered free cash flow looks for the cash flow that is available to just equity investors. It is also thought of as cash flow after a firm has met its financial obligations. This includes paying off all mandatory debt payments which would include amortizing bonds or maturity payments.
Levered free cash flow is calculated as Net Income (which already captures interest expense) + Depreciation + Amortization - change in net working capital - capital expenditures - mandatory debt payments.
It is important to note that even if a company is profitable from a net income perspective and positive from an unlevered free cash flow perspective, the company could still have negative levered free cash flow. This could mean that this is a dangerous equity investment since equity holders get paid last in the event of bankruptcy.
Learn more about how to calculate unlevered and levered free cash flow on a detailed thread on WSO.
Read More About Levered Cash Flow on WSO
- Levered vs. Unlevered Free Cash Flow Difference
- Here's a Quick Way to Value Unlevered & Levered Cash Flows
- DCF Analysis: Why do we use an unlevered Free Cash Flow to Firm, but discount it with the WACC (Levered)?
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If you took it out right at the end of the year, therefore getting to skip interest payments on it? Yep. That's the way I learnt it, at least.
I like to put principal amortisation below "levered FCF" as this is sometimes financed with an equity injection and it makes it easier to see if both lines are in the same section. Also, because of FCF sweeps (if applicable), you'd want to separate the cash interest line from debt amortisation otherwise you'll just see levered FCF of 0.0 (assuming 100% FCF sweep) in your model which isn't very pretty to look at. It really depends on the company and situation you're modelling. My models are always unique for every company, and I always model it in a way which makes sense to me (and which would make sense to anyone else looking at it). There's no point getting caught up in semantics if someone else has to go through your model line by line just to understand what's going on.
Hope that helps brother.
Just to add,
In reality, I rarely ever use the term "Levered FCF". Instead, I'd call it something like "FCF before debt service" and "FCF after interest" to make the distinction between the two.
levered cash flow is just cash flow from op - capex. In some debt investments you look at them to see how much cash you have left before paying down any principal on the debt. In a LBO model you use this number + any cash left from previous period - min cash + any revolver being drawn to be the mandatory debt cash paydown. Hope this clarifies.
I've seen a few modelling guides who teach this RCF drawdown when cash short on principle . Obviously they don't read intercreds and SFAs. I've never read loan docs from the LSTA but it may be different over there.....don't see why it would be though.
No this is right. Levered FCF = Cash flow from op - capex is just another way i thought?
Indeed those were the good days, but ARE generation is getting fucked with shitty markets and stricter regulation that will bring us two decades of declines, lower pay, and harder work. Life sucks bros.
To add to the above, main reason RCFs won't be utilised to pay back a mandatory amort is because senior secured debt will usually come with a debt service coverage ratio covenant of at least 1.0x, meaning the company needs enough unlevered FCF to fund debt service (interest + mandatory amort). In the event where you'd need to draw down on an RCF to fund the mandatory amort, you will already have blown the covenant which will freeze RCF drawings. They can usually be cured with equity (called equity cures) which will get added to the unlevered FCF number for the covenant test.
Example: company MauFuckinPreftigeUpinThisBiatch has LTM unlevered FCF of 100m, and total debt service for the period is 40mm cash interest + 90mm mandatory amortisation.
The debt service coverage ratio will be 100/(40+90) which is FCF, bringing the covenant test for the period to (100+30)/(40+90) = 1.0x To be honest, I'm not 100% sure what I said about intercreditor agreements is true (assumed so) but I knew there had to be a more concrete technical reason why this doesn't happen, and then I remembered this.
Now if shareholders can't fund the 30mm injection (or simply refuse to coz their equity is so far out of the money), then we got ourselves a special situation.
This - and typically your coverage ratio is going to be well north of 1x (and there are also likely going to be covenants about what your leverage ratios are for total funded debt), so you're never really going to get into the situation where someone is trying to draw on a RCF to service other debt. If they were put into that situation they're already fucked as it is.
Calculation of Levered FCF (Originally Posted: 09/05/2009)
Hi,
To calculate levered FCF from Net Income, do we need to add back items on the income statement like 'minority interest', 'equity earnings in affiliates', investments gains and 'income from discontinued operations' to get to FCF?
Typically, do we only pay attention to income from continuing operations in calculating EBITDA? How about for FCF?
I.e. either start with Net income or EBITDA:
Net income + D&A + issaunce/(repayment) in debt or principal amortization - change in WC + change in other assets/liabilities (e.g. goodwill, non-current assets/liabilities) - capex - investment in intangibles = levered FCF
To calculate levered FCF from EBITDA, should it be:
EBITDA - net interest expense - taxes + issaunce/(repayment) in debt or principal amortization - change in WC + change in other assets/liabilities (e.g. goodwill, non-current assets/liabilities) - capex - investment in intangibles = levered FCF
Thank you very much.
Umm I'm pretty sure that Free Cash Flow by definition is unlevered. Where are you getting these formulas?
Levered FCF does exist. Discount it by the cost of equity to arrive at equity value.
Sorry, to be clear, I simply mean levered cash flow after debt service - i.e. to be used in an LBO
The key differentiator is the tax number you pick. For FCFE, I would suggest you always start from Net income. For the EBITDA method you will need to calculate taxes on EBIT which is not always well regarded as a technique.
To sum it up
FCFF: Start from EBITDA FCFE: Start from PAT
dont take banker88's advice ever.
Calculating Levered FCF (Originally Posted: 12/28/2015)
I've started interview prep for PE and I've noticed some inconsistencies between how levered FCF is calculated between guides and model tests. Thus far I have seen three types of calculations:
1) EBIT*(1-t) - capex + D&A - (change in NWC) - AT cash interest 2) EBITDA - capex - total taxes paid - (change in NWC) - AT cash interest 3) Net Income + D&A - capex - (change in NWC)
I was wondering which one is correct and which one is most often used by PE shops. I think the big difference between the 3 is how the tax effect of D&A is modeled out. I believe the first one is the only one that properly models out the fact that the tax effect of D&A is a non-cash effect, that the taxes paid, calculated via multiplying by 1-t, is cash taxes paid, which is what actually influences CF.
The easiest is just looking at Cash Flow from Operations less Capex... Since Cash Flow from Operations starts at Net Income. That is under the context of having a full 3 statement model.
However your model is set-up should dictate how you bridge...
For the most part, I do not think the modeling tests go into that much depth via modeling what precisely cash taxes are. In reality, the change in deferred assets/liabilities usually encapsulates the impact of various items on cash taxes (change in DTA/DTL associated with depreciation of assets will help reconcile income tax to cash taxes).
Even if you're building out a full fledged three statement, the practice models I have seen don't have you build out a full DTA/DTL schedule unless it's related to NOLs.
For three statement, as the poster said above the easiest is to just move from your CF statement in creating your levered FCF (CFO - CFI is essentially levered FCF). The cash flow from operations will incorporate any necessary adjustments in order for your B/S to balance. For simpler models, it really shouldn't matter because all the formulas you listed will match for a simplistic non 3 statement analysis. I typically use Net Income method you outlined as I build most P&Ls down to Net Income and because it allows you not to worry about adjusting things after tax.
Levered FCF build- help (Originally Posted: 10/25/2014)
Question for anyone at the office right now, unsure why this is giving me a headache....
Building to levered fcf for a growth company to value their first manufacturing facility project. Taking out interest expenses and capex netted against the debt issued to fund the construction. During construction, what isn't financed by debt is financed through injections of equity.
For a levered fcf number how should those equity injections be accounted for (if at all). If there is 5 million in capex funded through an equity raise of 5 million (no earnings that year) is the levered fcf for the year 0, or -5.
Our old model has FCFE calc'd as EBITDA less interest and taxes added to total investing/financing cash flow (so essentially FCFE as being the net change in total cash position).
if you want (for the sake of you getting out of the office) just build in a quick toggle and just ask your associate on monday?
however, to answer your question, i've never seen equity infusions count as part of a levered fcf calc.
Don't include equity infusion in LFCF calc. Include it in change in cash so total delta is 0 for the year
LFCF and UFCF are supposed to describe cash the firm is generating through its business. I can't imagine why you'd use debt/equity injections for that calculation. Dukebanker12 got it.
Yes. I guess I'm confused because in a normal fcf/dcf build I'm used to looking at a business model in the course of its life with fairly steady items YoY. In this case you have enormous capex upfront for construction that you aren't earning on until 4 years out and not earning fully on until about 6 years out. Basically it will calculate as having 0 equity value (and probably pretty close to that in enteprise value as well). Is there any way to work around this or is a dcf just a poor valuation methodology to use for a construction project / something with large upfront costs.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/valques… - Aswath writes to add inflows from newly issued debt for FCFE. Is this not correct?
Levered FCF (Originally Posted: 02/01/2009)
Does anyone know the formula for levered FCF? Thank you.
you use net income instead of ebit and the rest stays the same
Instead of net income, you can also use EBIT(1-T) as a similar proxy.
net income + depreciation - increase in wc - capex +(increase in debt - repayment of debt)
Agree with WHMD. Most times I've seen levered FCF it has been off EBIT(1-t). A lot of stuff below EBIT is hard to flesh out and normalize, so most just use EBIT(1-t) because it is 'cleaner', ie you know all the non-recurring adjustments have been made to get from GAAP to non-GAAP.
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