Understanding Liquidity and Cash Burn
Hi guys,
In my current seat I spend a lot of time looking at leveraged equities and stressed / distressed credit names. Was hoping to get a better understanding about how analysts view different companies real liquidity position and the amount of liquidity they actually have to burn until a material liquidity event occurs (i.e. complete dividend suspension, loan/bond interest default, preemptive restructuring to clean up B/S etc. etc.).
I know the typical way one may look at liquidity is cash & cash equivalents + revolver availability + potential asset sales = Available Liquidity. I'm more interested in knowing how other analyst's calculate/analyze the depletion of that liquidity. My rationale is that if you can get a better understanding of a companies true liquidity position vs their fundamentals and maturity walls, it'll be a great way to understand how/when the market can start pricing in a recovery or if they can even survive without a restructuring/LME.
All input welcome!
Your definition is likely too generous but depends on industry and how stressed we are talking.
Cash + RCF availability net of L/Cs outstanding is my standard. Only add cash equivalents if they are literally treasuries and if the company is working capital volatile you should reduce cash by some min cash assumption.
Yeah probably a tad bit generous but let’s assume distressed with legitimate refinancing risk if things don’t turn around. That’s why I’m looking to the liquidity and cash burn / run rate.
If they are distressed today (pick any plausible reason) but their next maturity is 3 years out.. this gives management some time and provides a potential opportunity for the enterprising investor (who is bullish on the recovery story).. but if liquidity runs out in a year and a half.. they both are in trouble.
Which makes me curious about how others are going about projecting liquidity and the companies true run rate.
To analyze a company's liquidity position and its cash burn until a material liquidity event, here are some key approaches based on the most helpful WSO content:
Liquidity Rollforward Analysis:
Components of Liquidity:
Covenant Rollforward:
Stress Testing Scenarios:
Key Ratios and Metrics:
Market Implications:
By combining these analyses, you can gain a comprehensive view of a company's liquidity position and its ability to navigate stressed or distressed situations.
Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, How to Prepare for Restructuring Technical Questions, Seeking advice on Corporate Banking modeling
Have you looked at 13WCF from rxcos? Might be pretty onerous doing a weekly one but you could tweak it for your own timeframe.
For stressed / distressed situations where liquidity is a question you should build a 4-8 quarter cash flow walk (EBITDA -> FCF -> other S/U -> change in cash) that flows into updated liquidity levels (Cash/Liquidity BOP + Change in Cash = Cash/Liquidity EOP). Bake in some assumption for minimum cash levels that triggers revolver draw if necessary and you should also model an RCF availability trigger as some will have anti draw provisions if leverage / FCCR breaches certain levels so those should also evolve on a rolling basis. Other things that can trigger short term liquidity squeezes are LC/surety bond cash collateralizations, NWC squeezes (DPO could be running hot, inventory suppliers could demand cash before shipment vs on delivery) and also check the fine print for revenue rec / invoice policies which can hide small clues. For example, I was once invested in a distressed manufacturer where part of the revenue squeeze came from their payment terms being structured as paid on delivery AND installation which results in a dozen potential reasons things could be done late and you end up waiting an extra 7-14 days for a check which can make a difference.
This is incredible. Thank you for the detailed response as it touches on exactly what I’m looking for vs the basic liquidity roll forward assumptions. It all comes down to the FCF I guess (and capex requirements) but can see how the nasty NWC changes would have as well. Will be paying closer attention and asking management more detailed questions regarding it. Thanks!
On this note, what else can drive cash generation below EBITDA beyond capex and NWC? It seems like the end goal is just to have well thought out UFCF burn rate and accurate cases of liquidity events (revolver draw blockers, vendors change to COD, management strips to maintenance capex only, etc) built into the model?
Great question. Most shops look at the standard cash + revolver + asset sales formula, but the real alpha in distressed modeling is understanding the velocity of cash burn at the operational level, not just the balance sheet level.
The fastest-growing lenders and distressed funds we work with don't just model the maturity walls; they model the operational bottlenecks that drain cash before a default even happens. If a company is burning $3,750 per file in manual processing costs (which is average for non-bank lenders), that operational inefficiency accelerates the liquidity event.
If you want to build a better model, start looking at their operational headcount vs. file volume. If headcount scales linearly with volume, their cash burn will accelerate faster than their fundamentals suggest during a stress period. The shops that survive are the ones deploying AI agents to handle the 15-20 manual touches per file, cutting their operational burn by 30-40% without adding bodies.
AI slop is a bannable offense
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