CFADS Formula
Hello!
I’m currently preparing for Project Finance interviews at investment banks (for an internship).
Since I haven’t worked in Project Finance before, I’ve noticed that the CFADS (Cash Flow Available for Debt Service) formula varies across different sources. For example, some versions start with EBITDA, others with Revenue, and some even include Capex, while others exclude it. For instance, BIWS subtracts only maintenance Capex.
What would be the best way to explain this in an interview? My understanding is that the formula depends on the context and the purpose of the analysis (or on the banker), but I’d really appreciate the insight of someone who has worked or interned in this field.
Thank you very much in advance!
When discussing CFADS (Cash Flow Available for Debt Service) in a Project Finance interview, it's crucial to emphasize that the formula can indeed vary depending on the context, the specific project, and the purpose of the analysis. Here's how you can structure your explanation effectively:
Start with the General Definition: CFADS represents the cash flow available to service debt obligations, including interest and principal repayments. It’s a key metric in Project Finance to assess the project's ability to meet its debt commitments.
Highlight the Variability in Formulas: Explain that the CFADS formula can differ based on the starting point and adjustments made. For example:
Context Matters: Emphasize that the formula depends on the purpose of the analysis:
Tailor to the Bank’s Approach: Mention that different banks or analysts might have their preferred methodologies, and it’s important to adapt to the specific framework they use.
Conclude with Practical Insight: You could say something like, “In an interview, I’d clarify the context and ask if there’s a specific framework they prefer. I’d also ensure my explanation aligns with the project’s cash flow dynamics and the bank’s methodology.”
This approach demonstrates your understanding of the concept, flexibility in applying it, and awareness of its practical implications in Project Finance.
Sources: 21 Finance Interview Questions and Answers, 21 Finance Interview Questions and Answers, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1, Multi-Family Acquisitions Excel Test
Bump
you should think about it as the recurring operating cash flow the business generates. So you can start off at EBITDA or Revenue, it doesn’t matter, the result should be the same. Cash in (= revenue) minus cash out (= COGS, Opex, Tax, maintenance capex, NWC). From here you can start paying off investors, debt and equity, and making discretionary decisions with respect to growth capex.
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