Energy / infra queries
Hi guys,
Quick queries below related to modeling (tests), grateful to have your input:
- When you raise debt to finance the transaction (you also deploy equity) in Year 1, and you include it as a drawdown in CFF (in CFS), why you cannot have this as a dividend? Assume it is acquisition financing vs. ordinary financing for the asset. How would it work then so that you do no add it as a dividend? Otherwise, it would go to cash and sooner or later it would be distributed, and I have been told this is wrong.
-Can you do drawdown in Year 1, and in the same year, begin the debt repayment, or that happens the next year (same issue with depreciation)? Not sure if its valid to do it in the same year (assume so for financing fees as incurred in same time as the drawdown).
Thanks!
1/2
for your first question - it’s still unclear to me what you mean by “ordinary financing”. Normally you’d raise debt, even if we were talking about an acquisition, for either of two proposes: 1) pay for the transaction - hence a term loan kind of facility or 2) capex tranche which would help finance future growth
Under S&U, your term loan would be used to pay a part of the purchase price. Such a loan would be drawn at financial close. It’s true that at the same time, an equity check is also put forth to pay for the rest of the purchase price. But then I don’t understand why you’d think that the term loan would be used as a source of dividends for the buyer? Are you thinking about a dividend recap? That’s a different thing and debt for such a purpose would be structured in a different way.
2/2
I also don’t get your second question - why would you want to start paying down debt in the same period as you draw them? If we are thinking about a construction period, your EBITDA - Capex is anyways negative and CFADS
Maybe if you rephrase your Qs, I can offer more help
WSO - pls get your shit in order, I can’t even post my complete answer to this question. There’s some error or the other and whole sentences are missing
Thanks very much DingDongPong, really.
For Q1, I referred to your 1), the term loan to pay the transaction that goes into "Sources" in S&U. My understanding is that we would include this under CFF ("Debt drawdown") and this would then lead to extra cash, that could be either a. channelled as extra dividends or b. stay as cash in the Balance Sheet. Appreciate that I am surely wrong, so grateful for guidance for what to do with this term loan (as this will be part of the Balance Sheet under debt, there needs to be a counter-balance on the other side).
For Q2, meant that once you drawdown the debt (term loan) mention above in the Debt Schedule, you would need to do the repayments as a result. Do these repayments start in the same year as the drawdown (e.g., Year 1) or usually is done from Year 2? Regarding the D&A, meant that if you have a one-off growth capex in Year 3, you start depreciating that capex (growth asset) from Year 3 as well, or from Year 4 onwards?
Many thanks @DingDongPong !
Can’t you just raise less debt to mitigate the issue? If we’re talking about project financing here, typically there are strict distributions conditions that project has to meet in order for dividends to be distributed, and in most circumstances, one of the conditions is that first repayment/debt service date has to occur.
Regarding your second question, that’s just a matter of timeline. Depending on when you raise your debt and the frequency of debt service, you might need repayments in the first year. For instance, debt is raised in March 1st and credit agreement dictates payment dates on every Sep 1st and Mar 1st, then yes, you will have repayments within first year. Infra models are usually built quarterly or monthly so you will see repayments within year 1. But just to be clear, you would never raise debt on day 1 and then have payment dates (principal/interest) on day 1.
I think you've got this mixed up a bit. When you raise debt you will then use these funds for something (could be Capex, M&A, divs etc.). In simple terms yes, you raise debt and cash on BS also goes up (you raised money after all therefore you've got to show that on BS) but you then use that for something so cash goes down again. On your cash flows you reflect a cash inflow from debt raising but also reflect the outflow, whether that's a dividend, Capex or M&A. Its cash going out so need to show it. Net cash impact is what matters and you'll get the BS to balance. In terms of repayments you usually start paying in next FY or maybe quarter depending on the case but for simplicity you can assume debt raising at Dec-31st and interest payments in next FY.
Think your Q on repayments/depreciation is solved for now - repayments would depend on lender terms and how other provisions like sweeps apply
Ofc while you can start repayment the same year as you reach financial close/drawdown (in case the latter isn’t the same as the date of financial close), you don’t repay on Nov 1, 2023 if that was your date of drawdown. Repayments are usually made half yearly if not annually and interest payments usually quarterly (both on end of period basis)
Appreciate all your answers!
My main query then (on Q1) is, that you are using the debt raised for funding part of the acquisition (let's say 65% of the Total "Uses" in S&U). How would you then flow this debt (e.g. term loan), into the 3 financial statements? As said, the use for this debt is to finance the acquisition of the asset by the Fund, not to finance any capex or other asset stuff.
Apparently, it is not right to issue this extra cash as dividends as it is part of the cash raised to finance the acquisition.
Many thanks in advance!
Didn't we just explain this above?
There's no "extra cash", what you raised in debt was all channeled to acquire an asset funding part of the purchase price. You reflect that cash outflow in the CF and then there's no "extra cash" to use for dividends or keep on BS
Agreed, thanks.
But what is the item that you refer in the CF as cash outflow; in other words, what is the item you need to put as outflow to counterbalance that £Xm debt raised (inflow) as the way to channel that cash to acquire the asset funding part of the purchase price? Not clear on that.
You can record it as Acquisitions or Asset Purchases etc. under CF from Investments. There's no set name for it but it is indeed cash going out so need to reflect that.
Actually I think it needs to go via retained earnings, as it is a previous dividend to the seller which is part of the payment.
If you put it under asset purchases (or similar), there is no cash inflow to balance raising debt in the other side of the balance sheet. With a negative retained earnings, the big raise in debt is balanced.
Thanks!
Not sure I understand but what you describe doesn't make much sense to me. Try and think logically and with financial sense what the transaction is and what you need to reflect rather than just trying to balance the BS via random cash inflows / outflows.
To give you further colour:
Need to acquire an operating renewables asset. Will be financed by using debt (sizing it via DSCR method) and sponsor equity.
Thus, this debt financed for the acquisition, will need to be included as a drawdown in Year 0 (Date of the acquisition), and therefore, repayments and interest expense will happen as a result of this debt.
In year 0, at the same time, due to the drawdown of debt, we need to balance the BS with a cash outflow, in this case, dividends in the form of cash to the seller so that they get the full acquisition price from the seller, if that makes sense.
Therefore, now used retained earnings as a way to balance the balance sheet in year 0, but grateful if any other ideas. Hope you got what this looks like.
Putting some numbers onto this: suppose you’re acquiring a 100mm asset and leverage it with 80% debt. Assets increase by 100mm, debt increase by 80mm, equity increase by 20mm. What’s challenging about this?
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