Problem forecasting debt payments in dcf

Hi,

so I need to forecast debt schedule from this info: “Total amount borrowed is $97m, debt is amortised over 15 years, all-in annual cost of debt is 5.50%”

This doesn’t make sense right? If debt is amortised over 15yr. annual payment is $97m/15 ~ $6m (flat). You can’t pay off this amount at a given annual cost of debt (i.e. annual interest) of 5.50% unless there’s some unspecified bullet payment at the end right?

Can somebody please shed some light here?

 

How do you expect to pay 5.50% annual interest if you talk about principal only?

Edit:

$97m x (0.055) x 15 + $97m divided by 15 will give you your annual cashpay amort+interest expense. I.e. $177m paid back over 15yrs

If interest accruing instead of cashpay, $97m x (1.055)^15 divided by 15. I.e. $217m paid back over 15yrs

 
Most Helpful

You are confusing amortisation (i.e. debt service of principal) with cost of debt (i.e. debt service of interest). The debt service in period 1 is: 6.46m principal (97/15) + 0.53 interest (975.5% i.e. on opening balance). Thereafter, whilst your principal amount is fixed at 6.46m, your interest expense decreases -> 90.545.5% -> 84.08*5.5% etc.Not sure what you mean by this statement "you can't pay off this amount ..." -> this depends on cash flow available for debt service.

Whether or not there is or isn’t a bullet depends on whether the debt is fully amortising or not. The fact that it amortises over 15 years could be notional amortisation, i.e. it was sized over a 15-year profile, however the legal term is say 10 years. In this case, in year 10 you will indeed have a balloon.

 

Not really correct. The first part can be correct, if it is interest-only / bond-like -> annual interest is the same for 15 years. However, the second part is not correct from a cash flow perspective, as in an interest-only structure there is no amortisation -> the entire debt is due at the end of the 15 year term. The overall figure of 177m is correct as all-in cash paid, but the cash flow timing is not. You can sort of make the argument that you’d be calculating an “implied annual debt service”, but I question the useability of this, since principal repayment isn’t expensed, therefore even from a tax optimisation perspective this calc is kinda pointless.

 

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