Capex Facility - Drawdown

Hi all,

 

Let's say that you have a Capex facility with a tenor of 10 year to fund 70% of Capex. Let's say Capex is $20m per year. Do you draw everything in year zero, e.g. $140m, or do you do the drawdown each year, i.e. add $14m each year to your debt?

 

Thanks!

Comments (6)

 
Jan 13, 2021 - 1:28am

Assuming you have to do the capex either way, you would have to use cash on b/s to fund instead of debt if you did not draw all at once. The incremental interest from using debt up front is worth it if the capex funds a project that's return is higher than the cost of capital which includes cost of debt which includes interest expense. 

 

An analogy to consider  -- would you rather do an LBO where you have to fund more equity up front and slowly recap out your equity with installments of debt annually or take all of the debt up front and put in less equity? Assuming you think the business can pay down the debt you would rather use more leverage up front to generate a higher return even with higher interest expense.

 
Jan 14, 2021 - 3:48pm

I don't disagree with you and think we may be thinking about it a different way. My take on the question was that it was asking if you have $20M in capex needs each year for the next 5 years, and each year 70% of that can be funded with debt, it would make more sense to fund that on an as needed basis rather than borrowing the full $70M on day 0. As in the cash proceeds from that facility, assuming it can only be used for purposes of Capex, would essentially just be sitting around unused and you paying interest on it without the ability to generate returns with it.

If you can drag that capex forward, as I believe you are alluding to, and earn a higher rate of return than the cost of debt, then it makes sense to do upfront.

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