Corporate and Project Finance Modeling

Chapter 10Adding Debt to a Corporate or Project Finance Model by Programming Cash Flow Waterfalls

Once after-tax free cash flow has been established you can think of the remaining calculations in the model as allocating the cash flow among different investors into alternative buckets. If debt is part of a project finance or acquisition transaction or it is on the balance sheet of a corporation, then some of the free cash flow is distributed to the lenders and some of the cash flow is left over for equity investors. There may be multiple debt tranches and it is possible that further allocations of cash flow must be made among various different debt and equity investors. While much of the time spent in financial modeling must involve analyzing the economics of free cash flow drivers, it is also often essential to accurately reflect the financial structure of the company and the allocation of the free cash flow. This chapter addresses various modeling issues that arise when incorporating debt into a corporate finance, project finance, acquisition, or merger model.

Evaluating risks faced by lenders is vital for a host of financial and economic issues. This implies that reflecting the specific features of debt can be a crucial part of the modeling process. Debt features that need to be addressed in all sorts of financial models include: (1) the size of debt, (2) the manner in which debt is borrowed, (3) the repayment structure and tenor of the debt, (4) interest rates and fees paid ...