The aim of this tutorial is to provide an understanding of what the Cashflow Waterfall is and how to set it up correctly in a financial model. The tutorial will also focus on the cashflow available for debt service (CFADS). Given that the cashflow waterfall is the most common financial statement in a project finance transaction, the intended audience are those preparing or analysing project finance related financial models.
What is a Cashflow Waterfall and why is it a powerful tool for project finance?
The Cashflow Waterfall, not to be confused with Cashflow Statement, together with CFADS are often the most important financial statement and cashflow item respectively in project finance.
Project finance is a method of financing the development of a particular asset or pool of assets whereby repayment of funding is limited to the cashflow generated by the asset or pool of assets. Hence, given lenders are essentially lending against a stream of future cashflows generated by the asset or pool of assets and given that there are often multiple parties that are providing funding, it is important to understand who gets paid first. This is where a well-structured Cashflow Waterfall becomes a powerful tool as its key difference to a Cashflow Statement is that cashflows are all arranged in seniority, giving clear sight to lenders and equity the cashflows available to them.
Quite often when transactions are large and complex, the waterfall can turn into a minefield. Therefore, this tutorial attempts to illustrate how a typical waterfall should be laid out with an explanation of the categories and the key line items that it should or may contain.