Description

The cash flow waterfall ensures that each cash flow item occurs at the correct seniority to other items. This tutorial outlines key categories of cash flow items and how to present the waterfall in comparison to the cash flow statement in a project finance model.

In project finance, a project’s summarised using a cash flow waterfall. Which shows the priority of each cash inflow and outflow. The waterfall ensures that each item occurs at the correct seniority to other items. The waterfall becomes especially important when illustrating debt repayments of many debts tranches with reducing seniority.

The concept of the waterfall is also in more detail in Corality Academy’s project finance modeling training course. And in further detail in the advanced debt modeling and project finance course. The theory course of project finance is also in the Concepts & Applications course.

In a project finance deal, the main security for the financier is the projected cash flows from the project and lenders. Who typically finance 70-80 percent of an infrastructure. The project would like to have full control over what goes in and out of the project’s account. That is why various accounts will be set up prior to the financial close between the borrowers and the lenders to ensure that project cashflows are appropriately managed.

During the loan term sheet negotiation, all the accounts. That needs to be opened and managed by lenders will be set out in the term sheet or in a separate agreement sometimes called an “Accounts Agreement”. In addition, the term sheet will specify the seniority of each item which is a Waterfall. The cash flow waterfall statement is also one of the main financial statements to be included. In the project finance model and all return and debt ratio calculations will refer to the waterfall.