Cash Flow Drivers (5)
Chart (5) explores the main drivers of Cash Flow before Funding by plotting
Growth in Total Assets on the vertical axis and Margin Over Cash Cost of Capital
on the horizontal axis. High growth or a low margin will contribute to negative
cash flow before funding. (The I&E may show a negative margin but the cash
flow will usually look better because of depreciation added back and because
of a positive working capital contribution).
There is often a positive relationship between margin over funding and growth.
A high margin over funding allows higher growth whereas those associations
with negative margins will struggle to grow.
Financing Drivers (6)
Chart (6) also relates to cash flow and understanding the size of the requirement
for new debt finance. The vertical axis shows Cash Interest % Operating Cash
Flow and the horizontal axis shows Capital Expenditure (Capex) % Operating
Cash Flow. Figures above 100% on either axis indicate the need for extra new
debt. Arguably no association should be permanently in the top half of the
map where it will have to borrow to cover part of the interest on its existing
debt, as well as re-financing current maturities.
In the top left Capex is low (and the new financing will be manageable) but
in the top-central area heavy financing is needed for both interest and Capex.
In the extreme top-right heavy financing will be required which will increase
leverage sharply. In the bottom-left corner no new debt is required for either
interest or Capex. In the bottom-central area some extra debt, perhaps as much
again as the operating cash flow, is required for capital expenditure. In the
bottom-right area new financing for Capex is very heavy. This map assumes that
maturing debt can generally be re-financed.
Asset Cover x Repayment Ability (7)
Chart (7) summarises two fundamental aspects of credit-worthiness by plotting
adjusted Adjusted Leverage on the vertical axis and, Net Debt/ (Earnings before
Interest, Tax, Depreciation and Amortisation) EBITDA, a commonly used proxy
for ability to repay, on the horizontal axis. Associations may have poor credit
ratings through either an excessive loan to value figure or too much debt in
relation to 'cash profit'
.
Adjusted Leverage less than 50% is quite normal since grant funding is often
between 50% and 70%, ensuring strong asset cover. A figure for Debt/EBITDA
of 10 as a maximum ensures cover for interest and repayment of 30-year debt.
A figure of 14 indicates ability to service interest but not to repay loans.
Associations above 15 are likely to see leverage quickly increase up to and
beyond acceptable limits.
Debt Servicing x Repayment Ability (8)
Chart (8) plots annual Cash Interest Cover on the vertical axis against Repayment
Ability on the horizontal axis, as measured by HALCR ie the multi-period cover,
provided for interest and repayment, by the net present value of 30 years’ cash
flows.
In the short run annual cash flow cover for interest payments may easily fall
below 1.0, placing associations in the top-half of the map. An association
in the bottom-half of the map is covering its annual interest.
A figure of greater than 1.0 for the LLCR (30 constant) means that all debt
can be serviced and repaid within 30 years with some cover for slippage and
volatility in cash flows. Afigure of less than 1 means that interest will be
covered but debt cannot be fully repaid inside 30 years.
A top-left or top-middle position means immediate interest cover is inadequate
but in the long-run cash flows are sufficient to cover both interest and total
debt repayment. A bottom-right position means that current cover is satisfactory
but not long-term repayment ability. A top-right position indicates immediate
and continuing cash flow shortage and hence illiquidity combined with the threat
of insolvency.