Credit/Capacity Maps 
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.
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