Debt Capacity
| This sheet summarises the different approached to the assessment of borrowing capacity, already covered in the financial profile, using nine different measures based on: | |
the balance sheet estimated existing use market value based on a rent multiple the income and expenditure account short-term cash flow long-term cash flow |
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It is possible for the user to select any year of the forecast for analysis.
It is also possible for the user to set the limiting maximum or minimum value
for each capacity measure.
The principle, for each measure, is to calculate the maximum debt based on
either a percentage of an asset value, a multiple of EBITDA, or on the maximum
interest payable, at the effective interest rate, to achieve minimum cover.
In the case of repayment cover the average percentage of debt to be repaid
each year, based on the average term of the debt, is added to the effective
interest rate to calculate the maximum allowable on total debt service to achieve
minimum cover and hence maximum debt capacity.
| The following worked examples illustrate
the calculations for 1) Gearing, 2) Interest Cover and 3) Cash Debt Service Cover: |
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Gross
debt = 75 million |
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| 1 | Gearing
= Max 60% Tangible net worth = 150 million |
Maximum
debt = 0.6 x 150 = 90m Extra capacity = 90 - 73 = 17m |
2 |
Effective
interest rate = 6.7% SBIT/Gross Interest Min 1.1 times SBIT = 6 million |
Maximum
debt = 6/1.1/0.067 = 81.4m Extra capacity = 81.4 - 75 = 6.4m |
| 3 | Annual
repayment % = 3.3% Cash flow before interest = 6.5 million Cash Debt Service Min 0.75 times Interest and repayment = 6.7% + 3.3% = 10% |
Maximum
debt = 6.5/0.75/0.10 = 86.7 Extra capacity = 86.7 - 73 = 13.7m |
Debt capacity is summarised under the six headings, some
of which may give positive and some negative figures. For example the I&E
and short-term cash flow measures may indicate no spare capacity while the
balance sheet and long-term cash flow measures may indicate additional capacity.
This implies that current level of surplus is poor in relation to interest
payable but the level of debt is comfortable when compared with asset values.
Short-term cash flow may also be weak but long-term cash flow much stronger
or surpluses improve and development investment reduces.