From Principles of Project Finance

13.5 CONTROL OF CASH FLOW

Just as during the construction period of the project the lenders only allow drawings to be made and costs to be paid when they are satisfied that these are for the budgeted and approved purposes (cf. 13.3.2), similarly, during the operating period, the lenders normally control the application of the cash flow of the project by controlling the way in which the cash is used. These controls include:

  • an order of priorities in applying cash, known as the "cascade" (cf. 13.5.1)

  • requirements for the Project Company to establish reserve (or escrow) accounts (cf. 13.5.2)

  • control on distributions of cash to investors (cf. 13.5.3)

  • in some cases, cash sweep (cf. 13.5.4) or cash clawback requirements (cf. 13.5.5)

13.5.1 The Cash Flow Cascade

The controls for application of cash earned by the Project Company from its revenues are set out in a cash flow cascade (or "waterfall,") setting out the order of priorities for the use of this cash. A typical order of priorities is:

  1. Payment of fuel or raw material and operating costs, including the O&M Contract (based on the agreed budgetary procedures cf. 8.7.3) and taxes (i.e., all the costs the Project Company needs to pay to continue operating the project).

  2. Fees and expenses due to the agent bank, security trustee, etc.

  3. Interest on the debt and any swap or other hedging payments [1]

  4. Debt repayments (to the "target" schedule if there is one cf. 13.2.4) 1

  5. Payments to the Debt Service Reserve Account, and other Reserve Accounts...

Copyright Yescombe Consulting, Ltd. 2002 under license agreement with Books24x7

Products & Services
Business Transaction and Personal Business Software
Business transaction software and personal business software is used to facilitate any aspect of business transactions.
Invoice Software
Invoice software is used to create, print, and send invoices to customers for payment.
Banking Software
Banking software offers high-end technological and economical banking solutions to mid and large-size banks worldwide. Banking software equips banks with the latest technology trends in banking.
Direct Mail and Fulfillment Services
Direct mail and fulfillment services are specialized contract services that broadcast mailed marketing materials to target audiences who are usually identified by databases, provided by a direct mail company or the client.
Point of Sale and Kiosk Computers
Kiosks and point of sale (POS) systems are used for sale processing and inventory tracking.  Examples include electronic cash registers, computerized check-out systems and self-serve kiosks.

Topics of Interest

13.6 DEBT PREPAYMENTS AND REFINANCING A cash sweep is a form of mandatory (compulsory) prepayment of the loan by the Project Company. Other mandatory prepayments are normally required: If the...

OVERVIEW This chapter examines some of the main financial structuring issues likely to arise once the commercial fundamentals and risks of the project, and the cash flow that results from these, have...

13.2 DEBT SERVICE Debt service (i.e., loan interest payments and principal repayments) is one of the biggest factors in the financing structure that influences an investor's rate of return. The...

OVERVIEW The life of a project can be divided into three phases: Development. The period during which the project is conceived, the Project Contracts are negotiated and signed, and the equity and the...

13.1 DEBT:EQUITY RATIO As already discussed, a high ratio of debt is the essence of project finance. Within prudent limits, therefore, Sponsors wish to limit the amount of equity they invest in a...