Cash sweep modelling

Stand alone cash sweep analysis is an alternative metric for refinance risk and repayment ability in cashflow models for project finance. This article outlines the key features of a modelling cash sweep calculation and its application in analysis of a project finance model.

During a Cash Sweep, 100% of cashflow available for debt service is used to repay principal and interest. Stand alone cash sweep analysis is used to calculate the amount of time it takes to repay the debt in full and should not be confused with Cash Sweep mechanics governed by the Term Sheet.

It is an alternative to interpreting debt metrics, such as the LLCR and RLCR, which also analyse the project’s ability to repay debt. It is a quick and useful way of analysing the impact of downside scenarios.

Application of project finance cash sweep analysis

Cash Sweep analysis can be applied on the base case but will be the most beneficial when applied on a series of downside scenarios. 

A cash sweep that demonstrates debt being fully repaid in the most conservative downside scenario will reinforce the soundness of the project. Having a stand alone cash sweep is beneficial for a number of reasons as outlined below.

Quicker cash sweep modelling

It is easier to set up than all the mechanics needed to model the complete interpretation of a Term Sheet Cash Sweep that is triggered by financial covenants, but provides comparable levels of analysis.

Dynamic cash sweep assumptions

The start date of the sweep can be set up as an input, which makes it flexible. This can then be set to either the start of the debt facility, end of completion or the debt maturity to analyse refinance risk.

Effective communication of cash sweep analysis

A graphical representation of the Closing Debt Balance in the Cash Sweep account and in the usual debt account gives a good understanding of the project’s cashflow characteristics.

Modelling the stand alone cash sweep

Step 1: Determine Cashflow Used for Cash Sweep

The cashflow used for a stand alone cash sweep is CFADS less Interest Payable on the cash sweep debt balance – Cash Available for Principal.

Screenshot #1: Cashflow used for a stand alone sweep

Step 2: Set-up Flag for Sweep Start Date

Setting up a flag that illustrates when the sweep is in place enables the start date to change and helps to reduce the complexity of the mechanics in the cash sweep debt account. The flag drives off the sweep start date and is a simple binary [1, 0] result.

Screenshot #2: Setting-up flag for sweep start date

Step 3: Set-up Stand Alone Cash Sweep Account

The stand alone cash sweep account is set up so that during the periods before the sweep, the repayment is the scheduled principal and once the sweep starts the repayment switches to the Cash Available for Principal.

Screenshot #3: Cash sweep calculation

Screenshot #3 demonstrates that during the period ending Dec-08 (before the sweep start date of Jan-09), the repayment is the scheduled principal of USD 0.19 Million and once the sweep starts the repayment switches to the Cash Available for Principal, i.e. USD 17.07 Million in period ending Jun-09.

Step 4: Determine the Payback and Repaid Date

The analysis on the debt account gives us the repaid date and the time it takes to repay in the cash sweep.

Screenshot #4: Analysis to determine the payback and repaid date in the cash sweep

The example above shows the debt is fully repaid by 31-Dec-11 or it takes 2.50 years to pay back the debt under the cash sweep analysis.

Step 5: Link the Outputs into Scenario Table

The payback and repaid date as illustrated in Step 4 are key outputs which can be linked into a scenario table highlighting the payback under each scenario.

Screenshot #5: Sweep Payback under various scenarios

Step 6: Create Graph

Finally, the sweep analysis can be compared against the debt account by presenting it in a graph.

Screenshot #6: Graph Presentation

Constraints with a Stand Alone Cash Sweep

• Tax calculations are not as accurate as in the modelling of the full Term Sheet, however the difference is often less than one quarter of repayments. 
• The flexibility can sometimes cause confusion. Make sure to present all timing assumptions clearly to decision makers.

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