This tutorial looks at modelling a debt service reserve account or DSRA.
A Debt Service Reserve Account or DSRA is a cash reserve which is common place in project finance deals. The DSRA is usually sized to x months of forward looking debt service. For example lenders may require a 6 month look-forward DSRA. The DSRA gives additional security for lenders in the event that a project has insufficient funds or CFADS to pay debt service.
Where the DSCR is below 1. i.e. CFADS<debt service or there is insufficient cash to meet debt obligations, then the DSRA can be used to bridge the shortfall. For example a DSRA may give project companies additional time to resolve operational issues which may occur prior to default.
For those who have forgotten, a simple definition of debt service is “debt interest + principal (or repayments)” and CFADS is simply cash flow available for debt service. Both of these terms will be defined fully in the financing documentation.
The funding of the DSRA can take many forms and is fully documented in the projects financing documentation. In most cases the debt service reserve account will be funded on the last day of construction for a greenfield project, or where a brownfield asset is being privatised it would be funded on the acquisition date. It should be noted that in special circumstances the DSRA can be built up from project cashflows during operations.
Over the debt tenor the balance of the DSRA is more than likely going to change (except where there is constant debt service, aka credit foncier repayment profile, a case we have explored in the blog CFADS and DSCR – Sculpting)
So after construction or acquisition how is the DSRA funded?
Another way to phrase that question is how does the DSRA fit into the cash flow waterfall? In the majority of cases the DSRA is funded post debt service but before distributions to equity or sub-debt. Cash is released from the DSRA when the balance is to high and taken from cash flow post debt service when there is an insufficient balance.
The DSRA is cash account and as such is an asset on the balance sheet. When the account is funded (usually at construction end), we would also credit our funding sources, usually debt (liability) and shareholder loans (can be viewed as debt or shareholders equity).
For cash flow into the DSRA we would debit the DSRA and credit cash.
For cash flow out of the DSRA we would credit the DSRA and debit cash.
As always the best way to learn a modelling technique is with a worked example.
Let’s say that we had the following debt service profile.
What would the DSRA amount be for Dec 2011, June 2012 and Dec 2012 if we were reserving for a 12 month DSRA.
If you calculated 66, 52 and 10 you’d be correct. Note that the Dec 2012 DSRA only has one more period of debt service equating to 10.
If you haven’t fully grasped this concept check out the youtube video for a more in depth view of how the DSRA is modelled.
We hope you’ve enjoyed this blog tutorial. Check out more great tips in tricks in our advanced project finance self-study training course.