[PDF] Cash Flow and Liquidity - RMG Financial

Cash Flow and Liquidity - RMG Financial

Cash Flow Interest Coverage » Measure of cash flow / Interest, Measure of cash flow / Interest and leases Debt Service Capacity » Measure of cash flow / Financial charges Liquidity Internal » Unrestricted cash on the Balance Sheet Liquidity External » Analysis of undrawn (committed?) bank lines / assessment of access to equity

Modul-4- The Financial Statement part IIII- Statement of Cash

Indirect cash flows—alternative operating cash flow reporting method; reconciles net income to operating cash flow to report operating cash flows 4 Cash flows from investing activities—cash provided or used by the disposal and acquisition of long-term assets 5 Cash flows from financing activities—cash provided or used

ANALYSIS OF THE STATEMENT OF CASH FLOW AND FINANCIAL RATIO

Net Cash Flow to Equity CFO is not the Cash Flow used for business valuation purposes Nevertheless it is important to understand how the same is derived Once that is understood, it is far easier to understand the differences between various types of Cash Flows and easier to unde rstand the cash flows used for valuation purposes Neither CVA

Project Cost Management - PDHonlinecom

Project Cash Flow The overriding similarity between project cash flow and company cash flow is that there are only two ways for cash to flow: in and out There’s no secret as to which is preferable here Objectives of Cash Flow Management 1 Initiate and maintain positive cash flow throughout life cycle of project 2 Maximize sources of cash 3

Chapter 5 Revenue & Cost Analysis

3 Other Cost Concepts Cash vs Noncash Costs: Cash costs are those which represent actual monetary outlays Noncash costs do not directly represent such outlays but are permissible deductions from revenue, the sole impact of which is to reduce the income tax liability (depreciation and de - pletion)

FUNDAMENTALS OF ECONOMICS ANALYSIS IN ENGINEERING PROJECTS

CASH FLOW CONCEPTS Cash flow is the stream of monetary (dollar) values, costs (inputs) and benefits (outputs) resulting from a project investment A Time Value of Money

Effectively Using KPIs to Measure and Improve Revenue Cycle

II Cash To Net Rev Month 60 Day Lag 60 Day Lag No Lag Target Prior Year Month Dec11 Cash Collected In Period Minus Refunds 12,296 147,859 75,973 75,973 12,479 Net Collectable Revenue 14,564 149,745 77,132 78,462 13,517 Cash as Net Coll Rev 84 4 98 7 98 5 96 8 100 00 92 3 FAV (UNF) Variance III Unbilled - Gross $ Days $ Days $ Days $ Days

Who Should Attend PROJECT - Regent Business School

• Understand the concepts of Growth, Profitability, Cash Flow, Costing concepts, Cash flow projections and forecasting • Understand and interpret basic financial statements: basic analysis and interpretation Topics Covered: • Understanding of basic accounting terminology • Planning and management of budgets: Preparing a

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Cash Flow and Liquidity

Las Vegas / January 2014

Andrew Holmes

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 2

Andrew Holmes

»Director, Leveraged Finance, Credit Suisse First

Boston, New York and London

»Equity capital markets and Leveraged Finance, JP Morgan, New York

»MBA from University of Chicago

»5 years in asset management

Meet your Instructor...

Cash flow and liquidity

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 3

Moody"s Corporation

»Credit Ratings

-Corporate -Financial Institutions -Structured -Municipal/Public »Credit Research »Credit Research & Risk Measurement

»Economic & Consumer Credit Analytics

»Enterprise Risk Solutions

»Structured Analytics & Valuations

»Professional Services

»Training & Certification

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 4

Cash Flow

Analysis Session 1

Cash Flow and Liquidity

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Earnings Before Interest, Taxes, Depreciation,

and Amortization (EBITDA

Cash Flow Concepts: EBITDA

What assumptions are implicit in using EBITDA as a proxy for operating cash flow? What does the leverage measure Debt / EBITDA indicate? What is the commonly accepted industry definition of Free

Cash Flow?

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 6

Why is adjusted EBITDA always higher than

EBITDA?

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 7

EBITDA (Moody's Definition)

1)Equity accounted entities' income may be included if integral to

operations and backed by cash distributions

2)For Japanese GAAP reporters, equity accounted entities' income is included in reported EBIT but excluded from adjusted EBIT.

3)US GAAP reporters' minority interests should be excluded from adjusted EBIT.

Interest Gross Interest Expense per Income

EBIT Pretax Income + Interest + Non-Recurring Expenses/(Gains) EBITDA EBIT + Depreciation + Amortization of Intangibles

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 8 8 Source: Putting EBITDA in Perspective, Moody's Investors Service, June 2000, p. 6

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 9

Don't forget capital expenditures...

Cash Flow and Liquidity

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EBITDA versus cash flow - a final result

Cash Flow and Liquidity

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Definitions - Free Cash Flow

Revenues minus

Cost of Goods sold

equals

Gross Profit minus

Sales, General & Administration

equals

Earnings before Interest & Tax plus

Depreciation & Amortisation

equals

EBITDA

minus

Taxes minus

CAPEX (including change in w/c) equals

Free Cash Flow to the firm (and its providers of capital)

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 12

Less Dividends =

Operating Cash Flow 1. before ǻ w/c*

"FFO" after ǻ w/c* "CFO"

Less CAPEX =

Retained Cash Flow 2.

after ǻ w/c* before ǻ w/c*

Standard Definition

Free Cash Flow 3. before ǻ w/c*

after ǻ w/c*

Standard Definition

Three Levels of Cash Flow

* Working capital and other items not directly related to ongoing operations (e.g. pension and OPEB contributions)

Moody's Cash Flow Concepts

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 13 Source: Moody's Financial Metrics, Chart of Accounts, www.moodys.com/MFM, March 2007

Key Moody"s Cash Flow Concepts

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 14

Key Moody's Cash Flow Concepts

Source: Moody"s Financial Metrics, www.moodys.com/MFM, March 2007

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 15

A market overview of Chesapeake Energy

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 16

Treading water for 5 years

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 17

But what's really driving the price?

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 18

Case Exercise

Cash Flow Concepts

Calculate EBITDA, CFO, FFO, RCF,

and FCF

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 19

Liquidity Analysis and Refinancing

Risk Session 2

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 20

Debt Service Capacity

Operational Cash Drivers

Financial Cash Drivers

Operational Cash Flow

Financial Charges (Tank)

TOOLS E12 and E13

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 21

Overview of Debt Service Capacity

Debt service capacity is an assessment of whether the sustainability and stability of cash flows are sufficient to service a client's financing charges.

It reflects the Company's ability to generate

normal / sustainable cash flow to meet: cost of debt scheduled repayments (short term debt assumed refinanceable)

Cost of Equity ?

A DSCR of less than 1 means negative cash flow and liquidity need

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 22

Financial Charges ("Tank")

Bank fees & charges (?)

Operating lease payment (P&L)

CPLTD & financial lease OBS

(previous year B/S)

Gross Interest

Dividends/drawings

Capitalized interest (tangible fixed

assets note)

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 23

Debt Service Capacity

»What is the size of the "Tank" (financial charges) this year and next year? »Is the "Tank" impacted by debt maturity profile or dividend payments? »How much does the "normal" operating cash flow cover the "Tank"? »What level of operating cash flow should we use? Before or after ACC (WC) and Capex?

»What is the quality/sustainability of the operating cash flow? Check volatility caused by business risk and asset conversion cycle.

TOOL E14

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 24

Debt Service and Liquidity Ratios

Cash Flow Interest Coverage

»Measure of cash flow / Interest, Measure of cash flow / Interest and leases.

Debt Service Capacity.

»Measure of cash flow / Financial charges.

Liquidity Internal

»Unrestricted cash on the Balance Sheet

Liquidity External

»Analysis of undrawn (committed?) bank lines /

assessment of access to equity

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 25

Moody's Liquidity Assessments

»Investment grade companies

»Commercial paper ratings (short term)

»Specific measures versus cash usage over the next 12 months -Cash and marketable securities -Cash flow -Committed and undrawn facilities

»Covenant levels

-Commercial paper programs

»Backstop facilities

-Other facilities (e.g. uncommitted lines)

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 26

Moody's SGL Ratings

SGL-1

At all time over the next

four quarters, SGL 1 issuers can comfortably cover all cash requirements from internal sources, including seasonal working capital needs, maintenance capital spending, and extraordinary capital spending (with the exception of retailers and some distributors; see "vendor financing below").* SGL-2

For a projected 12

month period, but not necessarily at all times (not all interim quarterly periods), SGL

2 issuers

can likely cover all cash requirements from internal sources except for extraordinary capital spending and seasonal working capital needs. SGL-4

Issuers rated SGL

4 are not likely to be able to meet basic cash requirements through internal sources, and are likely to need external financing to remain liquid. SGL-3

Over the next four

quarters, it is unclear if SGL

3 issuers can

cover all basic cash requirements for internal sources. Basic cash requirements would include maintenance capital spending, as well as other items.

* Vendor financing Approach: For retailers and some distributors with large seasonal working capital needs we have made

“operational" assumptions of confidence and assume that “normal" vendor financing terms will be available.

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 27

Are markets like teenagers?

HY market shut

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 28

Seeing the issue

Key issues

»Refinancing

»M&A

»Market

Sentiment

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 29

Better - maybe

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 30

Part of the leveraged 'tsunami'?

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 31

Ericsson learned Its lesson from 2001/2

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 32

AT&T's structure is like a utility

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 33

British Land - financing property

companies

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 34

How to spot the top of the market?

The tech LBOs of 2006

»Freescale Semiconductor was

LBO'd in Q4 2006

»Ex-Motorola business

»Raised almost $6bn in high yield bonds

»Including 'toggle' bonds

»Philips Semiconductors (now NXP) was taken private by a consortium headed by KKR in early 2006

»One of the largest European LBOs ever

Global Semiconductor Sales

050100150200250300350

Sales ($bn)

Source: SIA

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 35

Risky LBO, 'low risk' capital structure

NXP's Capital Structure

Tranches Maturity/call Rating

$1.5bn Senior secured FRN @ L+275

7 non-call life Ba2/BB+

1.0bn Senior secured FRN @ L+275

7 non-call life Ba2/BB+

$1.0bn Senior secured bonds @ 7.875% 8 non-call 4 Ba2/BB+ $1.25bn Senior* unsecured bonds @ 9.5% 9 non-call 5 B2/B

525mm Senior* unsec. bonds @ 8.625% 9 non-call 5 B2/B

Plus a €500mm unfunded, super senior, covenant light (bond indenture) revolver * Subordinated really Leverage

Gross: 4.3x

Net: 3.5X

Equity:

44% (24% from sponsors)

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 36

NXP's capital structure by maturity

NXP debt maturities ($bn)

2006200720082009201020112012201320142015

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 37

Things did not however go according to

plan...

NXP Operating Performance

0 200
400
600
800
1000
1200
1400
1600
1800

Q1Q2Q3Q4Q1Q2Q3Q4

$ billions 0 5 10 15 20 25

SalesAdjusted EBITDA margin

Source: company filings

2007 2008

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 38
...debt repayment was non-existent...

NXP total debt ($mm)

Q4Q1Q2Q3Q4

2008
2007

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 39
...and the outlook was bleak » Economic conditions deteriorated significantly in Q3 2008

»Automotive and consumer sectors hit first

»Downturn broadened in Q4

»Capacity utilization fell to 56%

» Outlook sufficiently unclear that NXP withdrew 2009 guidance »Q1 2009 sales expected to be down 30-40% based on order book and customer sentiment » Company accelerating its restructuring program

»Savings of $550 million expected by mid-2010

»Cash cost of $700 million

» What, realistically, are the lenders' options?

»2008 adjusted EBITDA of $485m

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 40

The market's view was decidedly

pessimistic

About 10¢ for the

sub. bonds - roughly the next coupon... » Capitulation - the market is now expecting a restructuring

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 41

A happy ending

- but only for some

Cash Flow and Liquidity

© Moody's Analytics, Inc. and/or its licensors and affiliates. 42
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