Construct service capacity from operations and constraints

Begin with an operating forecast independent of the proposed debt receipts. Recover cash after operating payments, applicable tax, essential maintenance and the investment required by the selected operating plan. Then apply each instrument’s interest, principal, fees and other required payments at their dates. FIN.2 tests the cash account with reserves and actual support. EBITDA or interest coverage can aid analysis, but neither pays principal, tax or working-capital investment.

Stress the causes that can damage service together: revenue, margins, collections, required investment, rates, currency and refinancing access. Distinguish a temporary timing mismatch from an operating activity that cannot support its obligations even after a credible adjustment. The former may need bridging or changed terms; the latter may need a different mix, smaller investment or FIN.22 restructuring. Never make service capacity look adequate by repeatedly assuming an uncommitted refinancing just before each maturity.

Use FIN.12 for legal and contractual borrowing or distribution constraints. A covenant ceiling can be tighter than cash service capacity, and a cash shortfall can occur well within the covenant ceiling. Estimate available debt under both kinds of conditions and identify the binding one in each relevant state. Additional equity can remove a cash shortfall while still leaving a restriction on what the corporation may do.

Do not describe a limit obtained from one forecast as a permanent debt capacity. Report the operating conditions, time span, maturity profile and buffer that support it. If a small change in collections or margin makes a large difference, compare a range of policies with the cost of retaining more protection. Holding unused borrowing capacity can preserve a valuable future action, but its availability must survive the state in which that action matters.