Excess Cash Flow
Excess cash flow is a term used in loan agreements or bond indentures and refers to the portion of cash flows of a company that are required to be repaid to a lender. Excess cash flow is typically cash received or generated by a company in the form of revenues or investments that triggers a payment to the lender as stipulated in their credit agreement.Since the company has an outstanding loan with one or more creditors, certain cash flows are subject to various earmarks or restrictions for usage by the company.
Excess Cash Flow
Definition
Excess cash flow refers to the portion of a company's cash flow that must be used to repay lenders, as stipulated in loan agreements or bond covenants. This cash flow typically represents the cash received or generated by the company through revenue or investments, which triggers payments to lenders according to the credit agreement. The existence of excess cash flow indicates that the company has sufficient cash flow to meet its financial obligations and may have surplus funds for other uses.
Origin
The concept of excess cash flow originated in corporate finance and credit markets. As corporate financing methods diversified, loan agreements and bond covenants began to include excess cash flow clauses to ensure that lenders could recover their funds in a timely manner. This concept became widely used in corporate mergers and leveraged buyouts in the late 20th century.
Categories and Characteristics
Excess cash flow can be categorized based on different loan agreements and bond covenants, mainly including the following types:
- Fixed Proportion Excess Cash Flow: The company must use a fixed proportion of the excess cash flow to repay debt. This method is straightforward and easy to implement.
- Tiered Excess Cash Flow: Different repayment proportions are set based on different levels of the company's cash flow. For example, a higher proportion of repayment is required for cash flow exceeding a certain amount.
- Conditional Excess Cash Flow: Excess cash flow is only required to repay debt when specific conditions are met. These conditions may include profitability levels, cash flow amounts, etc.
Specific Cases
Case 1: A company undergoing a leveraged buyout signs a loan agreement stipulating that 50% of the excess cash flow must be used to repay the loan each year. After covering all operating costs and capital expenditures, the company has an excess cash flow of 10 million yuan, so it needs to use 5 million yuan to repay the loan.
Case 2: Another company issues bonds with a covenant stating that 30% of the excess cash flow must be used to repay debt only if the annual net profit exceeds 50 million yuan. If the company's net profit for the year is 60 million yuan and the excess cash flow is 20 million yuan, it needs to use 6 million yuan to repay the debt.
Common Questions
Question 1: Does excess cash flow affect the company's operations?
Answer: The repayment terms of excess cash flow may limit the company's use of funds, but they also help the company manage debt better and avoid over-leveraging.
Question 2: How is excess cash flow calculated?
Answer: Excess cash flow is typically the remaining cash flow after deducting all operating costs, capital expenditures, and other necessary expenses from the company's total cash flow.
