| INTRODUCTION | |
| All the inputs mentioned below are provided in the workbook for this case study. | |
| Your company wishes to better understand how its financing cashflows would be affected in times of cash | |
| shortage. They have asked you to model their two senior debt facilities, two reserve accounts and | |
| shareholder loan, and then test how the debts are repaid and reserves are funded under different profiles | |
| of cash generated from operations. | |
| Your model should be semi-annual with semi-annual periods ending in June and December. All debt | |
| payments and reserve account transfers occur at the end of a semi-annual period. The model should take | |
| as its starting point the debt and account balances on 31 December 2017, and should run through to 31 | |
| December 2035. | |
| Questions 29 to 34 relate to the target payments and balances and can be answered based on the | |
| details given for the individual facilities and accounts. | |
| Questions 35 to 39 relate to the actual payments made under five different profiles of available | |
| cash, and will require you to have implemented the priority of payments. The cash profiles you are | |
| required to test are increasingly restricted, such that under the first profile everything is fully | |
| funded and target balances are met, and under the fifth profile an overdraft is drawn. | |
| Prepare your model and then use it to answer the given questions. When finished, please upload | |
| your workbook (Question 40). | |
| SENIOR LOANS | |
| There are two senior loans. | |
| Senior 1 | |
| The loan balance on 31 December 2017 is $10,000,000. | |
| The loan should be repaid in equal principal repayment amounts with the final repayment occurring in the | |
| period ending 31 December 2023. | |
| The interest rates applied to the loan are given in the table below, and interest should be paid as incurred. | |
| The annual interest rates should be converted to semi-annual rates by multiplying by the number of days | |
| the rate is applied for in the semi-annual period and dividing by 365. | |
| From To Rate (per annum) | |
| 1 January 2018 14 December 2019 4.35% | |
| 15 December 2019 4 April 2021 5.5% | |
| 5 April 2021 24 October 2023 5.8% | |
| 25 October 2023 31 December 2023 6.2% | |
| Senior 2 | |
| The starting balance for the senior 2 loan is $10,000,000. | |
| From June 2024 onwards principal repayments of $1,000,000 or the outstanding loan amount (whichever | |
| is smaller) should be made each payment date. | |
| The interest rate for the Senior 2 loan is 6% per annum. This should be converted to a semi-annual rate | |
| by dividing by two. Until 31 December 2023 interest incurred should be added to the balance of the loan | |
| (interest should be incurred on capitalized interest in subsequent semi-annual periods). From 1 January | |
| 2024 onwards interest should be paid as incurred. | |
| TARGET RESERVE ACCOUNT BALANCES | |
| The target debt service reserve account balance is the total senior debt interest and repayments due in | |
| the next semi-annual period. Assume that this account is fully funded on 31 December 2017. | |
| The target MMRA balance is 100% of the next twelve months’ major maintenance costs, 66% of the costs | |
| in the twelve months after that, and 33% of the costs in the twelve months after that. The profile of | |
| forecast major maintenance costs is given in the Assumptions tab of the provided workbook for this case | |
| study. Assume that this account is fully funded on 31 December 2017. | |
| SHAREHOLDER LOAN | |
| On 31 December 2017 the shareholder loan balance is $3,000,000. The interest rate for the loan is 9% | |
| per annum, and this is converted to a semi-annual rate by dividing by two. | |
| The target shareholder loan balance is the balance that would result if the loan were an annuity that was | |
| fully repaid on 31 December 2030 (i.e. if the total interest and repayment amount in each semi-annual | |
| period was constant between June 2018 and December 2030). | |
| PRIORITY OF PAYMENTS | |
| If the balances of the debt service reserve account (DSRA) and major maintenance reserve account | |
| (MMRA) at the start of the semi-annual period exceed the target balance for the semi-annual period any | |
| excess should be added to the cash generated from operations. Available cash should then be used | |
| according to the following rules: | |
| 1. The senior interest payments and repayments should always be made. If insufficient cash is | |
| generated from operations to do this, the company does the following in this order until the senior | |
| debt payments are made in full: | |
| • Withdraw money from the debt service reserve account | |
| • Withdraw money from the major maintenance reserve account | |
| • Draw an overdraft in the cash account (it is NOT possible to draw an overdraft in the reserve | |
| accounts). | |
| Any overdraft drawn should be carried forward from period to period until it is repaid from | |
| available cash. Assume that no interest or other costs are incurred related to the overdraft. | |
| Any available cash left after the senior debt has been serviced should then be used in the following order: | |
| 2. Repay any overdraft drawn in the cash account in previous periods | |
| 3. Fund the MMRA up to the target balance | |
| 4. Fund the DSRA up to the target balance | |
| 5. Pay any interest due on the shareholder loan. Any interest for which there is not enough cash to | |
| pay should be added to the loan balance. | |
| 6. Pay off any outstanding shareholder loan which exceeds the target balance for that semi-annual | |
| period. | |
| Any cash that is remaining after the debts have been fully serviced and the reserve accounts are fully | |
| funded is then paid to the shareholders as a dividend. | |