This page discusses treatment of cash flow that comes from changes in the debt service reserve account — the DSRA –when computing the DSCR and debt repayment. If cash flow from changes in the DSRA account is positive, meaning that the DSRA is reduced through withdrawals from the bank account, then some would argue (correctly) that this cash flow should be included in calculation of the DSCR. After all, CFADS is cash that is available to pay debt service and the reduction in the DSRA is cash. Similarly, if the DSRA account is required to be increased and you must deposit cash into the DSRA bank account, one could argue that CFADS and the DSCR should be reduced. Including deposits or withdrawals from the DSRA in the calculation of repayments with sculpting and the DSCR is not easy. It can can cause painful circular reference issues. With some mathematics and VBA you can solve the DSRA moves and DSCR calculation, but I am warning you, it is not easy.

Many years ago I had a very smart student who explained to me that in a PPP project with a tight debt service coverage, including changes in the DSRA in the DSCR can be an important issue in financial models. He told me that my class sucked because I did not include this or other complex issues in my class. I became obsessed putting changes in the DSRA into CFADS for years. But when trying a copy and paste macro or a UDF to resolve the fact that the DSRA is driven by debt but the debt is driven by CFADS, the process blew up. Later, another student told me that the DSRA balance can be used to pay debt service in the final year. This is a variation of the same issue. Here, the last period change in DSRA is the repayment of the DSRA and this change can be included in sculpting. This again caused some nightmare circular reference issues.

Developing a project finance model that can evaluate the effects of including DSRA deposits and releases in the DSCR and either CFADS or Debt service are discussed below. Videos and files on this page describe how to resolve this problem with a UDF and some NPV formulas that adjust the size of debt for purposes of sculpting. The project finance structuring analysis below addresses incorporation of DSRA cash changes in debt sizing analysis. If you really want to see how all of debt sculpting in project finance works you can torture yourself by working through the project finance debt sculpting videos and then trying the debt sculpting exercises.

There are a couple of key files where I put the financial formulas, modelling examples and the VBA code for cases where you run into circular references. You can file these files on the google drive in the Project Finance Section under exercises and then Section D for the Sculpting course. The first file is the sculpting file that includes a separate section that isolates on the issue of DSRA changes. The second file is a model with the comprehensive parallel UDF.

## Theory of How to Treat DSRA Deposits and Withdrawals and Simple Examples

**LLCR = PV of Cash Flow over Debt Repayment/(Debt – DSRA Balance)**

## Change in the DSRA Balance with Sculpting when DSRA Changes are Included in CFADS

**Case 1: DSRA Changes Treated Like Other Cash Flow and Debt Sizing from DSCR**

- First, compute the NPV of DSRA moves (this only will really work with the UDF approach) and divided the NPV by the DSCR — the formula is NPV(interest rate, DSRA Moves)/DSCR.
- Second, Sculpt the Debt without DSRA moves (i.e. CFADS without DSRA Moves/DSCR)
- Third, Compute the Debt Balance from Sculpting without DSRA and subtract PV of DSRA Moves/DSCR: Debt Balance = NPV(Interest Rate, Debt Service from Normal CFADS) + PV of DSRA Moves/DSCR
- Fourth, Compute the Repayment as the Repayment from Sculpting Less the DSRA Moves/DSCR

**PV without DSRA = Sum of 400 + 400 = 800****PV of DSRA = 100/1.5 = 67****Total Debt = 800 + PV of DSRA = 800 + 67 = 867****Repayment = Base Repayment + DSRA Adjustment = 400 in year 1 and 400 + 67 in year 2**

**Case 1a: DSRA Changes Treated Like Other Cash Flow and Debt Size Given**

**First, compute the NPV of DSRA moves; for this you may need to compute the DSRA separately from the debt service (this only will really work with the UDF approach)****Second, compute the LLCR that will yield the correct debt balance with which allows DSRA changes to be included. This is LLCR = PV (CFADS+DSRA Moves)/Debt — when you think about this formula, you have more debt because of the DSRA that will provide you some money. In this case, the debt is fixed and you do not make an NPV adjustment. When you are using the non-constant or non-constant DSCR, you will have to make an adjustment to the goal seek.****Third, compute the repayment using the process where you make a calculation without the DSRA adjustment and you separately add the adjustment. This adjustment is the Repayment from Sculpting Less the (CFADS/LLCR) and later add the DSRA Move/LLCR to the repayment**

**Case 2: DSRA Changes Treated Like Negative Debt**

## Illustration of Alternative Methods in Cash Flow

The screenshot below demonstrates how different methods could be presented in the cash flow statement. For the method where DSRA moves are ignored in computing the DSCR and evaluating sculpting, the DSRA changes are shown at the bottom of the cash flow statement. In the case where DSRA changes are treated like other cash flows, the DSRA changes are part of CFADS. In this case a reduction in the DSRA account is treated as positive cash flow for purposes of computing the DSCR and sculpting. In the final year the cash flow is much higher and the debt service requirement may be negative. For the third case where the changes in DSRA are treated like negative cash flow using the concept of net debt, the DSRA changes in the debt service section of the cash flow.

## Cannot Include Debt Service Effects of DSRA Changes in the DSRA Itself from Either a Theoretical or a Practical Standpoint

The DSRA balance comes from debt service. With sculpting and changes in the DSRA included in CFADS, the size of the DSRA is driven by the debt service but the debt service comes from the DSRA. This idea does not make sense and the change in DSRA that is part of debt service should not be included in the DSRA itself.

Consider a simple example. You need liquidity for a trip — some cash in case things can go wrong. After the trip, you will not need the cash. You need to decide how much liquidity you will need from your fixed costs. At the end of the trip you can subtract the money you have in the bank for liquidity from the fixed costs. The liquidity is the DSRA and the fixed cost is the debt service. Assume your fixed cost is 100 for three months — a long trip. Assume you need to put aside 100 for the trip. If the liquidity requirement is reduced for the last period, then the fixed cost is reduced to zero and you don’t need the liquidity anymore. This does not make sense. The fixed costs still exist and the liquidity account must not be distorted by changes in the account itself.