The debt service reserve account (DSRA) is a key component in almost every project finance term sheet and financial model. The primary purpose of the DSRA is to protect a lender against unexpected volatility, or interruption, in the cash flow available to service the debt (CFADS). These funds, essentially put aside for a rainy day, are usually established at the end of a construction period, once the loan becomes repayable.
Developing a financial model to correctly incorporate a DSRA in normal operations and downside scenarios is an essential part of a project finance transaction. One of Corality’s most popular modelling tutorials covers the topic of financial modelling of debt service reserve accounts (DSRA or DSRA/c).
The DSRA releases cash to fund debt service
The DSRA releases to plug a shortfall between the CFADS and the debt service; it tops and releases to ensure its balance meets a prescribed target profile and then, all going well, empties out in conjunction with the final repayment of the debt facility.
Funding of the DSRA is considered part of the overall cost of the project, along with the interest during construction (IDC) and financing fees. While DSRAs are not funded as part of the initial project costs, they are built up as a priority out of the CFADS in the early operational periods. The DSRA is usually funded to be either six months or even one year of principal and interest payments.
Debt sizing considerations in project finance
Debt is generally sized so that in the bank base case the DSRA does not need to be drawn upon.
As you can tell from reading this, the DSRA is relatively straight forward to describe. However, after a couple of decades of financial modelling, my observation is that it is intriguingly difficult to get it right in a financial model when doing it for the first time.
The main reason I have identified is when you separate the movements in and out of the DSRA into single line items. There are more than you might think if you were to just model it without planning – which is generally the mistake people make! The result is that each constituent part becomes compounded, and lost within a myriad of IF(), OR(), AND(), MAX(), MIN() and all around… if it works in all situations then it’s down to luck more than design! We cover this topic in our in-house project finance modelling courses, and in our public course best practice project finance modelling.
Learn financial modelling of DSRA
Corality has several financial modelling and project finance tutorials to help new and experienced financial modellers through the challenge of building a DSRA into a financial model. This tutorial is a good guide (with accompanying Excel workbook) of how to layout the DSRA, and especially, where it sits within the cash flow waterfall. We also have insightful tutorials about the cash flow waterfall and the other important aspect, CFADS.
If you have any questions about debt service reserve accounts (DSRAs) or financial modelling in project finance, please contact me.