3.2.1 Cash Flow Available for Debt Service

Suppose that a company has a given age, representing the number of years since its establishment. To understand the factors determining the Cash Flow Available for Debt Service (CFADS) for this company, the following dynamic model is estimated:

where for each age t, CFADS is a function of the Revenue, Equity to Assets ratio, Senior Leverage, and CV are indicator variables for the industrial classifications that the company belongs to.

This dynamic model illustrates the age-varying relationship between cash flows of a company at a given age as a function of financial characteristics of infrastructure companies. The CFADS model is estimated with Kalman filtering to illustrate how the factor prices for each independent variable in the model vary with the age of the companies.

The dynamic model estimation by the Kalman filter can be written as a system of two equations. The observed equation and the state equation can be written as follows:

where is a vector of independent variables, is a vector of the model coefficients and an identity matrix. At each point in time, the filtered CFADS that is obtained from the state space model is compared to the actual CFADS from that period.