3.3 Debt Service Forecasts

Key points

• Computing future debt service cash flows is straightforward because detailed data is collected at the instrument level.

• Floating rate instruments debt service is computed using the term structure of forward rates. 

• Fixed rate instrument debt service may require estimating a principal repayment rate if information on the amortisation profile is missing. 

• Index-linked instrument debt service is computed using expected inflation at that point in time. 

Senior debt cash flows (drawdowns, principal and interest repayments) are computed based on the information collected for each instrument on the firm's balance sheet. 

When this information, as well as each instrument’s amortisation profile, is known, computing expected debt service cash flows for each instrument at each point in time is straightforward.

However, when analysing hundreds of infrastructure firms and extracting information about the firms’ financial structures from audited accounts, some of this information, especially the amortisation profile, can be missing. In such cases, the missing information needs to be approximated in order to forecast future debt service. Because the relevant loan-specific information consists of several variables, each of a different type, each variable is estimated in a different manner.

The information that is most frequently missing is the loan’s amortisation profile, which determines how the outstanding principal amount will be repaid over time. However, it can be approximated using the trends visible in the realised debt payments. These trends are estimated by estimating the level (intercept) and the slope of the realised interest- and principal-repayment rates, which can accommodate various commonly used amortisation profiles. For example, if the debt has a constant repayment profile, then the slope of the principal repayment rate would be zero. If the debt has a front-loaded interest-repayment profile, then the principal repayment would have a positive slope.

Once repayment rates are estimated, future debt service for each instrument is forecast based on estimated repayment-rate trends, which proxy the amortisation profile of the loan.