Hi Kenny, so what are some ways to upstream cash when there is that cash trap due to the difference between net income and cash flows?
Trapped cash is a common issue in Project Finance Models. There are a few options that are typically used to address this.
- Shareholder loan. Putting some of the equity requirement into the company in the form of a shareholder loan helps to extract the cash more quickly. The interest and principal on a shareholder loan are not subject to a cash vs profit test, meaning distributions can be made where dividends would not be allowed. I cover this in my teaching on Project Finance.
- Early redemption of share capital. If there is sufficient share capital in the Project company, this can be repaid to shareholders, again avoiding the earnings test. See this chapter of the handbook on early share capital redemption.
- Upstream loan. The project company can make a loan to shareholders or the holding company. Note that this is not allowed in some jurisdictions.
Hope this helps!
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