Read time: ~7 min
Standfirst: Two projects with identical revenue over a debt tenor can carry very different risk profiles depending on one modeling choice: whether debt repayment is flat or sculpted to match actual cash flow. In Nigerian infrastructure financing, where naira revenue routinely has to cover dollar-denominated debt, that choice is not cosmetic. It is often what makes or breaks bankability.
I. CFADS is the number everything else is built on
Cash Flow Available for Debt Service, CFADS, is calculated as EBITDA minus cash taxes, minus maintenance capital expenditure, adjusted for changes in working capital. It represents the cash a project actually has on hand in a given period to service debt, after operating costs but before any debt repayment itself. Every other project finance metric that determines how much a project can borrow, the Debt Service Coverage Ratio (DSCR) and the Loan Life Coverage Ratio (LLCR), is derived from CFADS.
DSCR is simply CFADS divided by the debt service due in the same period. A DSCR of 1.3x means the project generated 30 percent more cash than it needed that period to cover interest and principal. Lenders do not set this ratio arbitrarily. It is set to absorb exactly the kind of revenue volatility the project is expected to face, and that number becomes the ceiling on how much debt the project can support in the first place.
II. Sculpting solves a problem flat repayment schedules create
A standard annuity-style loan repays equal amounts every period. Project cash flow is rarely equal every period. A toll road ramps up traffic gradually. A solar asset degrades output over its life. A gas-fired IPP’s revenue can shift with seasonal demand or a phased tariff schedule. Applying a flat repayment schedule to an uneven cash flow profile creates periods where the DSCR is dangerously tight, cash barely covers debt service, alongside other periods where the project is sitting on excess cash that could have serviced more debt.
Debt sculpting fixes this by shaping the repayment schedule itself, rather than the underlying cash flow, so that each period’s debt service is set at CFADS divided by a constant target DSCR. Instead of every period repaying the same amount, every period repays whatever amount keeps the coverage ratio flat across the entire loan life. The result is a repayment schedule that looks irregular on paper but is actually the more conservative structure, because it eliminates the tight periods a flat schedule would otherwise create.
III. Why this matters more, not less, in Nigerian project finance
Debt sculpting is standard practice globally, but the Nigerian context adds a complication most sculpting tutorials do not account for: currency mismatch between revenue and debt.
A Nigerian IPP financed with dollar-denominated debt from international lenders, but earning naira-denominated revenue under a domestic power purchase agreement, faces a CFADS calculation that is not just uneven, it is exposed to a currency the debt itself is not denominated in. In the Azura-Edo financing, the project company’s sole source of income was naira receivables under its PPA, while the financing structure required funding US dollar-denominated offshore reserve accounts, a requirement typical of Nigerian IPP financing, and one that Nigeria’s foreign exchange regulations have, at various points, made difficult to satisfy through official currency markets. A sculpting model built only on projected naira cash flow, without stress-testing the naira-to-dollar conversion mechanism itself, would understate the actual risk to debt service.
This is compounded by tariff design. Azura’s PPA was structured with a classic capacity-and-energy tariff split, a structure familiar to international lenders and chosen specifically because it produces a more predictable, contracted revenue stream than a pure merchant or usage-based model. That predictability is precisely what makes sculpting tractable: the more contracted and fixed a project’s revenue is, the more confidently a sculpted repayment schedule can be modeled against it. A revenue-risk asset, a toll road with no minimum revenue guarantee, for example, has no such floor, and sculpting there has to be built around a far wider range of downside scenarios.
IV. What this means for reading a project’s financial model
Two questions separate a rigorously sculpted Nigerian infrastructure financing from a superficially conservative one:
- Is the CFADS forecast built on contracted or merchant revenue? A capacity-and-energy PPA, or an availability-based concession payment, gives a sculpting model a firmer floor than projected usage or spot-market revenue.
- Does the model account for currency conversion risk explicitly, or only for revenue volatility? A sculpting exercise that assumes naira revenue converts to dollar debt service at a stable rate, without stress-testing FX regulation and market access, is modeling half the risk the project actually carries.
A term sheet or information memorandum that shows a sculpted repayment schedule without disclosing the DSCR target it was built around, or the currency assumptions behind it, has not actually shown its work.
Read this before you read this one: Reading a Project Finance Term Sheet: Covenants, Conditions Precedent, and Step-In Rights
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