Q: When calculating borrower plus guarantor global cash flow, under what conditions do you add back the Section 179 Depreciation expense, if at all?

A: The Section 179 Deduction plays no role in computing a company's cash flow since it is not included as a depreciation expense in computing a company's bottom line profit. Therefore, there is nothing to add back.

With respect to the guarantor, the Section 179 Deduction reduces reported ordinary business income on Schedule E of the guarantor, which means that it reduces his or her income tax obligations and cash outflows for personal taxes.  In effect, the Section 179 Deduction is "added back" in this manner since it reduces personal income taxes and improves guarantor and global cash flow.

Q: It seems like cash flow available for debt service from the borrower was calculated as EBITDA minus distributions.  However, cash from affiliates was calculated based on cash distributions and does not take into account the net income. Isn't this combining two different approaches to global cash flow?

A: Please see Slide 36. The slide illustrates cash flow available from the borrower as net income increased by a) depreciation, b) amortization, c) interest expense and then reduced by distributions.  It differs from EBITDA less distributions by the amount of other income and expenses. So, in effect, they are roughly the same thing.

As Slide 49 illustrates, the business cash flow from affiliates is computed the same way. The computations for the borrower and for the affiliates are identical.

Q: We're confused on which global cash flow template we should use based on the first half of the presentation versus the second half.

A: Slide 49 uses the global cash flow template. Since the computations for business cash flow is the same for all business parties involved, the only differences we've introduced is the value to use for the guarantor's contribution to global cash flow. On Slide 49, please note the “Schumacher Available Cash” line item. We strongly support using the guarantor’s ready cash and not a rough and incomplete estimate of surplus personal cash flow available to service borrower debt.  What counts is cash on hand in a crisis. If Schumacher had invested all his surplus personal cash flow in highly liquid assets, then the ready cash he can access would be vastly greater. But it's apparent he used his personal cash flow surplus for other purposes, assuming our estimate of his personal cash flow surplus is roughly correct.

The personal cash flow statement is a very rough approximation of actual events and actual personal cash flow. We have no verifiable data about personal living expenses, for example. We're never really certain that we've identified all cash revenue. And we're equally uncertain if we got the personal debt service amounts correct.

Q: Is there a general rule of thumb for estimating personal living expenses when preparing a global cash flow analysis that includes guarantor support?

A: There is no general rule of thumb in computing personal living expenses. Some institutions have fixed amounts or fixed percentages of income that they use in the absence of actual guarantor estimates or for any guarantor estimate that falls below the banks minimum factor. The only relevant statistic currently might be the personal savings rate, which indicates that U.S. households save roughly five percent of disposal income. But guarantor living expenses are highly personal and can vary greatly. One thing to keep in mind is that once a guarantor establishes an elevated life style, it is extremely difficult for him or her to reverse it when times get tough.

An added thought. Know your guarantor, who is frequently the driving force in the company.

Course overview:  Guarantor Analysis, Global Cash Flow, and the Second Way Out