Key takeaways
- The Liquidity Reserve should be calculated from the actual obligations in each layer and compared with the funding sources that are actually available, rather than being set as a single lump sum
- Restricted customer money and uncommitted facilities should not be counted as reserves
- In the example, the group passes the normal-case test at 1.13x, but in the stress case coverage falls to 0.77x, so the response plan must be prepared before an event occurs
How many layers to set aside
| Tier | Level | Example formula | Used for |
|---|---|---|---|
| Working Capital Buffer | Project | Average monthly construction cost × 1 month | Waiting for drawdowns and paying contractors |
| DSRA | Project | Monthly debt service × 3–6 months | Interest and principal only |
| Cost Contingency | Project | Cost-to-Complete × 5–10% | Cost overruns |
| Corporate Buffer | Group | Corporate overhead × 3 months | Office expenses |
| Group Emergency | Group | Total annual revenue × 1% | Cross-project crisis events |
Coverage = countable liquidity sources ÷ required Liquidity Reserve
Example: a developer group with 3 projects
Figures in THB million. All figures are illustrative. Assumes a DSRA of 6 months and a contingency of 5% of cost-to-complete
| Project | Construction/month | Interest/month | Cost-to-Complete |
|---|---|---|---|
| A | 18 | 3.5 | 240 |
| B | 30 | 5.0 | 600 |
| C | 10 | 1.5 | 100 |
| Total projects | 58 | 10.0 | 940 |
| Project | Buffer | DSRA | Contingency | Total |
|---|---|---|---|---|
| A | 18 | 21 | 12 | 51 |
| B | 30 | 30 | 30 | 90 |
| C | 10 | 9 | 5 | 24 |
| Total projects | 58 | 60 | 47 | 165 |
| Group level | Criteria | THB million |
|---|---|---|
| Corporate Buffer | Overhead THB 6 million × 3 months | 18 |
| Group Emergency | Revenue THB 1,500 million × 1% | 15 |
| Total Liquidity Reserve | 165 + 18 + 15 | 198 |
How to count funding sources
| Source of funds | Counted? | THB million |
|---|---|---|
| DSRA already set aside | Counts towards the DSRA layer | 60 |
| Corporate cash | Counts | 45 |
| Unrestricted project cash | Counts | 38 |
| Undrawn Committed Facility | Counts, if the drawdown conditions are still met | 80 |
| Uncommitted line of THB 50 million | Does not count; the bank has the right to refuse drawdown | 0 |
| Restricted customer deposits of THB 90 million | Does not count | 0 |
| Countable sources | 223 |
Coverage = 223 ÷ 198 = 1.13x and headroom = THB 25 million
Stress test before calling it sufficient
Assumes 6 months, a 10% increase in construction cost and a 30% fall in sales receipts from a base of THB 20 million per month
| Item | THB million |
|---|---|
| Cost increase 58 × 10% × 6 | 34.8 |
| Receipts decrease 20 × 30% × 6 | 36.0 |
| Cash lost | 70.8 |
| Sources after stress 223 − 70.8 | 152.2 |
| Coverage after stress (152.2 ÷ 198) | 0.77x |
| Shortfall against required reserve level | 45.8 |
A plan should be in place before this point is reached, for example expanding the committed facility, deferring non-essential spending, accelerating collections, calling additional equity or slowing new projects
| Stress level | Assumptions | Target runway for management (example) |
|---|---|---|
| Mild | Sales −15%, costs +5% | 180–365 days |
| Moderate | Sales −30%, costs +10% | 90–180 days |
| Severe | Sales −50%, costs +15% | 30–90 days |
| Extreme | Sales halted for 6 months, costs +20% | A crisis plan is required |
| Credit Line Pulled | Uncommitted lines cancelled | Test separately |
Cash Flow at Risk
CFaR at confidence level = Expected CF − (Z × σ)
Expected quarterly cash flow of THB 180 million and a standard deviation of THB 45 million (example)
| Level | Calculation | CFaR (THB million) | Below expected value (THB million) |
|---|---|---|---|
| 95% (Z = 1.645) | 180 − 1.645 × 45 | 106.0 | 74.0 |
| 99% (Z = 2.326) | 180 − 2.326 × 45 | 75.3 | 104.7 |
THB 106 million means there is roughly a 5% chance that cash flow will fall below this level. It does not mean a reserve of THB 106 million is needed. The size of the reserve should be based on the amount by which cash flow falls short of the obligations that must be paid. This formula assumes a normal distribution, which project cash flows may not follow, so it should be used alongside scenarios
Contingency Funding Plan
Set the order of funding sources before an event occurs, and check the conditions in the loan and JV agreements as well
- Existing reserves
- Undrawn Committed Facility
- Additional uncommitted facilities
- Shareholder loans
- Sale of non-core assets
- Bridge Loan
- Emergency equity injection
| Early warning (example) | Criteria |
|---|---|
| Cash Ratio | <0.3 |
| Current Ratio | <1.0 |
| DSCR Forecast | <1.10x |
| Sales velocity vs plan | <50% |
| Cancellation Rate | >15% |
| Cost Overrun | >10% |
| Days Cash on Hand | <30 days |
Reserve accounts and short-term investments
Separate accounts by purpose and define who can withdraw and when. For example, the DSRA is used only for debt payments, while investment of other reserves is limited to instruments that can be withdrawn when needed: call deposits, treasury bills and money market funds. Spread counterparties, match maturities to payment obligations and prohibit speculative investment. Return is secondary to the safety of principal
An undrawn committed facility should have a tenor covering at least 6–12 months, be spread across banks and be renewed before maturity
Comparison with a hotel group
The same structure applies to a hold business, but the obligations change: construction contingency becomes a reserve for maintenance and refurbishment. In the example of 5 hotels, the buffer is set at 2 months, the DSRA at 6 months, the MRA at 4% and the CapEx reserve at 2% of revenue, while the group reserve is 1% of total revenue
| THB million | Revenue | OpEx/month | Debt/year | WCB | DSRA | MRA | CapEx | Total | % of revenue |
|---|---|---|---|---|---|---|---|---|---|
| Hotel 1 | 180 | 5.5 | 24 | 11.0 | 12.0 | 7.20 | 3.60 | 33.80 | 18.8% |
| Hotel 2 | 110 | 3.8 | 18 | 7.6 | 9.0 | 4.40 | 2.20 | 23.20 | 21.1% |
| Hotel 3 | 250 | 7.2 | 36 | 14.4 | 18.0 | 10.00 | 5.00 | 47.40 | 19.0% |
| Hotel 4 | 72 | 2.5 | 12 | 5.0 | 6.0 | 2.88 | 1.44 | 15.32 | 21.3% |
| Hotel 5 | 95 | 3.2 | 15 | 6.4 | 7.5 | 3.80 | 1.90 | 19.60 | 20.6% |
| Total hotel level | 707 | 22.2 | 105 | 44.4 | 52.5 | 28.28 | 14.14 | 139.32 | 19.7% |
Adding the group reserve of THB 7.07 million gives a total of THB 146.39 million, equal to 20.7% of total revenue. Figures are illustrative