What is Excess Cash Flow

Excess cash flow is a term used in loan agreements or bond indentures. A portion of these cash flows are often required to prepay amounts outstanding or are subject to various restrictions for usage by the company.

BREAKING DOWN Excess Cash Flow

Excess cash flows are written into loan agreements or bond indentures to provide additional cover for credit risk for lenders or investors. They are defined in exacting detail in the contracts and their application to debt outstanding is stipulated. Typically, at least 50% of excess cash flows must go toward prepayments of outstanding amounts.

Example of Excess Cash Flow

In 2010, Dunkin' Brands, Inc. entered into a credit agreement with Barclays Bank PLC and a number of other lenders party to the agreement for a $1.25 billion Term B Loan and $100 million revolver. Under "Defined Terms" of the agreement, excess cash flow is spelled out in a verbal formula as "an amount equal to the excess of: (a) the sum, without duplication of: (i) Consolidated Net Income of the Borrower for such period, (ii) an amount equal to the amount of all non-cash charges (including depreciation and amortization)..., (iii) the Consolidated Working Capital Adjustment for such period,...over (b) the sum, without duplication...of: (i) an amount of all non-cash gains, income and credits included in arriving at such Consolidated Net Income..., (ii)...the amount of capital expenditures, Capitalized Software Expenditures and acquisitions..., (iii) Consolidated Scheduled Funded Debt Payments..., (v) the amount of Investments made in cash...made during such period to the extent that such Investments were financed with Internally Generated Cash Flow, plus any Returns of such Investment,..., (viii) the aggregate consideration to be paid in cash...relating to Permitted Acquisitions..."

All the capitalized terms in the above excerpt are "Defined Terms" in the agreement. The excess of "(a)" items over "(b)" items are carefully laid out as the definition of excess cash flow. The highlighted items in the above example are by no means exhaustive; instead, they illustrate the fine details of a definition of excess cash flow. Without referring to a credit agreement or bond indenture, an analyst or investor who wants to know the approximate amount of excess cash flow to be used for prepayments of debt outstanding can start with net income, add back depreciation and amortization and deduct capital expenditures (necessary to sustain business operations) and regular dividends, if any.