The Debt Service Coverage Ratio (DSCR) or debt service coverage ratio ( DCT ) expresses the ratio between EBITDA and debt service (interest, principal and, where applicable, credit annuities -lease). It is a tool commonly used to assess the ability of a person or firm to generate enough operating margin to cover the annual lease or lease. This ratio is used in the banking field, and makes it possible to define a minimum threshold acceptable for a lender. The higher the ratio, the easier it is to get financing.
In corporate finance and project finance, the DSCR refers to an amount of operating margin available to cover interest and repayment of debt capital.
In personal financing, the DSCR is a ratio used by lenders to assess the ability to meet loan maturities.
In real estate, the DSCR makes it possible to measure whether the income generated makes it possible to cope with debt. In the late 1990s and early 2000s, banks demanded a DSCR of at least 120%, but more aggressive banks accepted lower ratios. This practice helped trigger the financial crisis of 2007-2010 . A DSCR greater than 100% means (in theory, according to the banking norms and the assumptions of the project) that the entity generates an income sufficient to pay the load of its debts. A DSCR below 100% indicates that there is not enough income to finance debt maturities.
In general, it is calculated as follows: DSCR = (Gross Operating Surplus) / (Main + Interest + Annuities of Financial Leasing )
In order to calculate the DSCR of a project, you must first calculate its gross operating surplus(GOS). In real estate, for example, you have to take the total rental income of the property, and deduct the operating expenses as well as the costs of vacancy. This base is used to obtain the EBITDA, which is related to the annual debt service (which corresponds to the total principal and the annual interest on the loans contracted on the property). If the property obtains a DSCR below 100%, the income it generates is not sufficient to meet the borrowing and operating expenses. A property characterized by a DSCR of 80% generates revenue to cover only 80% of annual loan annuities. Be that as it may, if a real estate property gets a DSCR greater than 100%, it generates enough income to cope with annuity payments. For example, a property benefiting from
A DSCR of less than 100% corresponds to a deficit project. For example, a 95% DSCR means that the gross operating surplus covers only 95% of the annual debt service. For example, in the area of personal financing, this would mean that the borrower will have to draw from his personal funds each month to finance the project. In general, donors are wary of a deficit project, but a few authorize it if the borrower has high external revenues. In practice, most traditional banks charge a rate of 115-135% over the term of the loan to ensure that revenues are sufficient to cover the corresponding annuities.
The Loan Life Coverage Ratio (LLCR), or Loan Duration Coverage Ratio, gives a DSCR value over the total duration of the loan. It is calculated from the present value of the sum of the BEE reported to the discounted value of credit maturities over the loan period alone.
The Project Life Coverage Ratio (PLCR), or Project Duration Coverage Rate, gives a DSCR value over the total duration of the project. It is calculated on the basis of the discounted value of the sum of the EBITDA relative to the discounted value of the credit terms, over the total duration of the project.