Debt service coverage ratio

The debt service coverage ratio or debt service coverage ratio ( engl. Debt Service Coverage Ratio DSCR ) is a business management code, in which, depending on the type of borrower the loan interest and the repayment, certain revenues are compared. This is to determine to what extent a debtor is able to raise interest and repayment of the loans.

General

Lenders have an interest to measure their credit risk by the debtor. Therefore, a multitude of school thinking numbers. These are important control and decision variables for the debt - deployment or leaving. While the interest burden ratio only takes into account the interest expense of a borrower, the debt service coverage ratio includes additionally the repayments to be made. Interest expense and amortization together form the debt service. As regards interest, all interest expenses resulting from interest-bearing liabilities include (except interest on provisions for pensions, bank charges). The debt service coverage ratio indicates the extent to which applied for loans and interest repayments can be paid by the debtor of revenue. The type of income depends on whether the debtor is a company or the government ( or its local authorities ) is.

Business

For companies in the debt service of the earnings before interest and taxes ( EBITDA) and cash flow before interest and repayment of a period is compared. EBITDA and cash flow are measured quantities from which the debt servicing is to deny. The higher EBITDA or cash flow are, the easier it is for a company to service the debt.

Tend to have strong equity company in a better position, the debt service than to deny debt- dependent. According to the debt service coverage ratio is more favorable at high-equity companies. He deteriorates when additional liabilities are recorded or at the same level debt increases the interest level. The coverage ratio must be at least be 1:1 to continuously ensure the payment of interest and principal on the debt. Critical is the debt situation for business - depends on the industry - if the debt service permanently 50% of the cash flow / EBITDA exceeds, so the cash flow falls below two times the debt service. If these limits are exceeded, not only temporarily, a company located in a corporate crisis.

In project finance, a debt service coverage ratio of 1.2 is assumed as a minimum, thus the time available for debt service cash flow of the project must cover the debt service by 20%. International project finance often work with ratios from 1:1.3 to 1:1.5. Decreases the cash flow by deterioration of business and / or increases the debt service through higher interest rates / loans, thus increasing the credit risks of project financing.

An unfavorable debt service coverage ratio indicates that an increase in equity is necessary to reduce the attendant with a strong dependence on borrowing from creditors.

States

States and their local authorities ( Länder, cantons, municipalities ) are also borrowers. For these debtors, the debt service coverage ratio indicates the extent to which applied for credit interest and repayments are covered by the state by GDP, government spending or export earnings. The budgetary debt service refers to the expenditure of the overall public budget, while the aggregate debt service from the comparison of the interest expense and repayments gives the gross domestic product. Debt service can be subject of change when the volume of short-term debt is relatively high and subject to the most variable interest owed large market fluctuations. Critical is the situation for a state and its authorities, if the interest and amortization payments of 20% to 25 % of the recoverable permanently export revenues ( state ) or total revenues ( local authorities) exceeds or reaches more than 20 % of total expenditure. For permanent exceeding the critical limits States may fall into a state crisis.

One negative development of the debt service coverage ratio can usually be met only with a strict budget discipline in the area of ​​spending in states and their local authorities. Gross domestic product or export earnings, however, are aggregates that are difficult to influence in the short and medium term.

In the general budget of the Federal Republic of Germany in 2012, interest payments are estimated at 38 billion euros in total 309 billion euros overall spending, so the interest burden ratio is still acceptable 12.3% of total expenditure. Compared to the gross domestic product in 2010 ( 2498.8 billion euros ) are the slight 1.5%.

Effects

The debt service coverage ratio may be part of loan terms or loan agreements under the covenants. Here, the debtor undertakes to its creditors, not to exceed a certain contractually defined upper limit of the debt service coverage ratio. If it comes to exceeding the limit, then there is a breach of contract ( covenant breach ), which initially mostly a healing period ( remedy / grace period ) has the result is to allow the borrower the subsequent performance of the given code. However, If this is still not a higher credit margins or even an extraordinary termination right of the creditor is triggered.

Others

Related to the debt service coverage ratio, which only considers the respective result for the period is called the Loan Life Cover Ratio ( LLCR ), in which is set the present value of the total cash flows over the term of the loan in relation to the outstanding balance. The latter thus describes the ability of a project / an investment to provide the debt service for the entire life of a loan.