Calculating the Debt Service Coverage Ratio (DSCR)

By Haydn Pallister | October 5, 2019

Overview 

The Debt Service Coverage Ratio (‘DSCR’) is the most commonly used ratio in project finance. It is most often used to:

  • Size the amount of debt the project can sustain
  • Sculpting debt repayments in each period – to determine the Principal Amortization profile of the loan
  • To monitor the performance of the project against the loan documentation

Although a relatively simple ratio, it is often poorly understood and there are a few tricks and common errors to be aware of.

DSCR = CADS/Debt Service 

What does DSCR really mean?

  • It is a measure of the health of the cashflows relative to the debt service
  • A DSCR of 1.0x means we have just enough money to repay the lenders
  • Or a 2.40x DSCR means 1.0x goes to the lenders, the remaining 1.40x goes to equity

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We also cover this concept in our training courses. See a sample video on DSCR -sculpting

Our courses are not limited to financial modeling and best practices in Microsoft Excel.  We are committed to explaining how the numbers align with underlying financial and engineering concepts, transaction structures, legal documentation, market conditions and risk management approaches. We don’t just teach how to build models. We teach how to transact. Learn more about our renewable energy project finance course

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