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
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