Debt service coverage ratio

Financial metric

The debt service coverage ratio (DSCR), also known as "debt coverage ratio" (DCR), is a financial metric used to assess an entity's ability to generate enough cash to cover its debt service obligations, such as include interest, principal, and lease payments. The DSCR is calculated by dividing the operating income by the total amount of debt service due. A higher DSCR indicates that an entity has a greater ability to service its debts. Banks and lenders often use a minimum DSCR ratio as a condition in the covenant, and a breach can sometimes be considered an act of default.

In corporate finance, DSCR refers to the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. In personal finance, DSCR refers to a ratio used by bank loan officers in determining debt servicing ability. In commercial real estate finance, DSCR is the primary measure to determine if a property will be able to sustain its debt based on cash flow. In the late 1990s and early 2000s banks typically required a DSCR of at least 1.2, but more aggressive banks would accept lower ratios, a risky practice that contributed to the Financial crisis of 2007–2010. A DSCR over 1 means that (in theory, as calculated to bank standards and assumptions) the entity generates sufficient cash flow to pay its debt obligations. A DSCR below 1.0 indicates that there is not enough cash flow to cover loan payments. In certain industries where non recourse project finance is used, a Debt Service Reserve Account is commonly used to ensure that loan repayment can be met even in periods with DSCR<1.0