Debt service coverage ratio: Difference between revisions

Revision as of 09:02, 7 July 2022

Revision as of 03:03, 24 July 2022

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A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.<ref name=freedictionary /><ref name="investopedia">[http://www.investopedia.com/terms/d/dscr.asp Debt-Service Coverage Ratio (DSCR) on Investopedia]</ref>

Typically, most commercial banks require the ratio of {{val|1.15|–|1.35}} {{tooltip|&times;×|times}} {{pars|{{sfrac|{{abbr|NOI|net operating income}} | annual debt service}}|153%}} to ensure cash flow sufficient to cover loan payments is available on an ongoing basis.

===Example===

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entire pool of 135 loans? The Standard and Poors press release

provides this number, indicating that the weighted average DSC

for the entire pool is 1.76 {{tooltip|&times;×|times}}.

Again, this is just a snapshot now.

The key question that DSC can help you answer,

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first made? The S&P press release provides this also, explaining

that the original weighted average DSC for the entire pool of 135

loans was 1.66 {{tooltip|&times;×|times}}.

In this way, the DSC (debt service coverage) ratio provides a way to assess the financial quality, and the associated risk level, of this pool of loans, and shows the surprising result that despite some loans experiencing DSC below 1, the overall DSC of the entire pool has improved, from 1.66 {{tooltip|&times;×|times}} to 1.76 {{tooltip|&times;×|times}}. This is pretty much what

a good loan portfolio should look like, with DSC improving over

time, as the loans are paid down, and a small percentage, in this