Debt-Service Coverage Ratio (DSCR)

The debt service coverage ratio (“DSCR”) is a covenant embedded in debt documentation that allows lenders to monitor the ability of a company to meet its debt obligations as they come due, including interest payments and often principal repayments. The DSCR is expressed as a ratio, and the company must ensure that it meets or exceeds the ratio. Many DSCRs use EBITDA as the numerator, and the sum of interest payments and principal repayments in the numerator, although there are many variations that are used depending on the circumstances. The DSCR is closely watched and can be particularly key in transactions such as leveraged buyouts – where LBO candidates are highly leveraged – or project financing, where debt repayments are contingent on cash flows from the bankruptcy-remote project itself.