What is DSCR? Debt Service Coverage Ratio Explained
The Debt Service Coverage Ratio (DSCR) is the single most important metric lenders use when evaluating infrastructure and project finance loans. If you're working on renewable energy deals, infrastructure projects, or any non-recourse financing, understanding DSCR is essential.
The Basic Formula
DSCR measures whether a project generates enough cash flow to pay its debt obligations:
Where:
- CFADS (Cash Flow Available for Debt Service) = Revenue − Operating Expenses − Taxes − Maintenance Capex
- Debt Service = Principal Repayment + Interest Payments
What the Numbers Mean
A DSCR tells you how many times over a project can pay its debt:
- DSCR = 1.0x — Project generates exactly enough cash to pay debt (no cushion)
- DSCR = 1.5x — Project generates 50% more cash than required for debt payments
- DSCR = 2.0x — Project generates twice what's needed for debt payments
Example
A solar project generates $15 million in CFADS annually. Its debt service (principal + interest) is $10 million per year.
DSCR = $15M ÷ $10M = 1.50x
This means the project has a 50% buffer above its debt obligations.
Typical DSCR Requirements by Sector
Lenders require different minimum DSCRs based on project risk:
- Contracted solar/wind (investment grade offtaker): 1.20x – 1.35x
- Contracted renewables (sub-IG offtaker): 1.35x – 1.50x
- Merchant power: 1.50x – 2.00x+
- Regulated utilities: 1.10x – 1.20x
- Infrastructure (toll roads, airports): 1.30x – 1.50x
Minimum vs. Average DSCR
Lenders look at both:
- Minimum DSCR: The lowest DSCR in any single period over the loan life. This is typically the binding constraint.
- Average DSCR: The average across all periods. Useful for understanding overall project health.
A project might have an average DSCR of 1.80x but a minimum of 1.25x in year 3 when a major maintenance event occurs. Lenders will size debt based on that 1.25x minimum.
How DSCR Affects Debt Sizing
DSCR directly determines how much debt a project can support. The calculation works backwards:
Example
A wind project has CFADS of $20 million in its lowest year. The lender requires a minimum DSCR of 1.40x.
Maximum Debt Service = $20M ÷ 1.40 = $14.3 million
The project can support at most $14.3M in annual debt payments. This, combined with interest rates and tenor, determines the total debt capacity.
DSCR Covenants
Loan agreements typically include DSCR-based covenants:
- Lock-up DSCR: If DSCR falls below this level (e.g., 1.15x), distributions to equity are "locked up" — all excess cash goes to a reserve account
- Default DSCR: If DSCR falls below this level (e.g., 1.05x), the loan is in technical default
These covenants create a buffer between normal operations and actual default, giving projects time to recover from temporary issues.
Common Mistakes
When calculating or analyzing DSCR, watch out for:
- Including non-cash items in CFADS: Depreciation is not a cash expense — don't subtract it
- Forgetting maintenance capex: Major maintenance reserves should be deducted from CFADS
- Ignoring DSRA funding: Debt Service Reserve Account contributions affect available cash
- Using wrong period: DSCR should be calculated for each debt service period, not annually if payments are semi-annual
Related Metrics
DSCR is often analyzed alongside:
- LLCR (Loan Life Coverage Ratio): NPV of CFADS over loan life ÷ Outstanding debt
- PLCR (Project Life Coverage Ratio): NPV of CFADS over project life ÷ Outstanding debt
LLCR and PLCR give a lifetime view, while DSCR measures period-by-period coverage.
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