Financial tests, such as the Debt Service Coverage Ratio (DSCR) test not only is used within credit documentation as a warning mechanism to determine and monitor the project performance and the likelihood for debt repayment. It also is a key metric in order to control and restrict dividends and other distributions to project sponsors. Further, it is considered a key metric at an early project stage already, when it comes to determining the feasibility of the project and its debt carrying capacity within the financial model.
The DSCR is usually calculated on each calculation date (as defined in the financing agreement, e.g. on a semi-annual basis) as the ratio of
- Available Cash Flow for the preceding calculation period to
- Debt Service (i.e. (interest payment and principal repayment) for the corresponding calculation period.
It usually is calculated on a backward or forward-looking basis.
Available Cash Flow usually is calculated as
- net operating revenues, insurance proceeds, interest on reserve accounts and working capital decreases, less
- project operating costs and working capital increases.