Debt Service Coverage Ratio (DSCR)

DSCR stands for Debt Service Coverage Ratio. It’s the ratio of operating income (i.e. cash available) to service debt obligations (pay what you owe the bank) in any specified period. It’s the most commonly mentioned of a variety of ratios used by banks to analyse the risk associated with providing debt to projects; not just in energy but any project finance transaction. It’s calculated from the cash flow analysis of the project for every period in which a debt payment is due; so for the length of the loan and monthly, annually or whatever, depending on the payment terms.

A DSCR <1 would mean your model shows you don’t have enough cash in a period to pay your debt. You’ll either have to earn more money in the period (e.g. by charging more to your energy off-taker) or reduce your debt burden (by borrowing less).

A DSCR of 1 would mean cash available = payment due to bank. In other words, your business model shows you can pay your debt, but only if everything goes exactly to plan.

A DSCR > 1 means you predict you’ll have enough cash to pay the bank, plus a bit spare. This is what the bank needs to see! It will still get paid if your business doesn’t quite go to plan: more downtime for maintenance, a period of low wind or whatever. The greater the risk the bank attaches to your business plan, the higher the DSCR (the more “spare cash”) it will want to see from your business model.

Since the easiest way to raise the DSCR is to borrow less money, this generally results in the obvious conclusion that riskier projects are likely to be able to raise less of their investment as debt. So they’ll have to fund more of it from equity (lower leverage).