The Debt Service Coverage Ratio is the most important ratio in Fund Raising Mandates. Banks want to see this ratio to understand Debt Repayment Capacity of the Project. It should be at least 1.5 for all future years. Numerator is either CFADS (Cash Flow Available for Debt Service, Rev-Exp-Tax) or can be FCFF.
Denominator is the Debt repayment of that year (Principal + Interest).
While reviewing a Power model, I observed that Numerator was further subjected to Interest deduction! Unfortunately this is wrong. The very purpose of DSCR is to compare Free Cash Flows (even before any Debt repayments are made) to the Repayments to be made.
Hence DSCR should be [ FCFF (or) CFADS ] / [Debt Repayments].
This has to be calculated for all future projected years and each year DSCR should be at least 1.5
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