Debt Service Coverage Calculation

calculator, calculation, insurance-385506.jpg

Debt Service Coverage Calc
Posted by: Loan101 Aug 23 2004, 10:51 AM
What is the detailed way of calculating a Debt Service Covarage (what is supposed to be 1.20x or higher) the UCA Cash Flow way as aposed to the traditional way???
Posted by: loanuniverse Aug 23 2004, 11:44 AM
Hmmmm, Debt Service Coverage calculation…. Essentially, you can calculate DSC from both traditional and UCA cash flow. However, most lenders will use traditional cash flow to come up with the ratio.

The ratio is calculated by taking cash available to service debt and dividing that amount by the combined debt service.

How do you come up with the cash available to service debt?

Easy, you get the traditional cash flow

Start with net income
Add depreciation
Add amortization
Add interest expense
The resulting amount will be the traditional cash flow or cash available to service debt. This is your numerator.

How do you calculate your combined debt service?

This is the sum of the existing interest expense, the CPLTD of any term loan, and the debt service for the proposed loan.

Take into account that the example above is very simplified and that there might be other numbers involved. If you work for a financial institution, your best source would be to look at some credit files and see how the analysts performed the calculation. It is much easier to understand with actual numbers.

When people talk about DSCR being at least 1.20X, they mean that the cash available to service debt is at least 120% of the combined debt service.

Good luck
Posted by: Loan101 Aug 23 2004, 01:06 PM
Thanx for the reply but i knew all that. That is why as asked for the UCA cash flow calc (formula) as aposed to the traditional way. I think the answer is Net Cash After Operations divided by the sum of CPLTD of and term plus the debt service of the proposed loan. is that right???
Posted by: loanuniverse Aug 23 2004, 01:46 PM

If you are working of spreads created by Winfast / Famas or Moody’s Financial Analyst. The NCAO would replace the “cash available for debt service”.

The difference with UCA, besides the fact that takes into account changes in balance sheet accounts is that you start calculating it with cash collected from sales, while traditional cash flow starts with net income. For practical terms Net Cash After Operations or NCAO should be considered as being available to service existing and proposed debt.

P.S.: don’t forget that existing interest expense remains unless you are paying off that loan.
Author: Commercial Loan Underwriter