DSCR (Debt Service Coverage Ratio)
DSCR measures cashflow coverage of debt payments, typically Net Operating Income ÷ Debt Service.
Allocator relevance: High — foundational underwriting metric for real estate and cashflow lending, directly tied to default probability.
Expanded Definition
DSCR estimates the borrower’s capacity to service interest and principal from operating cashflow. It is sensitive to base-rate changes (for floating-rate loans), revenue volatility, expense inflation, and vacancy/occupancy. Allocators focus on DSCR not as a static number but as a stress-tested metric under downside cases (rate up, NOI down, capex needs, etc.). Definitions vary by lender and asset type, so methodology must be stated.
Decision Authority & Governance
Governance includes consistent DSCR definition, monitoring cadence, covenant triggers (where present), and transparent reporting of DSCR deterioration. Institutions expect discipline around restructuring decisions and clear documentation of coverage assumptions.
Common Misconceptions
- DSCR is standardized across lenders.
- High DSCR eliminates risk.
- DSCR only matters at origination.
Key Takeaways
- DSCR is a primary default-risk indicator.
- Stress testing matters more than a point estimate.
- Methodology clarity is required for comparability.