Covenants
Debt service cover ratio (DSCR)
DSCR measures the cash available to service debt against everything the debt costs in the period, interest plus scheduled repayment. It is the tightest of the common covenants because it is the only one that counts amortisation.
Also called debt service coverage · DSCR covenant · debt service cover · cashflow cover
Measured as room to fall, DSCR is the tighter test. The same business has less cushion on debt service than on leverage.
| Test | Room to fall before breach |
|---|---|
| Leverage (3.5x cap) | 14% |
| Debt service cover | 10% |
Illustrative: £2m EBITDA, £6m net debt against a 3.5x cap; £1.11m cash against £1m debt service. Derived arithmetic.
What the ratio measures
The debt service cover ratio divides the cash available to service debt in a period by everything the debt costs in that period. The denominator is the part that distinguishes it: interest plus scheduled principal repayment, not interest alone.
That single difference is why DSCR behaves unlike the other covenants. Leverage caps the stock of debt and says nothing about whether you can pay for it. Interest cover asks whether earnings exceed the cost of carry. Only debt service cover asks whether the business generates enough cash to meet the full obligation as it falls due, which is the question a lender is really underwriting on an amortising facility.
Where the level is set
A DSCR covenant is usually set a little above 1.0 times. The logic is arithmetic rather than convention: at exactly 1.0x the business generates precisely enough cash to meet its obligations and nothing more, so any adverse movement produces a shortfall. A level slightly above 1.0x builds in a margin without demanding that the business cover its debt service several times over.
This is why DSCR looks tighter than the other tests and is tighter in practice. A leverage covenant set at 3.5x against actual leverage of 3.0x carries the customary 25 to 30% cushion in earnings terms. A DSCR floor a little above 1.0x against an actual of 1.10x carries far less absolute room, and it is the test most likely to fail first in a facility with meaningful repayments.
Amortisation, not interest, is what breaks the ratio. Three times leverage cannot fully amortise on this cash flow.
| Facility | DSCR |
|---|---|
| £3m | 1.38x |
| £4m | 1.04x |
| £6m (3x EBITDA) | 0.69x |
Derived arithmetic on the £1.11m of cash available charted on /library/cfads, which owns the build-up from EBITDA. Bank all-in 6.75% and a straight-line five-year profile, both published conventions. Facility size is the variable; the 1.10x worked example used throughout this page sits at about £3.7m on the same profile.
What goes into the numerator
The numerator is cash available for debt service, often abbreviated to CFADS, and it is emphatically not EBITDA.
The usual construction starts at EBITDA and deducts cash tax, maintenance capital expenditure and the movement in working capital. Some facilities deduct total capex rather than maintenance capex, which is materially harsher on a business investing for growth. Others add back the cash element of any equity injection or deduct dividends and other permitted payments.
On a business with £2m of EBITDA paying £250k of cash tax, £450k of maintenance capex and absorbing £190k into working capital, the cash available is around £1.11m, a little over half the EBITDA it started with. Against £1m of debt service that gives roughly 1.10 times. Which deductions the definition takes therefore decides the ratio as surely as trading does.
What goes into the denominator
Interest plus scheduled principal repayment in the test period. Three questions decide how demanding that is.
Whether it counts scheduled amortisation only, or also mandatory prepayments such as a cash sweep. A definition that includes swept amounts can produce a circularity, since a strong year generates a larger sweep which worsens the ratio. Whether it is measured on a trailing twelve months or a forward-looking twelve months, which matters where the amortisation profile steps up. And whether the final bullet or balloon repayment is included in the period it falls due, which would make the last test essentially impossible to pass and is normally carved out.
All three compound. A DSCR definition that captures a cash sweep and a forward-looking step-up at the same time can be materially tighter than the headline ratio suggests.
DSCR against interest cover
Interest cover measures earnings against interest. DSCR measures cash against interest plus amortisation. On a bullet facility with no scheduled repayment the two converge, and on a heavily amortising facility they diverge sharply.
The practical consequence is that a business can pass interest cover with room to spare and fail DSCR in the same quarter. That is not a modelling error; it is the tests doing their jobs. Interest cover asks whether the business can afford to carry the debt. DSCR asks whether it can afford to repay it on the agreed schedule.
Interest cover levels are set to the deal and tighten as leverage rises, and there is no single multiple that applies across the band. What can be said generally is that a structure sized on leverage alone frequently fails one of the cover tests, and in a rate environment where interest has risen faster than earnings, the binding constraint for many borrowers has moved from leverage to cover.
DSCR bites hardest where repayment is heaviest. On a bullet facility it barely binds; on fast amortisation it governs.
| Profile | How hard it binds |
|---|---|
| Bullet, no amortisation | Rarely binds |
| Back-loaded | Mild |
| Straight-line, 5 years | Real constraint |
| Front-loaded / asset-backed | Often governs |
Relative tightness by repayment profile. Market convention, individual facilities vary.
Where it appears and where it governs
DSCR is common on amortising bank debt and on asset-backed structures, and it is standard in property and project finance where the whole underwriting rests on cash flow servicing a fixed schedule.
It appears less often as the binding test on a unitranche or bullet facility, where there is little or no scheduled repayment for it to capture. That is one of the underrated differences between a bank package and a fund package at £3-15m: the bank facility usually amortises and carries a DSCR test, while the fund facility often runs bullet with leverage and a cash sweep instead. The choice between them is partly a choice about which covenant governs your quarterly life.
Most £3-15m facilities carry two to four maintenance covenants tested quarterly on a trailing twelve-month basis, and where DSCR is among them on an amortising structure, it is usually the one to model first.
What to negotiate
Five things, in rough order of value.
The capex deduction, and specifically that it captures maintenance capex rather than total capex, since otherwise a growth investment is penalised as though it were a cost of keeping the lights on. The treatment of mandatory prepayments in the denominator, to avoid the sweep circularity. A carve-out for the final bullet repayment. Whether the test is trailing or forward-looking, and if forward-looking, how the step-up in the amortisation profile is handled. And the working capital definition, particularly for a seasonal business where a single test date can fall at the worst point of the cycle.
Beyond the definitions, the structural lever is the amortisation profile itself. A slower profile, or an initial capital holiday during an integration or capex programme, does more for DSCR than any adjustment to the ratio, because it reduces the denominator directly.
When it starts to fail
DSCR deteriorates in ways that are visible in advance, which makes it the most forecastable of the covenants. A rate rise on a floating facility increases the denominator immediately. A capex programme reduces the numerator. A working capital absorption from growth does the same, which produces the uncomfortable pattern where a business grows into a breach.
That last one is worth naming because it surprises people. Rapid growth consumes cash into debtors and stock before it produces earnings, so a business trading well can fail a cash-based test while passing an earnings-based one. Where growth is the cause, the conversation with a lender is usually straightforward, but it is a great deal easier held in advance with a forecast than after a failed certificate.
Common questions
What is a good DSCR?
Lenders usually set the covenant a little above 1.0 times. At exactly 1.0x the business generates precisely enough cash to meet its obligations and nothing more, so a level slightly above builds in a margin. Because the floor sits so close to 1.0x, DSCR carries far less absolute room than a leverage covenant with its customary 25 to 30% cushion, and it is often the test that fails first.
How do you calculate DSCR?
Divide the cash available for debt service by interest plus scheduled principal repayment in the period. The numerator usually starts at EBITDA and deducts cash tax, maintenance capital expenditure and the working capital movement. On £2m of EBITDA with £250k of tax, £450k of maintenance capex and £190k absorbed into working capital, cash available is about £1.11m; against £1m of debt service that is roughly 1.10 times.
What is the difference between DSCR and interest cover?
Interest cover measures earnings against interest alone. DSCR measures cash against interest plus scheduled repayment. On a bullet facility the two converge; on a heavily amortising facility they diverge sharply, and a business can pass interest cover comfortably while failing DSCR in the same quarter.
Is DSCR the same as CFADS?
No. CFADS, or cash flow available for debt service, is the numerator of the ratio. DSCR is the ratio itself: CFADS divided by total debt service. Where a lender talks about CFADS they are usually discussing which deductions come out of EBITDA before the ratio is struck.
Why does my facility have both a leverage covenant and a DSCR?
They test different things. Leverage caps how much debt the business carries against its earnings. DSCR tests whether it generates enough cash to pay for that debt on the agreed schedule. A business can be modestly levered and still struggle to meet a fast amortisation profile, which is exactly the situation leverage alone would miss.
Does a bullet facility have a DSCR covenant?
Often not as the binding test. With no scheduled repayment there is little for the ratio to capture beyond interest, so it converges on an interest cover test. This is one of the practical differences between a bank package, which usually amortises and carries a DSCR, and a fund package, which often runs bullet with leverage and a cash sweep instead.
What should I negotiate on a DSCR covenant?
That the capex deduction captures maintenance rather than total capex, so growth investment is not penalised. That mandatory prepayments are excluded from the denominator, to avoid a sweep making a good year worse. A carve-out for the final bullet repayment. Whether the test is trailing or forward-looking. And the working capital definition, especially for a seasonal business. The strongest structural lever is a slower amortisation profile, which reduces the denominator directly.
Can a growing business fail its DSCR?
Yes, and it is a common pattern. Growth consumes cash into debtors and stock before it produces earnings, so a cash-based test can fail while an earnings-based one passes. Where growth is the cause the conversation with a lender is usually straightforward, but it is far easier held in advance with a forecast than after a failed compliance certificate.
The full treatment sits in the guide: loan covenants explained.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.