G4 - Financial Analysis for Credit CH4 Coverage

Coverage

What is coverage analysis?

Assessing a borrower’s ability to service interest and principal from operating cashflows.

What is interest coverage?

Measure of how many times EBITDA (or adjusted EBITDA) covers interest expense.

Typical interest coverage formula used here?

(EBITDA − Non-discretionary cash outflows) ÷ Total annual interest obligations.

Why subtract non-discretionary cash outflows?

To reflect cash needed for owner drawings or essential payments that reduce debt service availability.

What is Debt Service Coverage Ratio (DSCR)?

EBITDA (or adjusted EBITDA) / (Principal repayments + Interest).

What DSCR is commonly considered a minimum?

Around 1.25× (varies by lender/industry).

How does amortisation period affect DSCR?

Longer amortisation lowers annual principal payments and raises DSCR, but increases long-term risk.

What is a test rate?

A stress interest rate (market + buffer) used to measure covenant resilience to rising rates.

Why use average utilisation of a revolving line when calculating interest?

Because borrowers rarely run lines fully drawn; average utilisation gives realistic interest expense.

How do you compute annual loan payment in Excel?

Use PMT(rate, nper, pv) and multiply by −1 to get a positive payment.

What is the difference between interest coverage and DSCR?

Interest coverage focuses on interest only; DSCR includes both principal + interest repayments.

Why might lenders prefer DSCR covenants for amortising debt?

It ensures borrower can meet scheduled principal repayments, not just interest.

How should projected EBITDA be treated in coverage calculations?

Use conservative adjustments and test sensitivity to downside scenarios.

What does a DSCR <1 indicate?

Cash flow is insufficient to cover debt service — default risk.

Why is EBITDA adjusted for non-discretionary items?

To reflect true cash available to service debt after unavoidable payouts.

How does rising interest rates affect DSCR?

It increases interest component, lowering DSCR.

What’s the lender rationale for imposing a coverage covenant?

Early warning and contractual remedy before default.

How to stress-test coverage ratios?

Apply lower sales, margin compression and higher interest to calculate worst-case DSCR.

Why consider cyclical industry factors in coverage analysis?

Earnings volatility affects ability to consistently meet debt service.

How to treat tax payments in coverage ratios?

Often include as required cash outflows if material; adjust EBITDA or add to obligations.

What role does working capital play in short-term coverage?

Working capital deterioration can reduce cash available for debt service despite healthy EBITDA.

Why model covenant headroom?

To ensure borrower remains compliant with a buffer under conservative scenarios.

What is a test-rate covenant?

A covenant that uses a stressed interest rate to compute interest obligations for DSCR.

Why align amortisation with asset life?

To match cash outflows with cash inflows generated by the asset, improving sustainability.

How to treat capex in DSCR analysis?

Consider maintenance capex as necessary cash outflow that reduces cash available for debt service.

What is “all-in” borrowing rate?

Lender’s cost of funds + client credit spread (plus fees) — used to price loans.

How does lender funding source affect loan pricing?

Different lenders have different funding costs (deposits vs bonds), affecting client rates.

What is covenant testing frequency and why is it important?

Quarterly/annual tests — timely detection of covenant breaches allows remedial actions.

How does prepayment flexibility affect coverage?

Optional prepayments reduce future interest but may strain current cash; structured payments matter.

Why are coverage ratios more conservative for floating-rate debt?

Because interest payments can rise with rates — test rates safeguard lenders.

How to treat one-off gains when calculating coverage?

Exclude them (non-recurring) to avoid overstating sustainable cash.

How should seasonal cashflow be modelled for coverage?

Use annualised or rolling 12-month metrics and test lowest-cash months.

What’s the relationship between DSCR and loan tenor?

Shorter tenors raise principal repayments → lower DSCR; longer tenors do the opposite.

How to handle revolving credit availability when computing DSCR?

Model expected utilization and include interest on drawn balances plus committed fee/availability cost if material.

What is haircutting in coverage analysis?

Applying conservative reductions to projected cashflows or EBITDA for stress scenarios.

How does covenant waivers history affect assessment?

Frequent waivers suggest recurring covenant stress and higher risk.

Why include proposed new debt in coverage calculations?

It increases total service obligation and shows post-financing capacity.

How to treat capitalised interest in coverage metrics?

Capitalised interest increases debt and future service needs — include in funded debt where appropriate.

What’s the lender’s view of marginal DSCR improvement?

Improvement is positive, but look for sustainability and not one-off measures.

Single-line advice for structuring to protect coverage?

Match debt amortisation to asset cashflow life and build covenant headroom with conservative projections.