DSCR & Covenant Headroom
How far earnings can fall before your lender has a right to act.
Replaces: Bank relationship conversations you would rather have prepared for
How to use it
Enter your earnings, what you must repay, and the covenants your facility imposes. The calculator works out both ratios, identifies which one binds first, and reports how far earnings can fall before it breaks.
Where the number comes from
- Debt service is interest plus scheduled principal — both, because a covenant tests what you must pay rather than what you expense.
- Cover is available earnings divided by debt service. Where the facility deducts maintenance capex, that comes off earnings first.
- Leverage is total debt divided by EBITDA, tested against the maximum multiple the facility allows.
- Each covenant implies an EBITDA at which it is exactly met; the higher of the two is where you actually breach.
- The cushion is the gap between current EBITDA and that breach point, as a percentage.
What goes wrong
The part most calculators leave out.
- Covenant definitions are contractual, not standard. What counts as EBITDA — which add-backs are permitted, whether it is trailing twelve months or annualised, how acquisitions are treated — is defined in your facility agreement and frequently differs from your management accounts.
- Testing dates matter as much as levels. A covenant tested quarterly on trailing twelve months behaves very differently from one tested annually, and a single bad quarter can breach the first while the second never notices.
- Breaching one covenant usually triggers cross-default across every other facility. The exposure is rarely limited to the lender whose test you failed.
- Drawing available headroom tightens cover at the same time as it uses leverage capacity. The two constraints interact, and this model shows them separately.
- Waivers are granted at a price — higher margin, additional security, tighter future covenants, or restrictions on distributions. "The bank waived it" is not the same as no consequence.
- This tests the covenants you enter. Real facilities often carry several more, including minimum liquidity, capex limits and change-of-control provisions.
The cushion that is thinner than it looks
A business with 2.8m of EBITDA pays 620,000 of interest and repays 900,000 of principal — 1.52m of debt service, giving cover of 1.84× against a 1.25× covenant. That sounds comfortable. Leverage is 8.2m against 2.8m, or 2.93× against a 3.5× limit, which also looks fine. But the covenants bite at different points: cover fails once EBITDA falls to 1.9m, while leverage fails at 2.34m. Leverage binds first, and it binds after a 16% fall in earnings — not the 32% the cover ratio alone would suggest. A single soft quarter in a trailing-twelve-month test is enough to get there.
Questions
- What is a comfortable DSCR?
- Lenders commonly require 1.20× to 1.35× for ordinary corporate facilities, with project and real estate finance sometimes lower against more predictable cash flows. What matters more than the level is the headroom above it.
- Does a breach mean the loan is repayable immediately?
- Technically it usually gives the lender that right; in practice they more often negotiate. But the negotiation happens on their terms, which is exactly why headroom is worth protecting before it disappears.
- Why does leverage sometimes bind before cover?
- Because they measure different things. Leverage compares debt to earnings; cover compares earnings to repayments. A business with long-dated debt and light amortisation has strong cover and can still be highly levered.
- Does anything I type get sent anywhere?
- No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.
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