Question

Debt Coverage Ratios (DCRs) protect lenders with a cushion against

A) Landlords (borrowers) that may incur tenant turnover, tenant defaults and loss of rents

B) Interest rate fluctuations

C) Loan to Value changes in government regulations

D) Roof leaks

Answer 1

Debt Service Coverage Ratio (DSCR) is the ratio which states how many times money does the company have inorder to fulfil debt obligation. It shows how many times of debt can company pay in the year. Higher the DSCR lower the risk of default and lower the credit risk.

However at time of default there is no cushion which is available due to DSCR. Neither it protects the landlord in saving costs on tenant turnover.

It is just a barometer to measure the risk profile of the company. Hence if there is any fluctuation in interest rate, it may help in determining whether company will be able to fulfil debt if interest rate moves either way.

It is a profitability item and not a balance sheet item, hence there is no impact on value of the asset.

It also does not protect landlord against roof leaks

Correct option B