Debt service

Debt service refers to the total cash required in a given period to cover all loan obligations: scheduled principal repayments plus interest payments. The Debt Service Coverage Ratio (DSCR = EBITDA or operating cash flow / debt service) is a key metric in leveraged finance and financial structuring: it measures a company's capacity to service its debt from operating cash flows. Lenders typically require a minimum DSCR of 1.2x–1.5x. In financial due diligence, debt service modelling under downside scenarios reveals whether the business can sustain its debt obligations in adverse conditions.

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Example: a Swiss LBO company has annual debt service of CHF 3.2 million (CHF 2.0 million principal + CHF 1.2 million interest). With normalised EBITDA of CHF 5.5 million, the DSCR is 1.72x — comfortable against the bank's minimum threshold of 1.25x. Stress-testing a 20% EBITDA decline yields a DSCR of 1.38x — still above threshold, confirming adequate debt service capacity under a moderate downside scenario.

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Hectelion models debt service capacity and DSCR under multiple scenarios in leveraged acquisition financing analysis and due diligence.