The Debt Service Coverage Ratio (DSCR) is the central indicator of any LBO structure or acquisition financing. It measures the company's ability to repay its debt from operating cash flows, by dividing EBITDA (or free cash flow) by the annual debt service (principal repayment + interest).

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Its base formula is: DSCR = EBITDA / (Annual principal repayment + Annual interest). Senior lenders typically require a minimum DSCR of 1.20x to 1.30x in the base case and 1.10x in the stress scenario (EBITDA reduced by 15–20%). A DSCR of 1.25x means the company generates CHF 1.25 of EBITDA for each franc of debt service — providing a 25% safety buffer before default.

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The DSCR is closely linked to financial covenants: banks systematically include a minimum DSCR threshold in credit agreements. Falling below this threshold (covenant breach) triggers a waiver procedure with the lender, often accompanied by a margin increase and additional restrictive conditions. A headroom of 20 to 30% relative to the covenant threshold is recommended.

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Example: an industrial SME shows normalised EBITDA of CHF 2.8 million. The financing structure includes CHF 6.0 million senior debt (SARON + 2.5%, amortising over 5 years) + CHF 1.2 million vendor loan (5% over 4 years). Annual service: (6.0/5) + 6.0×3.85% + (1.2/4) + 1.2×5% = 1.200 + 0.231 + 0.300 + 0.060 = 1.791M. DSCR = 2.8 / 1.791 = 1.56x — comfortable.

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At Hectelion, we systematically model the DSCR in base and stress scenarios in all our Franco-Swiss financial structuring mandates.