Debt servicing ability

The debt service coverage is the ability of a borrower or a designated project financing , sufficient future cash flows to generate to the debt service of all liabilities from operating cash full and on time to dispute.

General

Lenders have an interest in measuring their credit risk with the debtor. A large number of debt ratios are available for this. These are important control and decision parameters for the provision or retention of outside capital . While the interest burden rate only takes into account the interest expense of a borrower, the debt service coverage ratio also includes the repayments to be made. The type of income depends on whether the debtor is a company , the state (or its local authorities ) or a natural person .

The ability to service debt is one of the most important economic indicators in banking , because it shows whether a debtor is able to properly service his debts from his liquidity surplus.

Legal requirements for credit institutions

The ability to service debt is at the core of the creditworthiness check of a borrower according to § 18 and § 18a of the German Banking Act (KWG) and is to be determined permanently by credit institutions for the first time when the credit is granted and then during the credit period . It belongs to the core of the rating . Art. 178 para. 1 Kapitaladäquanzverordnung (abbreviation CRR) is a loan default ( English default ) incontrovertibly presumed if the repayment of a loan is unlikely or an essential obligation of the debtor is overdue more than 90 days. The prognosis of the credit institution must show that the fulfillment has become unlikely. Without explicitly mentioning the term debt servicing ability, this banking supervisory regulation is implicitly based on the determination of debt servicing ability, because if repayment is improbable, debt servicing ability is impaired. The minimum requirements for risk management (MaRisk), on the other hand, specifically require credit institutions to check their ability to service debt before granting a loan, whereby "the factors that are important for assessing the risk must be analyzed and assessed, with particular attention to the ability of the borrower or the property / project to service the debt" are.

Determination of the key figure

The determination of the key figure depends on the type of borrower. A distinction must be made between whether it is a company , the state or its local authorities , real estate financing or natural persons . The debt service is the sum of all interest expenses and redemption payments and also includes redemption surrogates. The interest expense is made up of all debt interest and ancillary interest costs such as discounts , loan brokerage commissions or issuing costs for bonds .

The debt service check is future-oriented and prognostic. According to the MAK , so-called stress tests (e.g. 10% drop in sales, 5% increase in costs, 2% increase in interest rates) must be carried out on borrowers in crisis situations . The debt service limit should be determined with a properly integrated profit, balance sheet and financial planning system over 3–5 years. In their forms, the banking industry is satisfied with a simple 1–2 year forecast (without an update of the balance sheet and without a forecast of the cash flow statement). The lack of methodology for determining the debt service limit identified and criticized by Bantleon and Schorr in 2004 and 2012 has been partially eliminated in practice since 2008. In some financial planning systems available on the market, the debt service limit determination is programmed. Depreciation options, taxation, interest rates and the agreed repayment modalities, i.e. the term, also have a significant influence on the debt service capacity and its limits. The DATEV has long had a BWA shape debt service limit , which was recently improved by Knief by a new "BWA debt service limit NEU".

Companies

The debt service cover ratio for companies is calculated as follows:

    EBITDA
    ./. Gewinnausschüttung / Entnahmen
    ./. Ertragsteuern
    = Kapitaldienstgrenze
    ./. Zinsaufwand
    = Liquidität für Reinvestitionen
    ./. Tilgung vorhandener Verbindlichkeiten
    = Kapitaldienstfähigkeit

This end result of debt servicing ability is the unused debt servicing ability that is available for servicing additional credit facilities. It shows compliance with certain liquidity requirements and is therefore suitable as covenants in loan agreements and bond terms. A company is eligible for debt service if the difference between the debt service limit and the debt service is currently and in the future greater than zero:

{\ displaystyle {\ mbox {Debt service limit}} - {\ mbox {Interest expense - repayment}}> {\ mbox {0}}}

Real estate financing

Here, the debt servicing capacity shows the amount up to which the net rental income from a loan object (minus management costs ) can cover the debt servicing. It applies

{\ displaystyle {\ mbox {Debt servicing}} = {\ frac {\ mbox {Net rental income - management costs}} {\ mbox {total liabilities}}}}

Private individuals

In the case of private individuals, income includes all earned income and income from pensions after taxes, permanent statutory or contractual income as well as interest and other income. They are reduced by the fixed expenses of a household. This net amount is available for debt service. The debt service in turn includes loan interest and ancillary interest costs as well as repayments and redemption surrogates such as the savings from endowment insurance , annuity insurance or building society contracts , which must be added to the repayment.

consequences

The ability to service debt influences the future investment behavior of a company if investments are to be financed in whole or in part with outside capital. If the debt service capacity is low, the propensity to invest will be correspondingly low. If you are unable to service debt, there is a risk of loan defaults. For real estate financing in EU countries, debt servicing capacity of between 9 and 11% is considered the usual order of magnitude.

A too low value of debt servicing ability indicates that in the event of minor negative changes (e.g. decline in profit, decline in rental income or lower earned income due to unemployment ), the loans can no longer be serviced in full or on time from current income. Then the borrower has to sell parts of his assets or increase his equity or debt capital in order to ensure the debt service . However, these are indications of an impending debt or corporate crisis .

literature

BaFin, circular 24/2002 (BA) = MAK.

Individual evidence

↑ Appendix 1: Explanation of MaRisk in the version dated December 14, 2012. BTO 1.2.1 Item 1. BaFin , December 2012, archived from the original on September 15, 2013 ; accessed on August 29, 2019 .
↑ Michael Berndt, MaRisk opening clauses , 2008, p. 153.
^ Ulrich Bantleon / Gerhard Schorr, Debt Service Capability - Basics, Determination, Strategies , 2nd Edition, Düsseldorf 2012. ISBN 978-3-8021-1905-7 .
↑ Peter Knief, The determination of the ability to service a GmbH in practice , in: Price, rating check for medium-sized companies , Cologne 2002–2009, Chapter 11, No. 13.1 to 13.5
↑ Jutta Meyer, Controlling Kompakt , 2006, p. 72.
↑ ^a ^b Peter Wendlinger, Real Estate Key Figures , 2012, p. 217.

[1] Appendix 1: Explanation of MaRisk in the version dated December 14, 2012. BTO 1.2.1 Item 1. BaFin , December 2012, archived from the original on September 15, 2013 ; accessed on August 29, 2019 .

[2] Michael Berndt, MaRisk opening clauses , 2008, p. 153.

[3] Ulrich Bantleon / Gerhard Schorr, Debt Service Capability - Basics, Determination, Strategies , 2nd Edition, Düsseldorf 2012. ISBN 978-3-8021-1905-7 .

[4] Peter Knief, The determination of the ability to service a GmbH in practice , in: Price, rating check for medium-sized companies , Cologne 2002–2009, Chapter 11, No. 13.1 to 13.5

[5] Jutta Meyer, Controlling Kompakt , 2006, p. 72.

[Wendlinger-6] Peter Wendlinger, Real Estate Key Figures , 2012, p. 217.