Debt service limit

Capital service boundary is a financial ratio , the map for a debtor maximum acceptable capital service indicates.

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 term debt service limit originally comes - like many business and economic terms - from agriculture , where it is emphasized as a stability and liquidity indicator, and was adopted in real estate financing . It was subsequently extended to other debtors such as natural persons, companies, states and their local authorities. What all debtors have in common is that the debt service limit results in the maximum possible loan amount that a debtor can take out without getting into a liquidity crisis or even a debt crisis in the long term due to the debt service .

Determination of the key figure

Creditors can use debt ratios to determine whether their debtors are still able to service the debt from regular income. Therefore, they calculate their debt service limit first when you take out a loan and later continuously during the loan term. The aim of planning and determining the debt service limit for the debtor is to secure payment of the future debt service. The debt service coverage is from banks to consider in advance of the credit. The key figure can also be part of the covenants , so that the debtor has to prove compliance on an annual basis.

Interest expenses and repayments together form the debt service. Interest includes all interest expenses that result from interest-bearing liabilities (exceptions: interest on pension provisions , bank fees ).

Real estate financing

In real estate financing , the debt service limit is an "amount that is sustainably available from a loan object to pay annuity installments on a long-term loan - gross capital service limit ..." Lending value , lending limit and loan-to-value limit aim to reduce the loan amount taking into account risk factors on Orientate the value of the property to be lent. The debt service limit, on the other hand, determines the loan amount according to the repayability, as it results from the sustainable income of the lending object ( rental or lease income minus the management costs incurred ) or other periodic income ( labor income minus fixed expenses ) without impairing liquidity. A loan to real estate by credit institutions is only possible if both components are met.

Companies

In the case of companies and similar in agriculture, the annual surplus resulting from the profit and loss account is used as a basis:

    Jahresüberschuss aus der Gewinn- und Verlustrechnung
   + planmäßige Abschreibungen
   + Zuführung langfristige Rückstellungen
   + Fremdkapitalzinsen
   = Mittel für den Kapitaldienst
   ./. Gewinnausschüttungen und Privatentnahmen
   ./. notwendige Ersatzinvestitionen
   = Kapitaldienstgrenze
   ./. Zinsen und Tilgung
   = Liquiditätsüberschuss / -fehlbetrag

This means that the scheduled depreciation and the additions to the long-term provisions (warranty and pension provisions ) are added to the annual net income as expense-free expenses for the determination of the debt service. Profit distributions or private withdrawals and operationally necessary replacement investments, insofar as the latter are self-financed, reduce the funds to be drawn on for debt service. The remaining debt service limit is therefore the remaining amount that is available for the payment of interest and repayments. If

${\displaystyle {\mbox{Kapitaldienstgrenze}}={\mbox{Zinsen + Tilgung}}}$

applies, the extreme borderline case of a company's debt servicing capability has been reached. The debt service should never exceed the debt service limit, otherwise interest and repayments only have to be paid by reducing the assets or by additional equity or debt . If this is not possible, there is a risk of insolvency (illiquidity). If in this case at least one of the variables changes negatively (e.g. in the event of a decline in profit), debt service capacity is no longer given. This also means that companies with high debt service payments tend to invest less, because this results in higher capital expenditures that could jeopardize their ability to service debt. If there are economic or even structural crises, companies with a tight debt service limit can get into a corporate crisis. For this reason, there must be a liquidity cushion at the debt service limit. Similar to the debt service coverage ratio for project finance , a liquidity surplus of 20% is considered sufficient.

States and municipalities

The situation is critical for a state and / or its local authorities if the interest and repayment service exceeds 20% to 25% of the permanently achievable export revenues (for the state) or total income (for local authorities) or reaches more than 20% of the total expenditure. If the critical limits are exceeded permanently, states can get caught in a state crisis.

credit-worthiness

It should be noted that the debt service limit is only a meaningful variable for determining the creditworthiness of a borrower in connection with other key figures . In cases of a critical debt service limit, the equity ratio is usually too low, which is often associated with an excessively high interest burden ratio. Such a scenario can be seen as a sure sign of a debt crisis.

Individual evidence

1. ↑ Walter Schneeberger / Hermann Peyerl (eds.), Business Administration for Agricultural Economists, 2011, p. 358
2. ↑ Peter Posluschny, controlling for the craft , 2004, p 144
3. ↑ BTO 1.2.1 of the minimum requirements for risk management ( MaRisk ) according to circular 15/2009 of the Federal Financial Supervisory Authority (BaFin) of August 14, 2009 ( reference number: BA 54-FR 2210-2008 / 0001  ( page no longer available , search in Web archives )  Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. )  
4. ↑ Konrad Rüchardt, Evaluation and Credit Assessment in Real Estate Loans from the Perspective of Banking Supervision , 1981, p. 515
5. ↑ Hermann Kittel, Market Strategies in Mortgage Lending , 1974, p. 130
6. ↑ Willi Diez, Fundamentals of the Automobile Industry , 2001, p. 247
7. ↑ Christian Decker, International Project Financing: Concept and Review , 2008, p. 113
8. ↑ Urs Egger, Agricultural Strategies in Various Economic Systems , 1989, p. 124