DebtService

Debt service is the cash required to cover the repayment of interest and principal on outstanding debt during a given period, typically one year. It comprises scheduled interest payments and principal amortization. In some loan structures, it may also include mandatory deposits to a sinking fund or other features that are legally bound to reduce debt.

For analysis, debt service is compared against cash flow. The debt service coverage ratio (DSCR) is a common metric, defined as DSCR = cash flow available for debt service divided by debt service. In corporate finance, CFADS (cash flow available for debt service) is typically earnings before interest, taxes, depreciation, and amortization plus adjustments; in project finance, CFADS is net operating income minus operating costs plus other income before debt service. A DSCR above 1 indicates sufficient cash to cover debt service; higher values indicate stronger leverage positions. Lenders may require minimum DSCR covenants and monitor changes in DSCR as credit conditions evolve.

Debt service decisions affect liquidity, budgeting, and credit terms. In governments, debt service is a recurring budget obligation that influences fiscal sustainability and debt management strategies. If debt service crowds out other expenditures, it can limit flexibility. Debt service reserve funds may be established to cover shortfalls, and refinancing can lower current payments but may raise total interest costs. The term debt service is distinct from gross debt or total debt outstanding; it refers specifically to the cash outlays for debt repayment in a period.