Explain what the annual debt service coverage ratio (ADSCR) and loan life coverage ratio (LLCR) are....

Explain what the annual debt service coverage ratio (ADSCR) and loan life coverage ratio (LLCR) are. How are these estimated and what are the differences between them? What will you do if the ADSCR are less than one in year 9 and 10 of the 20 years project?

Expert Solution

Annual debt service coverage ratio is trying to calculate the ability of the firm in order to pay of its debt repayments schedule in form of interest and it is reflecting the the operating efficiency of the company in able to generate enough cash and liquidity in order to pay its interest on regular intervals.

Inefficiency of payment of interest will be leading to risk of financial distress costs.

loan life coverage ratio is used to calculate the solvency of the firm because it is a solvency ratio which is used to determine the ability of the firm to pay the the payment of any loan.it is used to calculate the net present value of the cash flows which are available to the firm and which will be divided by the amount of the outstanding debt.

Annual Debt service coverage ratio is trying to deflect the liquidity on the part of the company whereas loan life coverage ratio is trying to reflect the solvency on the part of the company so Debt service coverage ratio is related to liquidity in terms of interest payment whereas another is related to solvency in terms of capital payment.

If annual debt service coverage ratio is less than 1, it will mean that the company is facing the liquidity crunch in order to pay of its interest and I will be trying to adopt such measures which will be boosting the the liquidity of the company like I will be trying to to maintain an efficient cash conversion cycle and trying to increase my overall working capital ratio and current ratio in order to help the company in generation of a large amount of cash in short term in order to pay the interest obligation of these loans to improve my Debt service coverage ratio over 1.

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