November 16, 2012Daily Rates & Viewpoints From the Officers & Staff of TIB.

The Debt Service Coverage Ratio

In today’s challenging lending environment, I feel it is critical to review a basic tool of lending, the debt service coverage ratio, or DSCR. A borrower’s cash flow is vital to ensure the lender’s principal is repaid without incurring additional costs, such as attorney’s fees, foreclosure expenses, or costs associated with the liquidation of collateral.  

Where loan to value can help a lender determine how much to consider lending on a specific property, the DSCR will help a lender determine what size loan payment the borrower can afford to pay. 

DSCR Ratio =
Total Cash Available for Debt Service
Total Annual Debt Service

While the DSCR ratio is another one of the most basic underwriting ratios, it can be viewed in different ways. Let me explain by breaking down the equation. Cash Available for Debt Service in its simplest form can be defined as net income plus interest expense plus any non cash expenses, such as amortization or depreciation. 
Total Annual Debt Service equals the sum of all principal and interest payments the borrower currently has plus the principal and interest payment on the requested credit facility.
A DSCR ratio below 1.00X indicates the borrower cannot cover debt service with their excess cash flow. As a lender, you want your DSCR to be higher than a 1.00X. TIB’s lending guidelines provides guidelines for different DSCRs depending on collateral type and loan to value. For example, for a loan where the collateral is a commercial office building with a 75% loan to value, TIB’s guideline is the borrower should have a minimum 1.35X DSCR.   Alternatively, for a loan where the collateral is an owner occupied building with an 80% loan to value, TIB’s guideline is the borrower should have a minimum 1.20X DSCR.
For assistance in determining what may be an acceptable DSCR on a specific type of credit transaction please contact your TIB lending officer.

Rick Jamieson Rick Jamieson

Market Levels @ 7:58 AM CST

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.20% Dow Jones 12542.38
3 - Month LIBOR 0.31% NASDAQ 100 2836.93
1-Yr LIBOR 0.86% S&P 500 1355.80
1-Yr CMT 0.17% Spot Gold 1712.00
Prime 3.25% Spot Silver 32.43
3-yr LIBOR Swap/Offer 0.46% Spot Crude Oil 86.32
5-yr LIBOR Swap/Offer 0.77% CRB Index 292.84
3 Mo - Fed Fund Futures 0.13% 6 Mo - Fed Fund Futures 0.13%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.00% 90 - Days    
0.02% 180 - Days    
0.19% 2 - Year 0.25% 6bp
0.28% 3 - Year 0.37% 9bp
0.59% 5 - Year 0.76% 17bp
1.55% 10 - Year 1.78% 23bp
2.69% 30 - Year    
136 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FNMA 1.05 11/26/18 11/14 1.05% 1.05%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-Yr FNMA 3.00% 1.43% 99 / 3.62
30-Yr GNMA 3.50% 2.28% 94 / 7.28
*Duration @ 12 month Historical CPR
Morning Commentary: Reed Bateman

This has been somewhat of a quiet Friday morning ahead of Thanksgiving week with few economic releases. Industrial production dropped by 0.4% in October, which has sent Treasury prices slightly higher. Estimates were for a 0.2% increase in production, so the decline is concerning, but just like most releases this past week, Sandy is getting blamed for the disappointing result. The 10-year sits at 1.58%, very close to the 1.55% resistance level we set back at the end of August. Equities are lower this morning, and the Dow has lost about 400 points on the week. Ongoing discussions in Washington about taxes and budget deficits have markets on edge. We don’t have any major Treasury auctions scheduled for next week, but with the holiday, that’s expected. Markets will be closed Thursday, and we’ll have an early close at 1 CST on Friday. 

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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