Chirayuthchai TraisaengsatheanStrategic Finance for Property Development

DSCR below the threshold: set up a workout plan within 30 days

What to check when the DSCR test fails, the first 30 days, and turning your options into numbers before meeting the bank

Key takeaways

  • A DSCR below the threshold does not always mean the bank will call the loan immediately. The outcome depends on the contract, but it is the moment to start work on a plan straight away.
  • A good workout plan must show where the money will come from, not just ask for time.
  • In the example, a DSCR of 1.08x requires debt service to be cut by THB 15.57 m, or CFADS to rise by THB 20.24 m, to reach 1.30x; selling assets combined with cost reductions gives 1.49x.

The accounting team reports that the latest quarter's DSCR is below the threshold. A few days later a letter arrives from the bank asking for further information. The owner wants to call the relationship manager and ask for time. But what the bank really wants to know is whether the money will be enough, and how well the company understands its own problems. Going in to talk without numbers will waste the little opportunity that exists.

When the threshold is missed: what to check first

  • Definition in the contract How is DSCR calculated, when is it tested, and how many months does it look back?
  • Consequence of a breach Is it an immediate event of default? Is there a cure period or a right to inject equity (Equity Cure)?
  • Cross-default Are other agreements affected?
  • Restrictions while in breach Further drawdowns, dividend payments and transfers of money within the group.
  • Notification duty Within how many days must the bank be notified?

The wording of the contract governs. Do not assume from past experience, and have a lawyer read any letter before it is sent if it could amount to an admission of default.

The first 30 days

  1. Week 1 Prepare a 13-week cash flow forecast from actual bank accounts. Stop any payments that can be deferred. Set up a team and appoint one person in charge.
  2. Week 2 Prepare a schedule of total debt, collateral and key trade creditors. Determine whether the cause is temporary or structural.
  3. Week 3 Assess and rank the options in numbers. Seek shareholder approval for a capital increase.
  4. Week 4 Present the plan to the bank. Request a waiver or standstill with clearly defined conditions.

Example: turning options into DSCR

Hypothetical example Debt of THB 400 m, interest at 8%, principal repayments of THB 60 m a year, debt service of THB 92.00 m, CFADS of THB 99.36 m, DSCR of 1.08x. The target is 1.30x, which requires debt service of no more than THB 76.43 m or CFADS of at least THB 119.60 m.

OptionCFADSDebt ServiceDSCR
Current99.3692.001.08x
Cut costs by THB 10 m a year109.3692.001.19x
Sell a secondary asset for net proceeds of THB 80 m, repay debt, and reduce principal repayments proportionally to THB 48 m99.3673.601.35x
Request principal repayments be reduced to THB 30 m a year99.3662.001.60x
Sell a secondary asset combined with cost reductions109.3673.601.49x

Reducing principal repayments gives a high DSCR but does not reduce the debt. If repayments are reduced by THB 30 m a year for 2 years, the outstanding debt at the end of year 2 will be THB 60 m higher than under the original schedule. The bank will therefore often ask what source the company will use to pay this amount. The option of selling assets combined with cost reductions is stronger because debt is genuinely reduced and it does not rely on a concession alone.

What a workout plan must answer

SectionWhat is required
CauseSeparate market factors, management and capital structure, and acknowledge what the company got wrong
Cash positionActual 13-week cash flow, the order of payments, and creditors that cannot be held off
MeasuresCost reductions, asset sales, collections and a capital increase, each with a person responsible and a completion date
Additional shareholder fundingAmount and date. The bank will look at whether the owner is sharing the risk
What is requested from the bankWaiver, standstill, schedule adjustment or Covenant Reset, set out item by item
Forecast after the planBase and Downside cases, with the Covenant tested quarterly
Contingency planWhat to do next if the assets cannot be sold on time

Mistakes that destroy confidence

  • Submitting an overly optimistic forecast in order to pass the threshold
  • Taking money out of the company or paying group companies during negotiations
  • Paying certain creditors first without consulting a lawyer
  • Giving each bank inconsistent information
  • Asking for time without saying what the time will be used to fix

After the bank agrees

A waiver usually comes with conditions, such as fees, additional interest, additional collateral, more frequent reporting or restrictions on dividends. Before signing, calculate whether the new conditions can realistically be met, because a second breach will make the next negotiation much harder. Set monthly milestones, report progress as promised even if it is not as good as planned, and review the 13-week forecast every week until the figures stay above the threshold for at least two test periods. Key contractors and trade creditors should also receive sufficient information, because if work stops, the whole plan cannot continue.

Next steps

  • Read the Covenant definitions and the consequences of a breach in every agreement
  • Prepare a 13-week forecast and update it every week
  • Separate core assets from saleable assets, with values and expected sale timelines
  • Calculate the DSCR for each option before meeting the bank
  • Seek a shareholder resolution on a capital increase or Equity Cure
  • Consult a lawyer before sending any notice or paying any particular creditor